CHAPTER 3 Solutions MEASURING BUSINESS INCOME

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1 CHAPTER 3 Solutions MEASURING BUSINESS INCOME Chapter 3, SE c b d a Chapter 3, SE 2. Dec. 31 Insurance Expense 800 Prepaid Insurance To record insurance expired during the year $460 + $1,040 $700 = $ Chapter 3, SE 3. Dec. 31 Supplies Expense 920 Supplies To record supplies used during the year $380 + $980 $440 = $ Chapter 3, SE 4. Mar. 31 Depreciation Expense Office Equipment 100 Accumulated Depreciation Office Equipment To record depreciation for the month 100 Sheet Presentation: Office equipment Less accumulated depreciation $1, $1,600 Chapter 3, SE Wages Expense 230 Wages Payable To record wages accrued at the end of ( $1,380 6 ) 1 = $

2 Chapter 3, SE 6. Aug. 31 Unearned Service Revenue 760 Service Revenue To record service revenue earned during August on which advance deposits had been received 760 Chapter 3, SE 7. Revenue Service revenue Expenses Wages expense Rent expense Income taxes expense Utilities expense Telephone expense Total expenses Net income Retained earnings, November 30, Net income Subtotal Less dividends Retained earnings, December 31, Shimura Company Income Statement For the Month Ended December 31, Shimura Company Statement of Retained Earnings For the Month Ended December 31, $ $1, $ 350 $4, $4, $4,

3 Chapter 3, SE 8. Closing entries prepared Dec. 31 Service Revenue 1,300 Income Summary To close the revenue account Income Summary 950 Wages Expense Rent Expense Income Taxes Expense Utilities Expense Telephone Expense To close the expense accounts Income Summary 350 Retained Earnings To close the Income Summary account Retained Earnings 175 Dividends To close the Dividends account 1,

4 Chapter 3, SE 9. Cloud Company Income Statement For the Month Ended October 31, Revenue Service revenue Expenses Wages expense Rent expense Income taxes expense Utilities expense Telephone expense Total expenses Net income $ $1,950 1,426 $ 524 Retained earnings, September 30, Net income Subtotal Less dividends Retained earnings, October 31, Cloud Company Statement of Retained Earnings For the Month Ended October 31, $6, $6, $6,

5 Chapter 3, SE 10. Closing entries prepared Dec. 31 Service Revenue 1,950 Income Summary To close the revenue account Income Summary 1,426 Wages Expense Rent Expense Income Taxes Expense Utilities Expense Telephone Expense To close the expense accounts Income Summary 524 Retained Earnings To close the Income Summary account Retained Earnings 263 Dividends To close the Dividends account 1,

6 Chapter 3, SE 11. Unearned Revenue at December 31 Service Revenue earned during December Potential receipts from services provided during December Less Unearned Revenue at November 30 Cash received during December for services to be provided $ 450 2,550 $3, $2,350 Chapter 3, SE 12. Financial ratio calculated: Cash Flow Yield = Cash Flow from Operations Net Income $8,750 = = 1.3 $7,000 = 1.3 times 106

7 Chapter 3, E When a company has net income, its stockholders' equity increases, but there is also an increase in assets and/or decrease in liabilities. To measure a company's performance (net income) accurately, each expense (in this case, guaranty or warranty expense) must be matched with the related revenue in the year in which the product or service was sold. Otherwise, net income will be overstated, and the related liability will be understated. Accrual accounting is more closely related to profitability because the purpose of accrual accounting is to measure net income. Cash accounting is more closely related to the goal of liquidity. No, the carrying value will equal the market value of the asset only by coincidence because the goal of recording depreciation is to allocate the cost of the asset over its life, not to determine its market value. Chapter 3, E Retained Earnings is not listed because it begins with a zero balance in the first month of operation. It does not yet reflect the amounts of revenues, exthe Supplies T account. The amount expended in cash to purchase supplies penses, and dividends for the year, which are listed in the adjusted trial balance. You would expect to find the amount expended in cash on the debit side of represents an asset increase and is recorded by a debit to Supplies. The amount expensed during the period represents an asset decrease and is recorded by a credit to Supplies. Cash flow yield is a good measure of liquidity and is closely related to the goal of liquidity. It tells how much cash is generated by the company's operations in relation to its net income. Chapter 3, E 3. (Note to the instructor: Because more than one concept may apply to a particular action, which concept is most applicable is a matter of judgment. This exercise is intended to generate discussion.) 1. b d e 6. a f c 107

