Lls5e Chap04 Sols

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Chapter 4Adjustments, Financial Statements, and theQuality of Earnings

ANSWERS ! Q"ES#!NS

1. A trial balance is a list of the individual accounts, usually in financial statementorder, with their debit or credit balances. It is used to provide a check on theequality of the debits and credits.

2. Adjusting entries are made at the end of the accounting period to record all

revenues and epenses that have not been recorded but belong in the currentperiod. !hey update the balance sheet and income statement accounts at the endof the accounting period.

!he four different types are adjustments for"#1$ %eferred revenues && previously recorded liabilities that need to be adjusted at

the end of the period to reflect revenues that have been earned #e.g.,'nearned !icket (evenue must be adjusted for the portion of ticket revenuesearned in the current period$.

#2$ Accrued revenues && revenues that have been earned by the end of theaccounting period but which will be collected in a future accounting period

#e.g., recording Interest (eceivable for interest revenues not yet collected$.#)$ %eferred epenses && previously recorded assets that need to be adjusted at theend of the period to reflect incurred epenses #e.g., *repaid Insurance must beadjusted for the portion of insurance epense incurred in the current period$.

#+$ Accrued epenses && epenses that have been incurred by the end of theaccounting period but which will be paid in a future accounting period #e.g.,recording Accrued penses *ayable for utilities epense incurred during theperiod that has not yet been paid$.

). A contra&asset is an account related to an asset that is an offset or reduction to theasset-s balance. Accumulated %epreciation is a contra&account to the equipmentand buildings accounts.

+. !he net income on the income statement is included in determining ending retainedearnings on the statement of stockholders equity and the balance sheet. !hechange in the cash account on the balance sheet is analy/ed and categori/ed onthe statement of cash flows into cash from operating activities, investing activities,and financing activities.

0. #a$ Income statement" #(evenues ains$ & #penses 3osses$ 4 5et IncomeMcGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-$


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#b$ 6alance sheet" Assets 4 3iabilities 7tockholders- quity#c$ 7tatement of cash flows" 8hanges in cash for the period 4 8ash from

9perations 8ash from Investing Activities 8ash from :inancing Activities#d$ 7tatement of stockholders- equity" nding 7tockholders- quity 4 #6eginning

8ontributed 8apital 7tock Issuances & 7tock (epurchases$ #6eginning (etained arnings 5et Income & %ividends %eclared$

;. Adjusting entries have no effect on cash. :or unearned revenues andprepayments, cash was received or paid at some point in the past. :or accruals,cash will be received or paid in a future accounting period. At the time of theadjusting entry, there is no cash being received or paid.

. 5et profit margin 4 5et income = net sales

!he net profit margin measures how much of every sales dollar generated duringthe period is profit.

?. An unadjusted trial balance is prepared after all current transactions have beenjournali/ed and posted to the ledger. It does not include the effects of the adjustingentries. !he basic purpose of an unadjusted trial balance is to check the equalitiesof the accounting model #particularly, %ebits 4 8redits$ and to provide the data in aform convenient for further processing in the accounting information processingcycle.

In contrast, an adjusted trial balance is prepared after the effects of all of theadjusting entries have been applied to the corresponding #prior$ unadjusted trialbalance amounts. !he basic purpose of an adjusted trial balance is to insure thataccuracy has been attained in applying the effect of the adjusting entries. !headjusted trial balance provides a second check in the model equalities #primarily%ebits 4 8redits$. It also provides data in a form convenient for further processing.

1@. 8losing entries are made at the end of the accounting period to transfer thebalances in the temporary income statement accounts to retained earnings. !heclosing entries reduce the revenue, gain, epense, and loss accounts to a /erobalance so that they can be used for the accumulation process during the net

period. 8losing entries must be entered into the system through the journal andposted to the ledger accounts to state properly the temporary and permanentaccount balances #i.e., /ero balances in the temporary accounts$.

11. #a$ *ermanent accounts && balance sheet accounts that is, the asset, liability, andstockholders equity accounts #these are not closed at the end of each period$.

#b$ !emporary accounts && income statement accounts that is, revenues, gains,epenses, and losses #these are closed at the end of each period$.

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#c$ (eal accounts && another name for permanent accounts.#d$ 5ominal accounts && another name for temporary accounts.

12. !he income statement accounts are closed at the end of the accounting periodbecause, in effect, they are temporary subaccounts to retained earnings #i.e., a partof stockholders- equity$. !hey are used only for accumulation during theaccounting period. Bhen the period ends, these accumulated accounts must be

transferred #closed$ to retained earnings. !he closing process serves"

#1$ to correctly state retained earnings, and#2$ to clear out the balances of the temporary accounts for the year just ended so

that these subaccounts can be used again during the net period foraccumulation and classification purposes.

6alance sheet accounts are not closed at the end of the period because theyreflect permanent accumulated balances of assets, liabilities, and stockholders-equity. *ermanent accounts show the entity-s financial position at the end of theperiod and are the beginning amounts for the net period.

1). A post&closing trial balance is a listing taken from the ledger after the adjusting andclosing entries have been journali/ed and posted. It is not a necessary part of theaccounting information processing cycle but it is useful because it demonstratesthe equality of the debits and credits in the ledger after the closing entries havebeen journali/ed and posted.

