# CHAPTER 3. Understanding the Accounting Information System. 3. Trial balance. 6, 10 3, 4, 5 1, 2, Closing , 15, 16 1, 4, 8, 9, 11

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1 CHAPTER 3 Understanding the Accounting Information System ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Transaction identification. 1, 2, 3, 5, 6, 7, 8 1, 2 1, 2, 3, 4, Nominal accounts. 4, 7 3. Trial balance. 6, 10 3, 4, 5 1, 2, 7 4. Adjusting entries. 8, 11, 13, 14 3, 4, 5, 6, 7, 8, 9, 10 6, 7, 8, 9, 10, 22 1, 2, 3, 4, 5, 6, 7, 8, 9, Financial statements. 12, 13, 23 1, 2, 4, 6 6. Closing , 15, 16 1, 4, 8, 9, Inventory and cost of goods sold , 18, Comprehensive accounting cycle. 1, 2, 6, 11 *9. Cash vs. Accrual Basis. 18, 19, , *10. Reversing entries *11. Worksheet , 24, *These topics are dealt with in an Appendix to the Chapter. Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-1

2 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives Brief Exercises Exercises Problems 1. Understand basic accounting terminology. 2. Explain double-entry rules. 3. Identify steps in accounting cycle. 4. Record transactions in journals, post to ledger accounts, and prepare a trial balance. 1, 2, 3, 4, 5, 6, 7 1, 2, 3, 4, 5 1, 2, 3, 4 5. Explain the reasons for preparing adjusting entries. 3, 4, 5, 6, 7, 8, 9, 10 6, 7, 8, 9, 10, 11, 22 2, 3, 4, 5, 6, 7, 8, 9, Prepare financial statements from the adjusted trail balance. 12, 13 1, 2, 3, 4, 7, 8, 9, Prepare closing entries , 15, 16 1, 2, 3, 4, Explain how to adjust inventory accounts at year-end. *9. Differentiate the cash basis of accounting from the accrual basis of accounting , 18, , *10. Identify adjusting entries that may be reversed *11. Prepare a 10-column worksheet. 23, 24, *These topics are dealt with in the Appendix to the Chapter. 3-2

3 ASSIGNMENT CHARACTERISTICS TABLE Item Description Level of Difficulty Time (minutes) E3-1 Transactions of a corporation, including investment Moderate and dividend. E3-2 Transaction analysis service company. Simple E3-3 Corrected trial balance. Simple E3-4 Corrected trial balance. Simple E3-5 Corrected trial balance. Simple E3-6 Adjusting entries. Moderate E3-7 Adjusting entries. Complex E3-8 Adjusting entries. Moderate E3-9 Adjusting entries. Moderate E3-10 Analyze adjusted data. Complex E3-11 Adjusting entries. Moderate E3-12 Prepare financial statements. Moderate E3-13 Prepare financial statements. Moderate E3-14 Closing entries for a corporation. Moderate E3-15 Closing entries. Moderate E3-16 Closing entries. Simple E3-17 Missing amounts. Simple E3-18 Cost of goods sold periodic inventory. Moderate E3-19 Find missing amounts periodic inventory. Moderate *E3-20 Cash and accrual basis. Moderate *E3-21 Cash to accrual basis. Moderate *E3-22 Adjusting and reversing entries. Complex *E3-23 Partial worksheet preparation. Moderate *E3-24 Worksheet. Simple *E3-25 Worksheet and balance sheet presentation. Moderate P3-1 Transactions, financial statements service company. Moderate P3-2 Adjusting entries and financial statements Moderate *P3-3 Adjusting entries. Moderate *P3-4 Financial Statements, Adjusting and Closing Entries Moderate P3-5 Adjusting entries. Moderate P3-6 Adjusting entries and Financial Statements. Moderate P3-7 Adjusting entries and financial statements. Moderate P3-8 Adjusting entries and closing. Moderate P3-9 Adjusting entries and closing. Moderate *P3-10 Cash and accrual basis Complex *P3-11 Worksheet, balance sheet, adjusting and closing entries Moderate