8 Chapter 3, E Services have not been rendered. Persuasive evidence of an arrangement does not exist. Collectibility is not reasonably assured. The seller's price to the buyer is not fixed or determinable. Chapter 3, E 5. Dec. 31 Magazine Subscriptions Received in Advance 87,500 Magazine Subscriptions Revenue To recognize revenue for subscriptions expired during 87,500 Chapter 3, E Insurance Expense 17,150 Prepaid Insurance To record expired insurance $33,690 $16,540 = $17, Insurance Expense 4,300 Prepaid Insurance To record expired insurance 17,150 4,

9 Chapter 3, E Amounts indicated by the question marks are in italics a b c d Supplies on hand at July 1 $264 $ 217 $196 $ 822 Supplies purchased during the month 52 1, ,928 Total supplies available $316 $1,408 $370 $2,750 Supplies consumed during the month ,632 Supplies on hand at July 31 $122 $ 436 $ 56 $1, Adjusting entry for column a July 31 Supplies Expense 194 Supplies To record adjustment for supplies used 194 Chapter 3, E May 31 Salaries Expense 28,000 Salaries Payable To accrue salaries owed but not paid at month end $70,000 5 = $14,000 per day 2 work days (Monday and Tuesday) incurred = $28, Salaries Expense 42,000 Salaries Payable 28,000 Cash To pay weekly salaries 28,000 70,

10 Chapter 3, E Royalty expense and royalty income calculated January to (payment on November 1) $20,000 July to December ( $430, percent) 64,500 royalty expense and royalty income $84,500 Note: The $12,000 paid on May 1 relates to Adjusting entries recorded In Bit Comp, Inc.'s records: Dec. Dec. 31 Royalty Expense 64,500 Royalty Payable To record royalties owed for the last half of, to be paid on May 1, In Regina Company's records: 31 Royalty Receivable 64,500 Royalty Income To record royalties earned for the last half of, to be received on May 1, 64,500 64,

11 Chapter 3, E 10. Spark Cleaning Company, Inc. Income Statement For the Month Ended August 31, Revenue Janitorial revenue Expenses Wages expense Supplies expense Rent expense Income taxes expense Depreciation expense truck Gas, oil, and other truck expenses Insurance expense Depreciation expense cleaning equipment Total expenses Net income Spark Cleaning Company, Inc. Statement of Retained Earnings For the Month Ended August 31, Retained earnings, July 31, Net income Subtotal Less dividends Retained earnings, August 31, $5,680 2,920 1, $14,620 12,600 $ 2,020 $11,034 2,020 $13,054 2,000 $11,

12 Chapter 3, E 10. (Continued) Cash Accounts receivable Prepaid insurance Prepaid rent Cleaning supplies Cleaning equipment Less accumulated depreciation Truck Less accumulated depreciation Total assets Accounts payable Wages payable Unearned janitorial revenue Income taxes payable Total liabilities Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity Spark Cleaning Company, Inc. Sheet August 31, Assets Liabilities Stockholders' Equity $ 4,590 2, $ 3, ,880 $ 7, ,480 $17,274 $ $ 4,000 11,054 $ 2,220 15,054 $17,