ANSWERS ! $"%#&%E C'!#CE

1. b$ 2. a$ ). d$ +. c$ 0. d$

;. d$ . c$ ?. d$ 1@. b$

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Authors( Recommended Solution ime)ime in minutes*

Mini-exercises Exercises ProblemsAlternateProblems

Cases andProjects

No. Time No. Time No. Time No. Time No. Time

1 0 1 1@ 1 10 1 10 1 202 0 2 1@ 2 2@ 2 2@ 2 20) ) ) 1@ ) 20 ) 2@ ) 20+ 0 + 10 + 2@ + 2@ + 200 0 0 1@ 0 2@ 0 2@ 0 20; 0 ; 2@ ; 20 ; 20 ; +@< 0 < 2@ < )@ < )@ < +0> 0 > 2@ > )@ > )@ > )0? 0 ? 10 ? ;@ ? 0@

1@ 0 1@ 2@ 1@ 2011 0 11 1@ 11 C

12 ) 12 2@1) 101+ 1010 2@1; 2@1< 2@1> 2@1? 1@2@ 10

C %ue to the nature of this project, it is very difficult to estimate the amount of timestudents will need to complete the assignment. As with any open&ended project, it ispossible for students to devote a large amount of time to these assignments. Bhilestudents often benefit from the etra effort, we find that some become frustrated by theperceived difficulty of the task. Dou can reduce student frustration and aniety bymaking your epectations clear. :or eample, when our goal is to sharpen researchskills, we devote class time discussing research strategies. Bhen we want thestudents to focus on a real accounting issue, we offer suggestions about possiblecompanies or industries.


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$#N#+EERC#SES

$4-./

*uglisi 8ompany

Adjusted !rial 6alanceAt Eune )@, 2@@@@ + months$.

(b)

1. %eferred epense

2. Insurance epense #, 7$....................... ?@@

*repaid insurance #A$.......................... ?@@

!o record si months of insurance epense #F),;@@ ;G2+$.

(c)

1. %eferred epense

2. %epreciation epense #, 7$................... ),@@@

Accumulated depreciation #HA, A$..... ),@@@

!o record annual depreciation epense.

$4-2/

6alance 7heet Income 7tatement

!ransaction Assets 3iabilities7tockholders

quity (evenues penses5et

Income

a. 5 2@@ 2@@ 2@@ 5 2@@b. ?@@ 5 ?@@ 5 ?@@ ?@@c. ),@@@ 5 ),@@@ 5 ),@@@ ),@@@


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$4-3/

(a)

1. Accrued epense

2. 'tilities epense #, 7$........................... )2@

Accrued utilities payable #3$................ )2@ !o record utilities epense incurred but not yet paid.

(b)

1. Accrued epense

2. Bages epense #, 7$............................ +,0@@

Accrued wages payable #3$................. +,0@@ !o record wages epense incurred but not yet paid, calculated as 1@ employees ) days F10@ each per day.

(c

)

1. Accrued revenue

2. Interest receivable #A$................................. 2@@ Interest revenue #(, 7$.................... 2@@ !o record interest earned but not yet collected, calculated as F0,@@@ 12J +G12.

$4-/6alance 7heet Income 7tatement

!ransaction Assets 3iabilities

7tockholders

quity (evenues penses

5et

Incomea. 5 )2@ )2@ 5 )2@ )2@b. 5 +,0@@ +,0@@ 5 +,0@@ +,0@@c. 2@@ 5 2@@ 2@@ 5 2@@

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$4-5/$!R6AN C!$&AN7

#ncome StatementFor the 7ear Ended 8ecem9er 1., 0::

Re;enues@@

0,+2@),@@@

1@,@@@F 1>,+2@

F 1,;@@),>2@2,?@@

;@@>,?2@

2,+@@ ,+2@

(eq. 2

!he adjustments in M++ and M+; have no effect on the operating, investing, andfinancing activities on the statement of cash flows because no cash is paid or receivedat the time of the adjusting entries.

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$4-../

Re;enues.

(eq. 2 #Adjusting entries$

6oth transactions are accruals because revenue has been earned and epensesincurred but no cash has yet been received or paid.

#a$ %ecember )1, 2@@>"

Bage epense #, 7$............................................ ;,@@@Bages payable #3$......................................... ;,@@@

!o record wages earned by employees during 2@@>, but not yet paid by thecompany. !his entry records the #a$ 2@@> epense, and #b$ 2@@> liability, which

is necessary to conform to accrual accounting and the matching principle.

#b$ %ecember )1, 2@@>"

Interest receivable #A$............................................... ),@@@Interest revenue #(, 7$............................... ),@@@

!o record interest revenue earned during 2@@>, but not yet collected. !his entryrecords the #a$ 2@@> revenue, and #b$ 2@@> receivable, which is necessary toconform to accrual accounting and the revenue principle.

(eq. )

Adjusting entries are necessary at the end of the accounting period to ensure that allrevenues earned and epenses incurred and the related assets and liabilities aremeasured properly. !he entries above are accruals entry #a$ is an accrued epense#incurred but not yet recorded$ and entry #b$ is an accrued revenue #earned but not yetrecorded$. In applying the accrual basis of accounting, revenues should be recogni/edwhen earned and measurable and epenses should be recogni/ed when incurred ingenerating revenues.

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E4-4/

(eq. 1

2@@< Income statement"Insurance epense #F@@ +G2+$ 4 F1,)@@ used.7hipping supplies epense" #F1+,@@@ F


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E4-2/6alance 7heet Income 7tatement



Income

E43 (a) 5 ;,@@@ ;,@@@ 5 ;,@@@ ;,@@@E43 (b) ),@@@ 5 ),@@@ ),@@@ 5 ),@@@E44 (a) 1,)@@ 5 1,)@@ 5 1,)@@ 1,)@@E44 (b) 0@$.

b. Accrued epense && epense incurred before cash is paid.Bages epense #, 7$............................................ ),


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(eq. 1 and 2

a. Accrued revenue && revenue earned before cash is collected.Accounts receivable #A$.............................................. 2,1@@ 7ervice revenue #(, 7$................................. 2,1@@

Amount is given.

b. %eferred revenue && cash received before revenue is earned.'nearned storage revenue #3$.................................... +@@

7torage revenue #(, 7$................................ +@@7torage revenue earned in fiscal year 2@@; #F2,+@@ 1G;$

c. Accrued epense && epense incurred before cash is paid.

Bages epense #, 7$............................................ 2,?@@

Bages payable #3$............................................ 2,?@@Amount is given.

d. %eferred epense && cash paid before epense is incurred.