4 ANSWERS TO QUESTIONS 1. Examples are: (a) Payment of an accounts payable. (b) Collection of an accounts receivable from a customer. (c) Transfer of an accounts payable to a note payable. 2. Transactions (a), (b), (d) are considered business transactions and are recorded in the accounting records because a change in assets, liabilities, or owners /stockholders equity has been effected as a result of a transfer of values from one party to another. Transactions (c) and (e) are not business transactions because a transfer of values has not resulted, nor can the event be considered financial in nature and capable of being expressed in terms of money. 3. Transaction (a): Accounts Receivable (debit), Service Revenue (credit). Transaction (b): Cash (debit), Accounts Receivable (credit). Transaction (c): Office Supplies (debit), Accounts Payable (credit). Transaction (d): Delivery Expense (debit), Cash (credit). 4. Revenue and expense accounts are referred to as temporary or nominal accounts because each period they are closed out to Income Summary in the closing process. Their balances are reduced to zero at the end of the accounting period; therefore, the term temporary or nominal is given to these accounts. 5. Andrea is not correct. The double-entry system means that for every debit amount there must be a credit amount and vice-versa. At least two accounts are affected. It does not mean that each transaction must be recorded twice. 6. Although it is not absolutely necessary that a trial balance be taken periodically, it is customary and desirable. The trial balance accomplishes two principal purposes: (1) It tests the accuracy of the entries in that it proves that debits and credits of an equal amount are in the ledger. (2) It provides a list of ledger accounts and their balances which may be used in preparing the financial statements and in supplying financial data about the concern. 7. (a) Real account; balance sheet. (b) Real account; balance sheet. (c) Merchandise inventory is generally considered a real account appearing on the balance sheet. It has the elements of a nominal account when the periodic inventory system is used. It may appear on the income statement when the multiple-step format is used under a periodic inventory system. (d) Real account; balance sheet. (e) Real account; balance sheet. (f) Nominal account; income statement. (g) Nominal account; income statement. (h) Real account; balance sheet. 8. At December 31, the three days wages due to the employees represent a current liability. The related expense must be recorded in this period to properly reflect the expense incurred. 9. (a) In a service company, revenues are service revenues and expenses are operating expenses. In a merchandising company, revenues are sales revenues and expenses consist of cost of goods sold plus operating expenses. (b) The measurement process in a merchandising company consists of comparing the sales price of the merchandise inventory to the cost of goods sold and operating expenses. 3-4 Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)

5 Questions Chapter 3 (Continued) 10. (a) No change. (b) Before closing, balances exist in these accounts; after closing, no balances exist. (c) Before closing, balances exist in these accounts; after closing, no balances exist. (d) Before closing, a balance exists in this account exclusive of any dividends or the net income or net loss for the period; after closing, the balance is increased or decreased by the amount of net income or net loss, and decreased by dividends declared. (e) No change. 11. Adjusting entries are prepared prior to the preparation of financial statements in order to bring the accounts up to date and are necessary (1) to achieve a proper matching of revenues and expenses in measuring income and (2) to achieve an accurate presentation of assets, liabilities and stockholders equity. 12. Closing entries are prepared to transfer the balances of nominal accounts to capital (retained earnings) after the adjusting entries have been recorded and the financial statements prepared. Closing entries are necessary to reduce the balances in nominal accounts to zero in order to prepare the accounts for the next period s transactions. 13. Cost Salvage Value = Depreciable Cost: \$4,000 \$0 = \$4,000. Depreciable Cost Useful Life = Depreciation Expense For One Year \$4,000 5 years = \$800 per year. The asset was used for 6 months (7/1 12/31), therefore 1/2-year of depreciation expense should be reported. Annual depreciation X 6/12 = amount to be reported on 2010 income statement: \$800 X 6/12 = \$ December 31 Interest Receivable... 10,000 Interest Revenue... 10,000 (To record accrued interest revenue on loan) Accrued expenses result from the same causes as accrued revenues. In fact, an accrued expense on the books of one company is an accrued revenue to another company. 15. No, all international companies are not subject to the same internal control standards. All public companies that list their securities on U.S. stock exchanges are subject to the internal control testing and assurance provisions of the Sarbanes-Oxley Act of International companies that list their securities on non-u.s. exchanges are not subject to these rules and there is debate as to whether they should have to comply. 16. There is concern that the cost of complying with the higher internal control provisions is making U.S. markets less competitive as a place to list securities. This in turn could give U.S. investors less investment opportunities. On the other hand, some argue that the enhanced internal control requirements in the U.S. increase the perceived reliability of companies financial statements and helps reduce their cost of capital. Furthermore, the decline in public listings in the U.S. are more likely due to other factors, such as growth in non-u.s. markets and general globalization. Thus, the jury is still out on the net cost/benefit of Sarbanes-Oxley and its impact on international competitiveness. 17. As with accounting standards, there are differences in auditing standards across international jurisdictions. In the U.S., auditors of public companies are regulated by the Public Company Accounting Oversight Board (PCAOB). The PCAOB enforces the provisions of the Sarbanes-Oxley Act through its various auditing standards. In the international domain, the auditing standards board is the International Auditing and Assurance Standards Board (IAASB). The IAASB is working on a broad set of international auditing standards but to date does not have a law like Sarbanes-Oxley to guide its work. Note to instructors Some instructors may wish to direct students to the IAASB web-site learn more about its work and to compare to the work of the PCAOB Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 3-5