13 Chapter 3, E 11. Closing entries recorded Aug. 31 Janitorial Revenue 14,620 Income Summary To close the revenue account Income Summary 12,600 Wages Expense Supplies Expense Rent Expense Income Taxes Expense Depreciation Expense Truck Gas, Oil, and Other Truck Expenses Insurance Expense Depreciation Expense Cleaning Equipment To close the expense accounts 31 Income Summary 2,020 Retained Earnings To close the Income Summary account 31 Retained Earnings 2,000 Dividends To close the Dividends account 14,620 5,680 2,920 1, ,020 2,

14 Chapter 3, E Office Supplies Expense 428 Office Supplies To record supplies consumed during the year Beginning balance $ Purchases = Total available Ending balance Supplies consumed $ $ Depreciation Expense Office Equipment 1,065 Accumulated Depreciation Office Equipment To record depreciation allocated to the year 3. Property Taxes Expense 900 Property Taxes Payable To record property taxes applicable to the sixmonth period 4. Interest Receivable 425 Interest Income To record interest accrued during the period 5. Unearned Revenue 375 Service Revenue To record revenue earned for services for which payment had been received in advance 6. Accounts Receivable 400 Service Revenue To record service revenue earned but not billed 428 1,

15 Chapter 3, E Entries recorded Oct. Dec. 1 Cash 42,000 Unearned Legal Fees To record legal fees received in advance 31 Unearned Legal Fees 10,500 Legal Fees Earned To recognize three months' fees earned ( $42, months ) 3 months = $10,500 42,000 10, Revenue on the income statement includes the $10,500 in legal fees that have been earned. Unearned Legal Fees is a liability of $31,500 on the balance sheet. Chapter 3, E 14. Closing entries recorded Dec. 31 Consulting Fees Earned 31,700 Income Summary To close the revenue account 31 Income Summary 23,275 Office Salaries Expense Income Taxes Expense Rent Expense Advertising Expense Telephone Expense To close the expense accounts 31 Income Summary 8,425 Retained Earnings To close the Income Summary account 31 Retained Earnings 7,000 Dividends To close the Dividends account 31,700 13,500 3,000 2,650 2,525 1,600 8,425 7,

16 Chapter 3, E 15. Statement of retained earnings prepared Retained earnings, December 31, 2010 Net income Subtotal Less dividends Retained earnings, December 31, Cindy's Beauty Salon, Inc. Statement of Retained Earnings For the Year Ended December 31, $52,000 44,000 $96,000 19,000 $77,000 Chapter 3, E 16. Prepaid Insurance at end of Insurance Expense during Potential payments for insurance during Less Prepaid Insurance at end of 2010 Cash payments for insurance during Wages Payable at end of 2010 Wages Expense during Potential payments for wages during Less Wages Payable at end of Cash payments for wages during Unearned Revenue at end of Fees Earned during Potential receipts from fees during Less Unearned Revenue at end of 2010 Cash receipts from fees during $ 1,200 1,900 $ 3,100 1,450 $ 1,650 $ 1,100 9,750 $10, $10,250 $ 2,100 4,450 $ 6, $ 5,

17 Chapter 3, E Cash paid for rent during the year: $152,700 Ending balance Rent Expense Potential cash paid for rent Less beginning balance Cash paid during the year 2. Cash paid for interest during the year: $26,400 Beginning balance Interest Expense Potential cash paid for interest Less ending balance Cash paid during the year 3. Cash paid for salaries during the year: $229,000 Beginning balance Salaries Expense Potential cash paid for salaries Less ending balance Cash paid during the year $ 2, ,000 $ 152,700 $ 152,700 $ 3,000 23,400 $26,400 $26,400 $ 15, ,000 $257,000 28,000 $229,000 Chapter 3, E 18. Financial ratios calculated Cash Flow Yield = Cash Flows from Operating Activities Net Income $6,000 = = 1.2 or 1.2 $5,000 times 2010 = $5,500 $4,300 = 1.3 or 1.3 times 117