Advertising epense #, 7$..................................... +0@

*repaid advertising #A$..................................... +0@

Advertising used in fiscal year 2@@; #F;@@ ?G12$.

e. %eferred epense && cash paid for equipment before being used.%epreciation epense #, 7$................................... 2),@@@

Accumulated depreciation, equipment #HA, A$ 2),@@@

Amount is given.

. %eferred epense && cash paid before epense is incurred.

7upplies epense #, 7$......................................... 0@,?@@ 7upplies #A$....................................................... 0@,?@@

7upplies used in 2@@; #F10,;@@ F+


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E4-5/6alance 7heet Income 7tatement



Income

(a) >0@ 5 >0@ 5 >0@ >0@(b) 5 ),


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Selected alance Sheet Amounts at 8ecem9er 1., 0::Assets"

quipment #recorded at cost per cost principle$ F12,@@@Accumulated depreciation #for one year, as given$ #1,2@@ $8arrying value of equipment #difference$ 1@,>@@

9ffice supplies #on hand, as given$ +@@

*repaid insurance #remaining coverage, F+@@ 1>G2+ months$ )@@

Selected #ncome Statement Amounts for the 7ear Ended 8ecem9er 1., 0::penses"

%epreciation epense #for one year, as given$ F 1,2@@9ffice supplies epense #used, F1,+@@ & F+@@ on hand$ 1,@@@Insurance epense #for ; months, F+@@ ;G2+ months$ 1@@

E4-.0/

alance Sheet #ncome Statement

%ate Assets 3iabilities7tockholders


Income

Note .< April 1, 2@@>

2@,@@@G2@,@@@

5 5 5 5 5

%ecember )1, 2@@>a 1,0@@ 5 1,0@@ 1,0@@ 5 1,0@@

March )1, 2@@?b22,@@@G21,0@@

5 0@@ 0@@ 5 0@@

5ote 2" August 1, 2@@>

2@,@@@ 2@,@@@ 5 5 5 5

%ecember )1, 2@@>c

5 1,@@@ & 1,@@@ 5 1,@@@ & 1,@@@ Eanuary )1, 2@@?d & 21,2@@ & 21,@@@ & 2@@ 5 2@@ & 2@@

#a$ F2@,@@@ principal .1@ annual interest rate ?G12 of a year 4 F1,0@@#b$ Additional interest revenue in 2@@?" F2@,@@@ .1@ )G12 4 F0@@. 8ash

received was F22,@@@ #F2@,@@@ principal F2,@@@ interest for 12 months$receivables decreased by the F2@,@@@ note receivable and F1,0@@ interestreceivable accrued in 2@@>.

#c$ F2@,@@@ principal .12 annual interest rate 0G12 of a year 4 F1,@@@#d$ Additional interest epense in 2@@?" F2@,@@@ .12 1G12 4 F2@@. 8ash paid

was F21,2@@ #F2@,@@@ principal F1,2@@ interest for ; months$ payables

decreased by the F2@,@@@ note payable and F1,@@@ interest payable accrued in2@@>.

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(eq. 1 (a) 8ash paid on accrued income taes payable.(b) Accrual of additional income ta epense.


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(c) 8ash paid on dividends payable.(d) Amount of dividends declared for the period.(e) 8ash paid on accrued interest payable.() Accrual of additional interest epense.

(eq. 2 8omputations"(a)

6eg. 6al. accrued income taes cash paid 4 nd. bal.F@

T 4 F)2) paid(c)6eg. 6al. dividends declared cash paid 4 nd. bal.

F+) 1T 4 F1


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(eq. 1 Adjusting entries that were or should have been made at %ecember )1"

#a$ 7hould have been made.

%epreciation epense #, 7$................................. 12,@@@

Accumulated depreciation & equipment #HA, A$ 12,@@@Amount is given.

#b$ 7hould have been made.'nearned revenue #3$............................................... 2,@@@

:ee revenue #(, 7$..................................... 2,@@@Amount is given.

#c$ ntry already made.Interest epense #, 7$ ........................................ 1,>@@

Interest payable #3$ ........................................ 1,>@@#F10,@@@ 12J 12G12 months$

7hould have been made.

Interest epense #, 7$......................................... )@@Interest payable #3$......................................... )@@

#F10,@@@ 12J 2G12 months$

#d$ 7hould have been made.

Insurance epense #, 7$...................................... ;@@

*repaid insurance #A$..................................... ;@@Amount is given.

#e$ 7hould have been made.(ent receivable #A$.................................................... >0@

(ent revenue #(, 7$................................... >0@Amount is given.

(eq. 26alance 7heet Income 7tatement



Income

(a) 9 12,@@@ 5 9 12,@@@ 5 ' 12,@@@ 9 12,@@@

(b) 5 9 2,@@@ ' 2,@@@ ' 2,@@@ 5 ' 2,@@@(c) 5 9 1,0@@ ' 1,0@@ 5 9 1,0@@ ' 1,0@@(d) 9 ;@@ 5 9 ;@@ 5 ' ;@@ 9 ;@@(e) ' >0@ 5 ' >0@ ' >0@ 5 ' >0@


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E4-.2/

#temsNet

#ncomeotal

Assetsotal

%ia9ilitiesStoc@holders

EBuity6alances reported F+@,@@@ F>@,@@@ F)@,@@@ F0@,@@@ ffects of" a. %epreciation #?,@@@$ #?,@@@$ #?,@@@$

b. Bages #1


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(eq. 1

a. penses #depreciation$ #, 7$............. 0,@@@

Accumulated depreciation #HA, A$. . . 0,@@@

b. (ent receivable #A$.................................... 2,@@@ (evenues #rent$ #(, 7$................... 2,@@@

c. Income ta epense #, 7$.................... ;,?@@

Income taes payable #3$................... ;,?@@

(eq. 2

AsPrepared

Effects ofAdjusting

EntriesCorrectedAmounts

#ncome statement,@@@ b F2,@@@ F1@@,@@@

penses #


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E4-./

(eq. 1

a. 7alaries and wages epense #, 7$................. )1@

7alaries and wages payable #3$.................... )1@

b. 'tilities epense #, 7$..................................... +@@

Accrued epenses payable #3$...................... +@@

c. %epreciation epense #, 7$............................ 2),@@@

Accumulated depreciation #HA, A$.............. 2),@@@

d. Interest epense #, 7$.................................... 0@@

Interest payable #3$....................................... 0@@#F2@,@@@ .1@ )G12$

e. 5o adjustment is needed because the revenuewill not be earned until Eanuary #net year$.