6 Questions Chapter 3 (Continued) *18. Under the cash basis of accounting, revenue is recorded only when cash is received and expenses are recorded only when paid. Under the accrual basis of accounting, revenue is recognized when it is earned and expenses are recognized when incurred, without regard to the time of the receipt or payment of cash. A cash-basis balance sheet and income statement are incomplete and inaccurate in comparison to accrual-basis financial statements. The accrual basis matches effort (expenses) with accomplishment (revenues) in the income statement while the cash basis only presents cash receipts and cash disbursements. The accrual basis balance sheet contains receivables, payables, accruals, prepayments, and deferrals while a cash basis balance sheet shows none of these. *19. Wages paid during the year will include the payment of any wages attributable to the prior year but unpaid at the end of the prior year. This amount is an expense of the prior year and not of the current year, and thus should be subtracted in determining wages expense. Similarly, wages paid during the year will not include any wages attributable to hours worked during the current year but not actually paid until the following year. This should be added in determining wages expense. *20. Although similar to the strict cash basis, the modified cash basis of accounting requires that expenditures for capital items be charged against income over all the periods to be benefited. This is done through conventional accounting methods, such as depreciation and amortization. Under the strict cash basis, expenditures would be recognized as expenses in the period in which the corresponding cash disbursements are made. *21. Reversing entries are made at the beginning of the period to reverse accruals and some deferrals. Reversing entries are not required. They are made to simplify the recording of certain transactions that will occur later in the period. The same results will be attained whether or not reversing entries are recorded. *22. Disagree. A worksheet is not a permanent accounting record and its use is not required in the accounting cycle. The worksheet is an informal device for accumulating and sorting information needed for the financial statements. Its use is optional in helping to prepare financial statements. 3-6 Copyright 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only)

7 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 Aug. 2 Cash... 12,000 Equipment... 2,500 Brett Favre, Capital... 14,500 7 Supplies Accounts Payable Cash... 1,300 Accounts Receivable Service Revenue... 1, Rent Expense Cash Supplies Expense Supplies (\$400 \$270) BRIEF EXERCISE 3-2 May 1 Cash... 3,000 Common Stock... 3,000 3 Equipment... 1,100 Accounts Payable... 1,

8 BRIEF EXERCISE 3-2 (Continued) 13 Rent Expense Cash Accounts Receivable Service Revenue BRIEF EXERCISE 3-3 Feb. 1 Prepaid Insurance ,000 Cash ,000 June 30 Insurance Expense ,000 Prepaid Insurance ,000 (\$840,000 X 5/24) BRIEF EXERCISE 3-4 Nov. 1 Cash... 2,700 Unearned Rent Revenue... 2,700 Dec. 31 Unearned Rent Revenue... 1,800 Rent Revenue... 1,800 (\$2,700 X 2/3) 3-8