18 Chapter 3, P 1. Amount of Amount of Adjustment after Income Adjustment after Sheet Account (+ or ) Adjustment Statement Account (+ or ) Adjustment a. Prepaid Insurance $ 5,440 $ 1,360 Insurance Expense + $ 5,440 $ 5,440 b. Cleaning Supplies 12,448 2,300 Cleaning Supplies Expense + 12,448 12,448 c. Accumulated Depreciation Building + 25, ,800 Depreciation Expense Building + 25,600 25,600 d. Interest Payable + 2,000 2,000 Interest Expense + 2,000 24,000 e. Unearned Cleaning Revenue 850 2,550 Cleaning Revenue ,118 f. Wages Payable + 4,080 4,080 Wages Expense + 4, ,740 g. Income Taxes Payable + 4,600 4,600 Income Taxes Expense + 4,600 4,

19 Chapter 3, P Adjusting entries recorded a. 30 Interest Expense 26,000 Interest Payable To record accrued interest on mortgage b. 30 Salaries Expense 22,440 Salaries Payable To record accrued salaries ( $37,400 5 days ) 3 days = $22,440 c. No entry d. 30 Supplies Expense 8,824 Supplies To record supplies used $3,230 + $8,230 $2,636 = $8,824 e. 30 Insurance Expense 6,514 Prepaid Insurance To record expired insurance $3,240 2,900 [( $5, months ) 6 months ] 374 [( $6, months ) 2 months ] $6,514 f. 30 Depreciation Expense Buildings Depreciation Expense Equipment 14,600 41,300 Accumulated Depreciation Buildings Accumulated Depreciation Equipment To record annual depreciation g. 30 Services Collected in Advance 3,600 Service Revenue To record service revenue earned on services collected in advance ( $43, months) 1 month = $3,600 h. 30 Accounts Receivable 9,000 Service Revenue To record service revenue earned on a contract to be billed in August i. 30 Income Taxes Expense 12,600 Income Taxes Payable To accrue estimated income taxes for the year 26,000 22,440 8,824 6,514 14,600 41,300 3,600 9,000 12,

20 Chapter 3, P 2. (Continued) 2. User Insight: Revenue recognition discussed In transaction c, no revenue is recognized because even though a contract has been signed, no services have yet been provided or earned. In transaction h, the services have been provided and earned. Thus, in this case, it is appropriate to recognize revenue for the portion of the contract that has been completed. 120

21 Chapter 3, P T accounts set up and balances entered 2. Adjusting entries posted to the accounts Cash Accounts Receivable Office Supplies Bal. 9,250 Bal. 4,125 Bal. 1,331 (a) 1,181 (g) 1,550 Bal. 150 Bal. 5,675 Accumulated Depreciation Prepaid Rent Office Equipment Office Equipment Bal. 660 (b) 305 Bal. 4,620 Bal. 355 Accounts Payable Interest Payable Common Stock Service Revenue Utilities Expense (c) 263 Bal. 1,033 Bal. 2,970 Bal. 5,500 (f) 902 Bal. 1,485 Bal. 583 (d) 285 (e) 165 (h) 2,100 Bal. 6,000 Bal. 7,001 Bal. 11,000 Bal. 36,300 Bal. 24,700 Bal. 2,200 (f) 902 (e) 165 (b) 305 (g) 1,550 Bal. 24,865 Bal. 2,505 Bal. 38,752 Bal. 2,140 (a) 1,181 (c) 263 Interest Expense (d) 285 (h) 2,100 Notes Payable Salaries Payable Retained Earnings Salaries Expense Office Supplies Expense Income Taxes Expense Bal. Income Taxes Payable Dividends Rent Expense 770 Unearned Service Revenue Depreciation Expense Office Equipment 121