. Maintenance epense #, 7$............................ 1,@@@

Maintenance supplies #A$.............................. 1,@@@

!. Income ta epense #, 7$...............................


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E4-./ )continued*

(eq. 2

8ERED, #NC/#ncome Statement

For the 7ear Ended 8ecem9er 1., 0::

(ental revenue F11+,@@@penses"

7alaries and wages #F2>,0@@ F)1@$ F2>,>1@Maintenance epense #F12,@@@ F1,@@@$ 1),@@@(ent epense ?,@@@'tilities epense #F+,@@@ F+@@$ +,+@@as and oil epense ),@@@%epreciation epense 2),@@@Interest epense #F2@,@@@ 1@J )G12$ 0@@Miscellaneous epenses 1,@@@!otal epenses >2,


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E4-.5/

(eq. 1

(a) Insurance epense #, 7$ ..................................... 0

*repaid insurance #A$..................................... 0

(b) %epreciation epense #, 7$................................. @@

(ent revenue #(, 7$..................................... +,>@@F


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&4-1/

(eq. 1

a. %eferred epense e. Accrued revenueb. %eferred epense . %eferred epensec. Accrued epense !. Accrued epense

d. Accrued epense ". Accrued epense

(eq. 2

a. Insurance epense #, 7$....................................... 2@@

*repaid insurance #A$...................................... 2@@

F1,2@@ = ); months ; months of coverage. !his entry reduces the asset#prepaid insurance$ because part of it has been used and only F1,@@@represents future benefits #an asset$ to the company.

b. 7upplies epense #, 7$......................................... @@ nding Inventory F)@@.

c. (epairs and maintenance epense #, 7$.............. >@@

Accrued epenses payable #3$......................... >@@(epairs and maintenance epense is increased #debited$ because this epensewas incurred in 2@@>. A liability #accrued epenses payable$ is creditedbecause this amount is owed but will not be paid until 2@@?.

d. *roperty ta epense #, 7$.................................... 1,;@@

*roperty ta payable #3$..................................... 1,;@@*roperty ta epense is increased #debited$ because this epense wasincurred in 2@@>. A liability #property ta payable$ is credited because thisamount is owed but will not be paid until 2@@?.

e. Accounts receivable #A$.............................................. >,@@@ 7ervice revenue #(, 7$................................. >,@@@!his entry records an asset for the amount due from the customer andrecogni/es the revenue because it was earned in 2@@>.

. %epreciation epense #, 7$................................... 1,1@@

Accumulated depreciation, van #HA, A$ 1,1@@

!o record depreciation epense to recogni/e the use of the van during theyear. Amount is given.


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&4-1/ )continued*

!. Interest epense #, 7$........................................... )@@

Interest payable #3$............................................. )@@!o accrue interest epense incurred but not paid,F1@,@@@ 12J )G12 4 F)@@.

". Income ta epense #, 7$...................................... ?,??@

Income ta payable #3$....................................... ?,??@!o accrue income ta epense incurred but not paid"

Income before adjustments #given$ F)@,@@@ffect of adjustments #a$ through #g$ ),)@@ #&2@@ & @@ &1,;@@Income before income taes )),)@@ >,@@@ &1,1@@ &)@@$Income ta rate )@JIncome ta epense F ?,??@

&4-4/

(eq. 1

a. %eferred revenue e. %eferred epenseb. Accrued epense . %eferred epensec. Accrued revenue !. %eferred revenued. Accrued epense ". Accrued epense

(eq. 2

6alance 7heet Income 7tatement



Incomea. 5 +,>@@ +,>@@ +,>@@ 5 +,>@@b. 5 1+,)@@ 1+,)@@ 5 1+,)@@ 1+,)@@c. 2,@@@ 5 2,@@@ 2,@@@ 5 2,@@@d. 5 ;@@ ;@@ 5 ;@@ ;@@e. 1,@@@ 5 1,@@@ 5 1,@@@ 1,@@@. 1,0@@ 5 1,0@@ 5 1,0@@ 1,0@@!. 5 +@@ +@@ +@@ 5 +@@". 5 +@@ +@@ 5 +@@ +@@

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&4-2/

(eq. 1

a. %eferred epense e. Accrued revenueb. %eferred epense . %eferred epensec. Accrued epense !. Accrued epense

d. Accrued epense ". Accrued epense




Income

a. 2@@ 5 2@@ 5 2@@ 2@@

b. @@

d. 5 1,;@@ 1,;@@ 5 1,;@@ 1,;@@

e. >,@@@ 5 >,@@@ >,@@@ 5 >,@@@. 1,1@@ 5 1,1@@ 5 1,1@@ 1,1@@

!. 5 )@@ )@@ 5 )@@ )@@

". 5 ?,??@ ?,??@ 5 ?,??@ ?,??@

8omputations"a. 7i months of epired insurance during 2@@>" F1,2@@ ;G); 4 F2@@.

b. 7upplies used during 2@@>" 6eg. inventory, F2@@ *urchases, F>@@ & ndinginventory, F)@@ 4 F to be paid during Eanuary 2@@?.

d. *roperty taes incurred in 2@@> to be paid in 2@@?.

e. Accrued revenue" earned in 2@@> but not yet collected or recorded payablewithin )@ days.