9 BRIEF EXERCISE 3-5 Dec. 31 Salaries Expense... 3,600 Salaries Payable... 3,600 (\$6,000 X 3/5) Jan. 2 Salaries Payable... 3,600 Salaries Expense... 2,400 Cash... 6,000 BRIEF EXERCISE 3-6 July 1 Prepaid Insurance... 18,000 Cash... 18,000 Dec. 31 Insurance Expense... 3,000 Prepaid Insurance... 3,000 (\$18,000 X 1/2 X 1/3) BRIEF EXERCISE 3-7 July 1 Cash... 18,000 Unearned Insurance Revenue... 18,000 Dec. 31 Unearned Insurance Revenue... 3,000 Insurance Revenue... 3,000 (\$18,000 X 1/2 X 1/3) 3-9

10 BRIEF EXERCISE 3-8 Depreciation Expense... 3,000 Accumulated Depreciation Equipment... 3,000 Equipment... \$30,000 Less: Accumulated depreciation equipment... 3,000 \$27,000 BRIEF EXERCISE 3-9 Dec. 31 Interest Receivable Interest Revenue Feb. 1 Cash... 10,400 Notes Receivable... 10,000 Interest Receivable Interest Revenue BRIEF EXERCISE 3-10 Aug. 31 Interest Expense Interest Payable Accounts Receivable... 1,400 Service Revenue... 1, Salaries Expense Salaries Payable Bad Debt Expense Allowance for Doubtful Accounts

11 BRIEF EXERCISE 3-11 Sales ,900 Interest Revenue... 13,500 Income Summary ,400 Income Summary ,300 Cost of Goods Sold ,200 Operating Expenses ,000 Income Tax Expense... 35,100 Income Summary... 62,100 Retained Earnings... 62,100 Retained Earnings... 18,900 Dividends... 18,900 BRIEF EXERCISE 3-12 Beginning inventory \$ 81,000 Purchases \$540, 000 Less: Purchase returns \$5,800 Purchase discounts 5,000 10,800 Net purchases 529,200 Add: Freight-in 16,200 Cost of goods purchased 545,400 Cost of goods available for sale 626,400 Ending inventory 70,200 Cost of goods sold \$556,

12 *BRIEF EXERCISE 3-13 (a) Cash receipts... \$152,000 + Increase in accounts receivable... 5,600 (\$18,600 \$13,000) Service revenue... \$157,600 (b) Payments for operating expenses... \$ 97, 000 Increase in prepaid expenses... (5,700) (\$23,200 \$17,500) Operating expenses... \$ 91,300 *BRIEF EXERCISE 3-14 (a) Salaries Payable... 3,600 Salaries Expense... 3,600 (b) Salaries Expense... 6,000 Cash... 6,000 (c) Salaries Payable... 3,600 Salaries Expense... 2,400 Cash... 6,

13 SOLUTIONS TO EXERCISES EXERCISE 3-1(10 15 minutes) J1 Date Account Titles and Explanation Ref. Debit Credit Mar. 1 Cash 50,000 Common Stock 50,000 (Investment of cash in business) 3 Land 10,000 Building 22,000 Equipment 6,000 Cash 38,000 (Purchased Michelle Wie s Golf Land) 5 Advertising Expense 1,600 Cash 1,600 (Paid for advertising) 6 Prepaid Insurance 1,480 Cash 1,480 (Paid for one-year insurance policy) 10 Equipment 2,500 Accounts Payable 2,500 (Purchased equipment on account) 18 Cash 1,200 Service Revenue 1,200 (Received cash for services performed) 25 Dividends 500 Cash 500 (Declared and paid a \$500 cash dividend) 30 Wages Expense 900 Cash 900 (Paid wages expense) 30 Accounts Payable 2,500 Cash 2,500 (Paid creditor on account) 3-13