22 Chapter 3, P 3. (Continued) 3. Adjusted trial balance prepared Financial Service, Inc. Adjusted Trial December 31, Cash Accounts Receivable Office Supplies Prepaid Rent Office Equipment Accumulated Depreciation Office Equipment Accounts Payable Notes Payable Unearned Service Revenue Interest Payable Salaries Payable Income Taxes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Rent Expense Utilities Expense Office Supplies Expense Depreciation Expense Office Equipment Interest Expense Income Taxes Expense $ 9,250 5, ,620 $ 1,033 2,970 5, ,100 6,000 7,001 11,000 38,752 24,865 2,505 2,140 1, ,100 $64,389 $64,

23 Chapter 3, P 3. (Continued) 4. User Insight: The following financial statements are affected by the adjustments: a. b. c. d. e. f. g. h. sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings The statement of cash flows is not affected by the adjustments. 123

24 Chapter 3, P T accounts set up and balances entered 2. Adjusting entries posted to the accounts Bal. Cash Accounts Receivable Prepaid Insurance 7,400 Bal. 2,198 Bal. 480 (b) 280 Bal. 200 Office Supplies Bal. 1,560 (a) 1,110 Bal. 14,200 Bal. 1,540 Bal. 450 (c) 1,590 Bal. 3,130 Accounts Payable Common Stock Tax Fees Revenue Rent Expense Bal. 1,270 (e) 438 Bal. 438 (f) 4,860 (d) 42 Bal. Bal. 1,312 Bal. 7,000 Bal. 6,878 Bal. 12,000 Bal. 43,852 Bal. 16,600 Bal. 1,300 (e) 438 Bal. 44,290 Bal. 4,800 Bal. 440 (b) 280 (d) 42 Bal. 482 Office Supplies Expense Office Equipment Unearned Tax Fees Revenue Retained Earnings Office Salaries Expense Telephone Expense Depreciation Expense Office Equipment (a) 1,110 (c) 1,590 (f) 4,860 Accumulated Depreciation Office Equipment Income Taxes Payable Dividends Advertising Expense Insurance Expense Income Taxes Expense 124

25 Chapter 3, P 4. (Continued) 3. Adjusted trial balance, income statement, statement of retained earnings, and balance sheet prepared Kazai Tax Service, Inc. Adjusted Trial December 31, Cash Accounts Receivable Prepaid Insurance Office Supplies Office Equipment Accumulated Depreciation Office Equipment Accounts Payable Income Taxes Payable Common Stock Retained Earnings Dividends Tax Fees Revenue Office Salaries Expense Advertising Expense Rent Expense Telephone Expense Insurance Expense Office Supplies Expense Depreciation Expense Office Equipment Income Taxes Expense $ 7,400 2, ,200 $ 3,130 1,312 4,860 7,000 6,878 12,000 44,290 16,600 1,300 4, ,110 1,590 4,860 $67,470 $67,470 Note: Unearned Tax Fees Revenue does not appear on the adjusted trial balance because it now has a zero balance. 125

26 Chapter 3, P 4. (Continued) Revenue Tax fees revenue Expenses Office salaries expense Income taxes expense Rent expense Depreciation expense office equipment Advertising expense Office supplies expense Telephone expense Insurance expense Total expenses Net income Kazai Tax Service, Inc. Income Statement For the Year Ended December 31, Kazai Tax Service, Inc. Statement of Retained Earnings For the Year Ended December 31, Retained earnings, December 31, 2010 Net income Subtotal Less dividends Retained earnings, December 31, $16,600 4,860 4,800 1,590 1,300 1, $44,290 31,022 $13,268 $ 6,878 13,268 $20,146 12,000 $ 8,

27 Chapter 3, P 4. (Continued) Kazai Tax Service, Inc. Sheet December 31, Assets Cash Accounts receivable Prepaid insurance Office supplies Office equipment Less accumulated depreciation Total assets Liabilities Accounts payable Income taxes payable Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 7,400 2, $14,200 3,130 11,070 $21,318 $ 1,312 4,860 $ 7,000 8,146 $ 6,172 15,146 $21, User Insight: The effect of adjusting entries discussed By definition, adjusting entries cannot include a debit or a credit to Cash. Because adjusting entries never involve the Cash account, they never affect cash flows. That is why it is not necessary to show the effects of adjusting entries on the statement of cash flows. 127