. %epreciation is given.

!. Interest epense accrued for ) months" F1@,@@@ 12J )G12 4 F)@@.

". Adjusted income 4 F)@,@@@ & 2@@ & @@ &1,;@@ >,@@@ &1,1@@ & )@@ 4F)),)@@ )@J ta rate 4 F?,??@ income ta epense.


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&4-3/

Account

0::

alance

Financial

Statement

Effect on

Cash Flos

1. (ent revenue F02>,@@@ Income statement F012,@@@

2. 7alary epense ;0,@@@ Income statement ;2,@@@

). Maintenance supplies epense ?,)@@ Income statement 5o effect

+. (ent receivable 1;,@@@ 6alance sheet 5o effect

0. (eceivables from employees 1,0@@ 6alance sheet 1,0@@

;. Maintenance supplies 1,,@@@

,@@@ ;0,@@@ ?,)@@

(')Rent receiable

() Receiablesfrom emplo#ees

() &aintenancesupplies

(b) 1;,@@@ (!) 1,0@@ (") ),@@@(i) >,@@@ ?,)@@ used

1;,@@@ 1,0@@ (j) 1,


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&4-/

(eq. 18ecem9er 1., 0::3 Adjusting Entries

#1$ Accounts receivable #A$.......................................... +@@ #b$ 7ervice revenue #(, 7$ ............................ +@@ (i)!o record service fees earned, but not collected.

#2$ Insurance epense #, 7$ .................................. 2@@ #l$

*repaid insurance #A$ .................................. 2@@ #c$

!o record insurance epired as an epense.

#)$ %epreciation epense #, 7$.............................. >,0@@ ##$

Accumulated depreciation, equipment #HA, A$ >,0@@ (e)

!o record depreciation epense.

#+$ Income ta epense #, 7$ ................................ +,


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&4-/ )continued*

(eq. +

5et profit margin 4 5et income 5et 7ales 4 F#>,.>$J

!he net profit margin indicates that, for every F1 of service revenues, Bagonblattactually lost [email protected]>> of net income. !his ratio implies that Bagonblatt destroysshareholder value in generating its sales and suggests that better management of itsbusiness #in terms of sales price or costs$ is required.

(eq. 0

7ervice revenue #($................................................ +;,+@@

(etained earnings #7$ ......................................... >,


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&4-5/

(eq. 18ecem9er 1., 0:: Adjusting Entries c 1;@d ) 8 )2 8 1;@6al. ;> 6al. 2) 6al. @

DepreciationE$pense

ncome 2a$E$pense

nterestE$pense

m ; 8 ; $ > 8 > n% 1 8 16al. @ 6al. @ 6al. @

C F1@,@@@ .12 1@G12

"uppliesE$pense

0agesE$pense

RemainingE$penses

l 1; 8 1; o 12 8 12 e >0 8 >06al. @ 6al. @ 6al. @


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&4-?/ )continued*

(eq. 2a. 8ash #A$........................................................... 1@,@@@

5otes payable #3$................................... 1@,@@@6orrowed cash on 12J note, March 1, 2@@>.

b. 3and #A$............................................................ ?,@@@ 8ash #A$................................................. ?,@@@

*urchased land for future building site.

c. 8ash #A$........................................................... 12@,@@@Accounts receivable #A$................................... +@,@@@ 7ervice revenue #(, 7$...................... 1;@,@@@7ervice revenues earned during 2@@>.

d. 8ash #A$........................................................... ),@@@ 8ontributed capital #7$......................... ),@@@

7old capital stock for cash.

e. (emaining epenses #, 7$......................... >0,@@@

Accounts payable #3$............................. 10,@@@

8ash #A$................................................. .

. 8ash #A$........................................................... 2+,@@@

Accounts receivable #A$......................... 2+,@@@

8ollected on customers- accounts.

!. 9ther assets #A$............................................... 1@,@@@ 8ash #A$................................................. 1@,@@@

*urchased additional assets.

". Accounts payable #3$....................................... 1),@@@

8ash #A$................................................. 1),@@@

*aid creditors.

i. 7upplies #A$...................................................... 1>,@@@ Accounts payable #3$............................. 1>,@@@*urchased supplies for future use.

j. 5o entry required no revenue earned in 2@@>.

#. (etained earnings #7$.................................... 1


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&4-?/ )continued*

(eq. )

l. 7upplies epense #, 7$.............................. 1;,@@@

7upplies #A$............................................. 1;,@@@

!o record supplies used #F)@ & 1+$.

m. %epreciation epense #, 7$........................ ;,@@@

Accumulated depreciation #HA, A$........ ;,@@@

!o record depreciation as given.

n. Interest epense #, 7$................................ 1,@@@

Interest payable #3$................................. 1,@@@!o accrue interest for March & %ecember, 2@@>,#F1@,@@@ 12J 1@G12$.

o. Bages epense #, 7$................................. 12,@@@ Bages payable #3$.................................. 12,@@@!o accrue wages incurred but not paid.

$. Income ta epense #, 7$........................... >,@@@

Income taes payable #3$........................ >,@@@!o accrue income ta.