14 EXERCISE 3-1 (Continued) 31 Cash 750 Service Revenue 750 (Received cash for services performed) EXERCISE 3-2 (15 20 minutes) Apr. 2 Cash... 73,600 Equipment... 32,200 Brown, Capital ,800 2 No entry not a transaction. 3 Supplies... 1,610 Accounts Payable... 1,610 7 Rent Expense... 1,380 Cash... 1, Accounts Receivable... 2,530 Service Revenue... 2, Cash... 7,360 Unearned Service Revenue... 7, Cash... 5,290 Service Revenue... 5, Insurance Expense Cash Salaries Expense... 2,668 Cash... 2, Supplies Expense Supplies Equipment... 14,030 Brown, Capital... 14,

15 EXERCISE 3-3(10 15 minutes) Wanda Landowska Company Trial Balance April 30, 2007 Debit Credit Cash... \$ 4,800 Accounts Receivable... 2,750 Prepaid Insurance (\$700 + \$100) Equipment... 8,000 Accounts Payable (\$4,500 \$100)... \$ 4,400 Property Tax Payable Wanda Landowska, Capital (\$11,200 + \$1,500)... 12,700 Wanda Landowska, Drawing... 1,500 Service Revenue... 6,690 Salaries Expense... 4,200 Advertising Expense (\$1,100 + \$300)... 1,400 Property Tax Expense (\$800 + \$100) \$24,350 \$24,

16 EXERCISE minutes) The ledger accounts are reproduced below, and corrections are shown in the accounts. Cash Accounts Payable Bal. 5,912 (4) 190 Bal. 7,044 (1) 450 Accounts Receivable Common Stock Bal. 5,240 (1) 450 Bal. 8,000 Supplies on Hand Retained Earnings Bal. 2,967 Bal. 2,000 Furniture and Equipment Service Revenue Bal. 6,100 Bal. 5,200 (2) 3,200 (3) 2,025 (5) 80 Office Expense Bal. 4,320 (2) 3,

17 EXERCISE 3-4 (Continued) Blues Traveler Corporation Trial Balance (corrected) April 30, 2007 Debit Credit Cash... \$ 6,172 Accounts Receivable... 4,790 Supplies on Hand... 2,967 Furniture and Equipment... 9,300 Accounts Payable... \$ 7,044 Common Stock... 8,000 Retained Earnings... 2,000 Service Revenue... 7,305 Office Expense... 1,120 \$24,349 \$24,

18 EXERCISE 3-5 (15 20 minutes) Watteau Co. Trial Balance June 30, 2007 Debit Credit Cash (\$2,870 + \$180 \$65 \$65)... \$ 2,920 Accounts Receivable (\$3,231 \$180)... 3,051 Supplies (\$800 \$500) Equipment (\$3,800 + \$500)... 4,300 Accounts Payable (\$2,666 \$206 \$260)... \$ 2,200 Unearned Service Revenue (\$1,200 \$325) Common Stock... 6,000 Dividends Retained Earnings... 3,000 Service Revenue (\$2,380 + \$801 + \$325)... 3,506 Wages Expense (\$3,400 + \$670 \$575)... 3,495 Office Expense \$15,581 \$15,581 EXERCISE 3-6 (10 15 minutes) 1. August 31, 2007 Wages Expense... 2,280 Wages Payable... 2,280 (To record wages payable at 8/31) 2. August 31, 2007 Utilities Expense Accounts Payable (To record utility expense for August) 3. August 31, 2007 Interest Expense (\$36,000 X 6% X 1/12) Interest Payable (To record interest expense for August) 3-18