28 Chapter 3, P Adjusting entries recorded in the general journal General Journal Page 14 Description Ref. Debit Credit a. 30 Rent Expense 514 6,000 Prepaid Rent 117 6,000 To expense one year's rent paid in advance b. 30 Insurance Expense Prepaid Insurance To record insurance that expired during the year c. 30 Maintenance Expense 518 5,472 Prepaid Maintenance 119 5,472 To record amount of deposit used during the year d. 30 Spare Parts Expense 516 4,647 Spare Parts 141 4,647 To record spare parts used during the year $5,655 $1,008 = $4,647 e. 30 Depreciation Expense Limousines ,750 Accumulated Depreciation Limousines ,750 To record depreciation on the limousines for the year $110, % = $13,750 f. 30 Interest Expense 519 5,650 Interest Payable 213 5,650 To record accrued interest g. 30 Unearned Passenger Service Revenue 212 6,092 Passenger Service Revenue 411 6,092 To recognize passenger service revenue earned $15,000 $8,908 = $6,092 h. 30 Income Taxes Expense 520 6,625 Income Taxes Payable 214 6,625 To accrue estimated income taxes for the year 128

29 Chapter 3, P 5. (Continued) 2. Ledger accounts opened and balances recorded 3. Adjusting entries posted from the general journal Cash 30 4,906 Accounts Receivable Prepaid Rent 30 7, , Adjustment J14 6,000 Prepaid Insurance 30 2, Adjustment J ,550 Account No. 111 Account No. 112 Account No. 117 Account No. 118 Prepaid Maintenance 30 6, Adjustment J14 5, Account No

30 Chapter 3, P 5. (Continued) Spare Parts Account No , Adjustment J14 4,647 1,008 Limousines Account No ,000 Accumulated Depreciation Limousines Account No , Adjustment J14 13,750 31,250 Notes Payable Account No ,500 Unearned Passenger Service Revenue Account No , Adjustment J14 6,092 8,908 Interest Payable Account No Adjustment J14 5,650 5,

31 Chapter 3, P 5. (Continued) Income Taxes Payable Account No Adjustment J14 6,625 6,625 Common Stock Account No ,000 Retained Earnings 30 24,106 Dividends Account No ,000 Passenger Service Revenue , Adjustment J14 6, ,341 Gas and Oil Expense 30 44,650 Account No. 312 Account No. 411 Account No

32 Chapter 3, P 5. (Continued) Salaries Expense , , Adjustment J14 6,000 6, Adjustment J Adjustment J14 4,647 4, Adjustment J14 13,750 13,750 Account No. 512 Advertising Expense Account No. 513 Rent Expense Account No. 514 Insurance Expense Spare Parts Expense Account No. 515 Depreciation Expense Limousines Account No. 517 Account No

33 Chapter 3, P 5. (Continued) Maintenance Expense 30 Adjustment J14 5,472 5, Adjustment J14 5,650 5, Adjustment J14 6,625 6,625 Account No. 518 Interest Expense Account No. 519 Income Taxes Expense Account No

34 Chapter 3, P 5. (Continued) 4. Adjusted trial balance, income statement, statement of retained earnings, and balance sheet prepared Elite Livery, Inc. Adjusted Trial 30, Cash Accounts Receivable Prepaid Insurance Prepaid Maintenance Spare Parts Limousines Accumulated Depreciation Limousines Notes Payable Unearned Passenger Service Revenue Interest Payable Income Taxes Payable Common Stock Retained Earnings Dividends Passenger Service Revenue Gas and Oil Expense Salaries Expense Advertising Expense Rent Expense Insurance Expense Spare Parts Expense Depreciation Expense Limousines Maintenance Expense Interest Expense Income Taxes Expense $ 4,906 7,114 1, , ,000 $ 31,250 22,500 8,908 5,650 6,625 20,000 24,106 10, ,341 44, ,180 13,400 6, ,647 13,750 5,472 5,650 6,625 $339,380 $339,380 Note: Prepaid Rent does not appear on the adjusted trial balance because it now has a zero balance. 134