(eq. +

' H ' !!%, #NC/

#ncome StatementFor the 7ear Ended 8ecem9er 1., 0::5

(evenues"7ervice revenue F1;@,@@@

penses"%epreciation epense ;,@@@Interest epense 1,@@@7upplies epense 1;,@@@Bages epenses 12,@@@(emaining epenses >0,@@@

*reta income +@,@@@Income ta epense >,@@@

5et income F)2,@@@

arnings per shareKF)2,@@@ = ;>,@@@L

F@.+ F;0,@@@ F >,@@@ F,@@@(etained earnings 2),@@@ !otal stockholders-

equity ?1,@@@

otal assets G.4,:::otal lia9ilities andstoc@holders( eBuity G.4,:::

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-#$


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&4-?/ )continued*

' H ' !!%, #NC/Statement of Cash Flos

For the 7ear Ended 8ecem9er 1., 0::5

8ash from 9perating Activities" 8ash collected from customers #c $ F1++,@@@ 8ash paid to suppliers and employees #e"$ #>),@@@$ Cash pro;ided 9y operations 3.,:::

8ash from Investing Activities" *urchase of land #b$ #?,@@@$ *urchase of other assets #!$ #1@,@@@$ Cash used for in;esting acti;ities ).?,:::*

8ash from :inancing Activities" 6orrowing from bank #a$ 1@,@@@

Issuance of stock #d$ ),@@@ *ayment of dividends ##$ #1,@@@6eginning cash balance, Eanuary 1, 2@@> ),@@@nding cash balance, %ecember )1, 2@@> F +1,@@@

(eq. 0

8ecem9er 1., 0::5 Closing Entry

& 7ervice revenue #($......................................... 1;@,@@@ (etained earnings #7$ ......................... )2,@@@ %epreciation epense #$ ...................... ;,@@@

Interest epense #$ ............................... 1,@@@

7upplies epense #$ ............................. 1;,@@@

Bages epense #$ ............................... 12,@@@

(emaining epenses #$ ........................ >0,@@@

Income ta epense #$ ......................... >,@@@

!o close revenues and epenses #temporaryaccounts$.


#-#2 %olut ions Manual


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&4-?/ )continued*

(eq. ;

*ost&closing trial balance"

' H ' !!%, #NC/&ost+Closing rial alance

At 8ecem9er 1., 0::5

Debit Credit 8ash F +1,@@@

Accounts receivable 21,@@@7upplies 1+,@@@3and ?,@@@quipment ;@,@@@

Accumulated depreciation #equipment$ F 12,@@@9ther assets #not detailed$ 1+,@@@

Accounts payable 20,@@@Bages payable 12,@@@Interest payable 1,@@@Income taes payable >,@@@5otes payable 1@,@@@8ontributed capital #;>,@@@ shares$ ;>,@@@(etained earnings 2),@@@7ervice revenue @%epreciation epense @Income ta epense @Interest epense @

7upplies epense @Bages epense @(emaining epenses #not detailed$ @

!otal F10?,@@@ F10?,@@@

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-#&


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&4-?/ )continued*

(eq. Inventories 1>1*repaid epenses 1?9ther current assets 213ong&term investments ;>*roperty, plant, and equipment 1,@>1

Accumulated depreciation F )219ther long&lived assets )>

Accounts payable 0;Accrued liabilities 1)17hort&term bank debt ;+3ong&term liabilities +@8ontributed capital ;+@Interest income ?8ost of sales eneral and admin. epenses ?@Interest epense 1Income ta epense ;2 !otals F ),1;@ F ),1;@

(eq. 2

7ince debits are supposed to equal credits in a trial balance, the balance in (etainedarnings is determined as the amount in the credit column necessary to make debitsequal credits #a NpluggedO figure$.

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-#!


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(eq. 1

a. %eferred epense e. %eferred revenueb. Accrued epense . Accrued epensec. %eferred revenue !. Accrued epense

d. %eferred epense ". Accrued revenue(eq. 2

a. Insurance epense #, 7$....................................... 1,;@@

*repaid insurance #A$...................................... 1,;@@

F),2@@ = ; months ) months of coverage. !his entry reduces the asset#prepaid insurance$ because part of it has been used and the remaining F1,;@@represents future benefits #an asset$ to the company.

b. Bage epense #, 7$............................................. ?@@

Bages payable #3$............................................ ?@@

Bage epense is increased #debited$ because this epense was incurred byEune )@, 2@@


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(eq. 1

a. %eferred epense e. %eferred epenseb. Accrued revenue . %eferred epense

c. Accrued epense !. Accrued revenued. %eferred epense ". Accrued epense

(eq. 2

a. 7upplies epense #, 7$......................................... 1,10@

7upplies #A$....................................................... 1,10@

7upplies is decreased #credited$ to record the use of supplies during the yearbecause this epense was incurred in 2@@>, calculated as6eg. Inventory of F)0@ *urchases F1,2@@ nding Inventory F+@@.

b. Accounts receivable #A$.............................................. . A liability #accrued epenses payable$ is creditedbecause this amount is owed but will not be paid until 2@@?.

d. Insurance epense #, 7$....................................... 2@@ *repaid insurance #A$...................................... 2@@

F1,2@@ = 12 months 2 months of coverage. !his entry reduces the asset#prepaid insurance$ because part of it has been used while F1,@@@ representsfuture benefits #an asset$ to the company.

e. (ent epense #, 7$...............................................


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A&4-1/ )continued*

!. Interest receivable #A$................................................. >@ Interest income #(, 7$..................................... >@!o accrue interest income earned but not yet received,F+,@@@ 12J 2G12 4 F>@.

". Income ta epense #, 7$......................................


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(eq. 1

a. %eferred epense e. %eferred epenseb. Accrued revenue . %eferred epensec. Accrued epense !. Accrued revenued. %eferred epense ". Accrued epense




Income

a. 1,10@ 5 1,10@ 5 1,10@ 1,10@b. but not yet collected or recorded payablewithin )@ days.

c. pense incurred during 2@@> to be paid during Eanuary 2@@?.

d. !wo months of epired insurance during 2@@>" F1,2@@ 2G12 4 F2@@.

e. 9ne month of epired rent during 2@@>" F2,1@@ 1G) 4 F


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A&4-3/

(eq. 18ecem9er 1., 0::3 Adjusting Entries

#1$ Accounts receivable #A$ ......................................... 1,0@@ #b$ 7ervice revenue #(, 7$ ............................ 1,0@@ #j$!o record service fees earned, but not collected.

#2$ (ent epense #, 7$ .......................................... +@@ #m$

*repaid rent #A$............................................ +@@ #c$

!o record rent epired as an epense.

#)$ %epreciation epense #, 7$ ............................. 1,@@@ #j$!o record service fees earned.