19 EXERCISE 3-6 (Continued) 4. August 31, 2007 Telephone Expense Accounts Payable (To record telephone expense for August) EXERCISE 3-7 (25 30 minutes) (a) 1. Aug. 31 Insurance Expense (\$4,500 X 3/12)... 1,125 Prepaid Insurance... 1, Aug. 31 Supplies Expense (\$2,600 \$450)... 2,150 Supplies... 2, Aug. 31 Depreciation Expense Cottages... 1,080 Accumulated Depreciation Cottages... 1,080 (\$120,000 \$12,000 = \$108,000; \$108,000 X 4% = \$4,320 per year; \$4,320 X 1/4 = \$1,080) Aug. 31 Depreciation Expense Furniture Accumulated Depreciation Furniture (\$16,000 \$1,600 = \$14,400; \$14,400 X 10% = \$1,440; \$1,440 X 1/4 = \$360) 4. Aug. 31 Unearned Rent Revenue... 3,800 Rent Revenue... 3, Aug. 31 Salaries Expense Salaries Payable Aug. 31 Accounts Receivable Rent Revenue Aug. 31 Interest Expense... 1,200 Interest Payable... 1,200 [(\$60,000 X 8%) X 1/4] 3-19

20 EXERCISE 3-7 (Continued) (b) Greco Resort Adjusted Trial Balance August 31, 2007 Debit Credit Cash... \$ 19,600 Accounts Receivable Prepaid Insurance (\$4,500 \$1,125)... 3,375 Supplies (\$2,600 \$2,150) Land... 20,000 Cottages ,000 Accumulated Depreciation Cottages... \$ 1,080 Furniture... 16,000 Accumulated Depreciation Furniture Accounts Payable... 4,500 Unearned Rent Revenue (\$4,600 \$3,800) Salaries Payable Interest Payable... 1,200 Mortgage Payable... 60,000 Common Stock... 91,000 Retained Earnings... 9,000 Dividends... 5,000 Rent Revenue (\$76,200 + \$3,800 + \$800)... 80,800 Salaries Expense (\$44,800 + \$375)... 45,175 Utilities Expense... 9,200 Repair Expense... 3,600 Insurance Expense... 1,125 Supplies Expense... 2,150 Depreciation Expense Cottages... 1,080 Depreciation Expense Furniture Interest Expense... 1,200 \$249,115 \$249,

21 EXERCISE 3-8 (10 15 minutes) 1. Accounts Receivable Service Revenue Utilities Expense Utilities Payable Depreciation Expense Accumulated Depreciation Dental Equipment 400 Interest Expense Interest Payable Insurance Expense (\$12,000 X 1/12)... 1,000 Prepaid Insurance... 1, Supplies Expense (\$1,600 \$500)... 1,100 Supplies... 1,100 EXERCISE 3-9 (10 15 minutes) 1. Depreciation Expense (\$250 X 3) Accumulated Depreciation Equipment Unearned Rent Revenue (\$9,300 X 1/3)... 3,100 Rent Revenue... 3, Interest Expense Interest Payable Supplies Expense... 1,950 Supplies (\$2,800 \$850)... 1,

22 EXERCISE 3-9 (Continued) 5. Insurance Expense (\$300 X 3) Prepaid Insurance EXERCISE 3-10 (15 20 minutes) (a) Ending balance of supplies \$700 Add: Adjusting entry 950 Deduct: Purchases 850 Beginning balance of supplies 800 (b) Total prepaid insurance \$4,800 (\$400 X 12) Amount used (6 X \$400) 2,400 Present balance 2,400 The policy was purchased six months ago (August 1, 2006) (c) The entry in January to record salary expense was Salaries Expense... 1,800 Salaries Payable Cash... 2,500 The T account for salaries payable is 3-22

23 EXERCISE 3-10 (Continued) Salaries Payable Paid 700 Beg. Bal.? January End Bal. 800 The beginning balance is therefore Ending balance of salaries payable \$ 800 Plus: Reduction of salaries payable 700 Beginning balance of salaries payable \$1,500 (d) Service revenue \$2,000 Cash received 1,600 Unearned revenue reduced \$ 400 Ending unearned revenue January 31, 2007 \$ 750 Plus: Unearned revenue reduced 400 Beginning unearned revenue December 31, 2006 \$1,150 EXERCISE 3-11 (15 20 minutes) (a) 10/15 Salaries Expense Cash (To record payment of October 15 payroll) 10/17 Accounts Receivable... 2,400 Service Revenue... 2,400 (To record revenue for services performed for which payment has not yet been received) 3-23