35 Chapter 3, P 5. (Continued) Elite Livery, Inc. Income Statement For the Year Ended 30, Revenue Passenger service revenue Expenses Salaries expense Gas and oil expense Depreciation expense limousines Advertising expense Income taxes expense Rent expense Interest expense Maintenance expense Spare parts expense Insurance expense Total expenses Net income Elite Livery, Inc. Statement of Retained Earnings For the Year Ended 30, Retained earnings, 30, 2010 Net income Subtotal Less dividends Retained earnings, 30, $103,180 44,650 13,750 13,400 6,625 6,000 5,650 5,472 4, $220, ,274 $ 16,067 $ 24,106 16,067 $ 40,173 10,000 $ 30,

36 Chapter 3, P 5. (Continued) Elite Livery, Inc. Sheet 30, Assets Cash Accounts receivable Prepaid insurance Prepaid maintenance Spare parts Limousines Less accumulated depreciation Total assets Liabilities Notes payable Unearned passenger service revenue Interest payable Income taxes payable Total liabilities Stockholders' Equity Common stock Retained earnings Total stockholders' equity Total liabilities and stockholders' equity $ 4,906 7,114 1, ,008 $110,000 31,250 78,750 $93,856 $ 22,500 8,908 5,650 6,625 $ 20,000 30,173 $43,683 50,173 $93, User Insight: The effect of adjustments discussed Adjusting entries affect net income on the income statement, and therefore they affect the cash flow yield. After the adjustments have been posted in the previous parts of the problem, the cash flow yield for the year has increased because the additional expenses recorded exceed the additional revenues, causing net income to decrease. 136

37 Chapter 3, P 6. Amount of Amount of Adjustment after Income Adjustment after Sheet Account (+ or ) Adjustment Statement Account (+ or ) Adjustment a. Office Supplies $ 783 $ 150 Office Supplies Expense + $ 783 $ 783 b. Prepaid Rent Rent Expense c. Accumulated Depreciation Equipment Depreciation Expense Equipment d. Unearned Answering Service Revenue Answering Service Revenue ,250 e. Wages Payable Wages Expense ,005 f. Income Taxes Payable + 1,110 1,110 Income Taxes Expense + 1,110 1,

38 Chapter 3, P Adjusting entries recorded a. Nov. 30 Supplies Expense 5,171 Supplies To record supplies used $2,350 + $4,218 $1,397 = $5,171 b. 30 Insurance Expense 6,874 Prepaid Insurance To record expired insurance $4,720 1,750 [ ( $4, months ) 5 months ] 404 [ ( $7, months ) 2 months ] $6,874 c. 30 Depreciation Expense Buildings Depreciation Expense Equipment 16,000 40,000 Accumulated Depreciation Buildings Accumulated Depreciation Equipment To record annual depreciation d. 30 Unearned Service Revenue 4,650 Service Revenue To record service revenue earned on services collected in advance ( $18, months ) 3 months = $4,650 e. 30 Accounts Receivable 7,000 Service Revenue To record service revenue earned on a contract to be billed in January f. 30 Interest Expense 18,000 Interest Payable To record accrued interest on note payable 5,171 6,874 16,000 40,000 4,650 7,000 18,