#0$ Income ta epense #, 7$ ................................ ;,0@@ #n$

Income taes payable #3$ ............................ ;,0@@ #$!o record income taes for 2@@;.

(eq. 2Amounts before

Adjusting EntriesAmounts after

Adjusting Entries

(evenues" 7ervice revenue F>),@@@ F?2,0@@penses" 7alary epense 0+,@@@ 0+,@@@ %epreciation epense 1


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A&4-3/ )continued*

(eq. )

arnings per share 4 F1+,1@@ net income 0,@@@ shares 4 F2.>2 per share

(eq. +

5et profit margin 4 5et income 5et 7ales 4 F1+,1@@ F?2,0@@ 4 10.2J

!he net profit margin indicates that, for every F1 of service revenues, Abraham [email protected] #10.2J$ of net income. !his ratio suggests that Abraham is generally profitable.

(eq. 0

7ervice revenue #($................................................ ?2,0@@

(etained earnings #7$.................................. 1+,1@@

7alary epense #$......................................... 0+,@@@

%epreciation epense #$............................... 1,@@@Accounts receivable 1,0@@*repaid rent >@@*roperty, plant, and equipment 21@,@@@

Accumulated depreciation ,@@@8ontributed capital 11@,@@@(etained earnings )0,>@@7ervice revenue @7alary epense @%epreciation epense @(ent epense @Income ta epense @

!otals 2)@,)@@ 2)@,)@@

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-!$


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A&4-/

(eq. 18ecem9er 1., 0:: Adjusting Entries 6al. + ! > 6al. 2 l >a 2@ e 2> d ? i 1@c 0 )

d 0; " 11! > # 1@j )6al. 2< 6al. 0 6al. +

"mall 2ools E-uipment AccumulatedDepreciation

6al. ; l 1 b 1> m 2 )6al. > 6al. 1> 6al. 2

.ther Assets Accounts Pa#able /otes Pa#able6al. ? " 11 6al. < a 2@

e F10,@@@ F +,@@@ F1?,@@@ Additional stock issuance 0,@@@ 0,@@@ 5et income 11,@@@ 11,@@@ %ividends declared #1@,@@@$ #1@,@@@$6alance, %ecember )1, 2@@> F2@,@@@ F 0,@@@ F20,@@@

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-!7


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A&4-5/ )continued*

NEW A6A#N F"RN#"RE, #NC/alance Sheet


Assets: Liabilities:

8urrent Assets" 8urrent 3iabilities"8ash F2,@@@ Interest payable 1,@@@

!otal current assets ++,@@@ Income taes payable +,@@@quipment 1>,@@@ 'nearned revenue ),@@@3ess" Accum. depr. #2,@@@$ !otal current liabilities ++,@@@9ther assets ?,@@@ "toc3holders4 E-uit#:

8ontributed capital 2@,@@@(etained earnings 0,@@@

!otal stockholders-equity

20,@@@

otal assets G3?,:::otal lia9ilities andstoc@holders( eBuity G3?,:::

NEW A6A#N F"RN#"RE, #NC/Statement of Cash Flos

For the &eriod Ended 8ecem9er 1., 0::5

8ash from 9perating Activities" 8ash collected from customers #d !j$ F ;,@@@$ *urchase of small tools #$ #),@@@$ Cash used in in;esting acti;ities )0.,:::*

8ash from :inancing Activities" 6orrowing from bank #a$ 2@,@@@ Issuance of stock #c$ 0,@@@

*ayment of dividends ##$ #1@,@@@$ Cash pro;ided 9y financing acti;ities .2,:::8hange in cash 22,@@@6eginning cash balance, Eanuary 1, 2@@> 0,@@@nding cash balance, %ecember )1, 2@@> F 2


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A&4-5/ )continued*

(eq. 08ecem9er 1., 0::5 Closing Entry

7ervice revenue #($......................................... ;0,@@@

(etained earnings #7$ ......................... 11,@@@ %epreciation epense #$ ...................... 2,@@@

Interest epense #$ ............................... 1,@@@

Bages epense #$ ............................... ),@@@

(emaining epenses #$ ........................ ++,@@@

Income ta epense #$ ......................... +,@@@

!o close revenues and epenses.

(eq. ;

NEW A6A#N F"RN#"RE, #NC/&ost+Closing rial alance


Account 2itles Debit Credit8ash F2,@@@quipment 1>,@@@

Accumulated depreciation F 2,@@@9ther assets #not detailed$ ?,@@@

Accounts payable 1),@@@

5otes payable 2@,@@@Bages payable ),@@@Interest payable 1,@@@Income taes payable +,@@@'nearned revenue ),@@@8ontributed capital #2@,@@@ shares$ 2@,@@@(etained earnings 0,@@@7ervice revenue @%epreciation epense @Bages epense @Income ta epense @Interest epense @

(emaining epenses #not detailed$ @!otals F


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A&4-5/ )continued*

(eq. +>,1@> 4 @.@;+ F+?,;;; 4 @.@0?Margin 7ales 1,)>2,?2) F>+>1,2+1 F1,22?,.


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C&4-4

(eq. 1

!he author suggests that the root cause of accounting scandals is Na widespreadobsession with earnings that drives companies to push accounting standards to thelimit and, in etreme cases, to engage in outright fraud.O !his causes managers to

make decisions to meet short&term earnings epectations, often at the epense of long&term shareholder value.

(eq. 2

!he uncertainties that the author believes are problems in current financial reportingare related to the subjective assumptions about the future #accruals$ revenuerecognition and epense matching. amples include uncertainties as to how muchrevenue a company will generate from current&period ependitures for research anddevelopment, employee training, brand building, or additions to production capacity.

!here is also subjectivity in matching epenses with revenues. amples include thevarious depreciation methods available to managers and epensing research anddevelopment.