39 Chapter 3, P 7. (Continued) g. Nov. 30 Salaries Expense 10,000 Salaries Payable To record accrued salaries ( $15,000 6 days ) 4 days = $10,000 h. No entry i. 30 Income Taxes Expense 23,000 Income Taxes Payable To accrue estimated income taxes for the year 10,000 23, User Insight: Revenue recognition discussed In transaction e, $7,000 has to be recognized as revenue because services have already been provided and there is an obligation to pay for them. In transaction h, November 29 is not a recognition point because no services have been provided and there is no obligation to pay for them. 139

40 Chapter 3, P T accounts set up and balances entered 2. Adjusting entries posted to the accounts Cash Accounts Receivable Office Supplies Bal. 13,786 Bal. 24,840 Bal. 991 (a) 894 (g) 915 Bal. 97 Bal. 25,755 Prepaid Rent Bal. 1,400 (b) 500 Bal. 7,300 Bal. 900 Accounts Payable Salaries Payable Common Stock Service Revenue Rent Expense Bal. 2,600 (c) 720 Bal. 3,320 Bal. 1,820 Bal. 10,000 (d) 600 (e) 230 (f) 1,450 Bal. 2,860 (h) 2,780 Bal. 1,410 Bal. 11,000 Bal. 19,387 Bal. 15,000 Bal. 58,500 Bal. 33,400 Bal. 1,750 (f) 1,450 (e) 230 (g) 915 Bal. 33,630 Bal. 60,865 Bal. 7,700 (a) 894 (c) 720 (b) 500 Bal. 8,200 Interest Expense (d) 600 (h) 2,780 Office Equipment Notes Payable Unearned Service Revenue Retained Earnings Salaries Expense Office Supplies Expense Income Taxes Expense Accumulated Depreciation Office Equipment Interest Payable Income Taxes Payable Dividends Utilities Expense Depreciation Expense Office Equipment 140

41 Chapter 3, P 8. (Continued) 3. Adjusted trial balance prepared Sigma Consultants Corporation Adjusted Trial December 31, Cash Accounts Receivable Office Supplies Prepaid Rent Office Equipment Accumulated Depreciation Office Equipment Accounts Payable Notes Payable Interest Payable Salaries Payable Unearned Service Revenue Income Taxes Payable Common Stock Retained Earnings Dividends Service Revenue Salaries Expense Utilities Expense Rent Expense Office Supplies Expense Depreciation Expense Office Equipment Interest Expense Income Taxes Expense $ 13,786 25, ,300 $ 3,320 1,820 10, ,410 2,780 11,000 19,387 15,000 60,865 33,630 1,750 8, ,780 $111,412 $111,

42 Chapter 3, P 8. (Continued) 4. User Insight: The following financial statements are affected by the adjustments: a. b. c. d. e. f. g. h. sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings sheet, income statement, statement of retained earnings The statement of cash flows is not affected by the adjustments. 142

43 Chapter 3, P T accounts set up and balances entered 2. Adjusting entries posted to the accounts Bal. Cash Accounts Receivable Prepaid Insurance 3,650 Bal. 970 Bal. 195 (b) 130 Bal. 65 Office Supplies Bal. 610 (a) 430 Bal. 6,800 Bal. 670 Bal. 180 (c) 650 Bal. 1,320 Accounts Payable Rent Expense Bal. 590 (e) 315 Bal. 315 (f) 2,385 (d) 45 Bal. Bal. 635 Bal. 3,300 Bal. 3,117 Bal. 4,200 Bal. 20,079 Bal. 8,300 Bal. 585 (e) 315 Bal. 20,394 Telephone Expense Bal. 2,350 Bal. 411 (b) 130 (d) 45 Bal. 456 Office Supplies Expense Office Equipment Unearned Travel Fees Revenue Depreciation Expense Office Equipment (a) 430 (c) 650 (f) 2,385 Accumulated Depreciation Office Equipment Income Taxes Payable Common Stock Retained Earnings Dividends Travel Fees Revenue Office Salaries Expense Advertising Expense Insurance Expense Income Taxes Expense 143

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