According to the author, these uncertainties about the future combined with historicalinformation produce financial statements, and net income in particular, that do not tellusers what they need to know to make investing and lending decisions.


#-'' %olut ions Manual


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(eq. 1"nadjustedrial alance

Adjustedrial alance

&ost+Closingrial alance

Account Debit Credit Debit Credit Debit Credit

8ash 2@,@@@ 2@,@@@ 2@,@@@

Maintenance supplies 0@@ 2@@ 2@@7ervice equipment ?@,@@@ ?@,@@@ ?@,@@@

Accumulated depreciation,service equipment 1>,@@@ 2@@ >@@Income taes payable 1),@2@ 1),@2@Bages payable 0@@ 0@@'nearned revenue ;,@@@ ;,@@@8ontributed capital 0;,@@@ 0;,@@@ 0;,@@@(etained earnings ?,@@@ ?,@@@ )?,)>@7ervice revenue 22@,@@@ 21+,@@@ @penses 1;@,@@@ 1>),;2@ @

)1),@@@ )1),@@@ ));,)2@ ));,)2@ 102,@@$ and to record interest payable.

#c$ !o reduce service revenue for cash collected in advance of being earned and torecord the liability for those services yet to be performed, F;,@@@.

#d$ !o record depreciation epense for 2@@.

#$ !o record 2@@< income ta and the related liability, F1),@2@.

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-'7


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C&4-2/ )continued*

(eq. )Closing Entry on 8ecem9er 1., 0::@

penses #from the adjusted trial balance$ #$......... 1>),;2@

(eq. +

*reta income Average income ta rate 4 Income ta epense#F21+,@@@ & 1,@@@ T 4 F0;,@@@

T 4 F


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C&4-3/

2ransaction (a):

1. !his transaction will affect 7hirleys financial statements for 1@ years #from 2@@; to2@10$ in conformity with the matching principle.

2. Income statement"%epreciation epense, as given F1,+@@ each year

). 6alance sheet at %ecember )1, 2@@>"Assets"

9ffice equipment F1+,@@@3ess" Accumulated depreciationC +,2@@

8arrying #book$ value F ?,>@@CF1,+@@ ) years 4 F+,2@@.

+. An adjusting entry each year over the life of the asset would be recorded to reflect

the allocation of the cost of the asset when used to generate revenues"%epreciation epense #, 7$ 1,+@@

Accumulated depreciation #HA, A$ 1,+@@

2ransaction (b):

1. !his transaction will affect 7hirleys financial statements for 2 years&&2@@> and2@@?&&because four months rent revenue was earned in 2@@>, and two months-rent revenue will be earned in 2@@?.

2. !he 2@@> income statement should report rent revenue earned of F1;,@@@#F2+,@@@ +G;$. 9ccupancy was provided for only + months in 2@@>. !his is inconformity with the revenue principle.

). !his transaction created an F>,@@@ liability #F2+,@@@ & F1;,@@@ 4 F>,@@@$ as of%ecember )1, 2@@>, because at that date 7hirley Uowes-- the renter two moremonths- occupancy for which it has already collected the cash.

+. Des, an adjusting entry must be made to #a$ increase the rent revenue account byF1;,@@@, and #b$ to decrease the liability to F>,@@@ representing the futureoccupancy owed #in conformity with the revenue principle$.

%ecember )1, 2@@>&&Adjusting entry"

'nearned rent revenue #3$ ............................ 1;,@@@ (ent revenue #(, 7$......................... 1;,@@@

McGraw- Hil l/Ir win The McGraw- Hill Companie s, Inc., 2007Financial Accountin, !"e #-')


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C&4-3/ )continued*

2ransaction (c):

1. !his transaction will directly affect 7hirleys financial statements for two years, withthe epense incurred in 2@@> and the cash payment in 2@@?.

2. !he F income statementand as a liability on the 2@@> balance sheet. 9n Eanuary 0, 2@@?, the liability willbe paid. !herefore, the 2@@? balance sheet will reflect a reduced cash balanceand reduced liability balance. !he transaction will not directly affect the 2@@?income statement #unless the adjusting entry was not made$.

). Des, an adjusting entry must be made to #a$ record the F #matching principle$ and #b$ to record the liability which will be paid in 2@@?.

%ecember )1, 2@@>&&Adjusting entry"

Bage epense #, 7$ ................................


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C&4-/

(eq. 1

Adjusting entries0,@@@ e @@ *repaid insurance +,@@@ b 2,@@@ 2,@@@

!otal current assets 10,@@@ >,>@@ quipment +@,@@@ +@,@@@ 3ess" Accumulated deprec. @ c >,@@@ #>,@@@$ (emaining assets 2,@@@ 1@,?0@!otal stockholders- equity 2,@@@ F;@@


#-7' %olut ions Manual


77/80

C&4-?/ )continued*

(eq. )

9mission of the adjusting entries caused"#a$ 5et income to be overstated by F2


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C&4-?/ )continued*

(eq. 0

#todays date$

!o the 7tockholders of Magliochetti Moving 8orporation"

Be regret to inform you that your request for a F2@,@@@ loan has been denied.

9ur review showed that various adjustments were required to the original set offinancial statements provided to us. !he original #unadjusted$ financial statementsoverstated net income for 2@@< by F2,@@@ & F1@,?0@$. !hisoverstatement was caused by incorrectly including F,@@@ because annual depreciation was notproperly recogni/ed.

A review of key financial ratios indicates that the adjustments caused earnings pershare and net profit margin to decline. 5et profit margin declined from ++.


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C&4-.:/

(eq. 1 8ash from 9perations" F1>,@@@

(eq. 2 7ubscriptions (evenue for fiscal year ended March )1, 2@@>#F1>,@@@


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:I5A58IA3 (*9(!I5 A5% A53D7I7 *(9E8!

C&4-../

!he solutions to this project will depend on the company andGor accounting periodselected for analysis.

Lls5e Chap04 Sols

Documents

Transcript of Lls5e Chap04 Sols