24 EXERCISE 3-11 (Continued) 10/20 Cash Unearned Service Revenue (To record receipt of cash for services not yet performed) (b) 10/31 Supplies Expense Supplies (To record the use of supplies during October) 10/31 Accounts Receivable... 1,650 Service Revenue... 1,650 (To record revenue for services performed for which payment has not yet been received) 10/31 Salaries Expense Salaries Payable (To record liability for accrued payroll) 10/31 Unearned Service Revenue Service Revenue (To reduce the Unearned Service Revenue account for service that has been performed) 3-24

25 EXERCISE 3-12 (20 25 Minutes) (a) ANDERSON COOPER CO. Income Statement For the Year Ended December 31, 2007 Revenues Service revenue... \$11,590 Expenses Salaries expense... \$6,840 Rent expense... 2,260 Depreciation expense Interest expense ,328 Net Income... \$ 2,262 (b) ANDERSON COOPER CO. Statement of Retained Earnings For the Year Ended December 31, 2007 Retained earnings, January 1... \$11,310 Add: Net income... 2,262 13,572 Less: Dividends... 3,000 Retained earnings, December \$10,

26 EXERCISE 3-12 (Continued) (c) ANDERSON COOPER CO. Balance Sheet December 31, 2007 Assets Current Assets Cash... \$19,472 Accounts receivable... 6,920 Prepaid rent... 2,280 Total current assets... 28,672 Property, plant, and equipment Equipment... \$18,050 Less Accumulated depreciation... (4,895) 13,155 Total assets... \$41,827 Liabilities and Stockholders Equity Current liabilities Accounts payable... \$ 5,472 Interest payable Notes payable... 5,700 Total current liabilities... 11,255 Stockholders equity Common Stock... \$20,000 Retained Earnings... 10,572* 30,572 Total liabilities and stockholders equity... \$41,827 *Beg. Balance + Net Income Dividends = Ending Balance \$11,310 + \$2,262 \$3,000 = \$10,

27 EXERCISE 3-13 (20 25 Minutes) (a) SANTO DESIGN AGENCY Income Statement For the Year Ended December 31, 2007 Revenues Advertising revenue... \$61,500 Expenses Salaries expense... \$11,300 Depreciation expense... 7,000 Rent expense... 4,000 Art supplies expense... 3,400 Insurance expense Interest expense Total expenses... 27,050 Net income... \$34,450 SANTO DESIGN AGENCY Statement of Retained Earnings For the Year Ended December 31, 2007 Retained earnings, January 1... \$ 3,500 Add: Net income... 34,450 Retained earnings, December \$37,

28 EXERCISE 3-13 (Continued) (a) Continued SANTO DESIGN AGENCY Balance Sheet December 31, 2007 Assets Cash... \$11,000 Accounts receivable... 21,500 Art supplies... 5,000 Prepaid insurance... 2,500 Printing equipment... \$60,000 Less: Accumulated depreciation printing equipment... 35,000 25,000 Total assets... \$65,000 Liabilities and Stockholders Equity Liabilities Notes payable... \$ 5,000 Accounts payable... 5,000 Interest payable Unearned advertising revenue... 5,600 Salaries payable... 1,300 Total liabilities... \$17,050 Stockholders equity Common stock... \$10,000 Retained earnings... 37,950 47,950 Total liabilities and stockholders equity... \$65,000 (b) (1) Based on interest payable at December 31, 2007, interest is \$25 per month or.5% of the note payable..5% X 12 = 6% interest per year. (2) Salaries Expense, \$11,300 less Salaries Payable 12/31/07, \$1,300 = \$10,000. Total Payments, \$17,500 \$10,000 = \$7,500 Salaries Payable 12/31/

29 EXERCISE 3-14 (10 15 minutes) Sales ,000 Cost of Goods Sold... 90,280 Sales Returns and Allowances... 4,800 Sales Discounts... 6,000 Selling Expenses... 6,400 Administrative Expenses... 15,200 Income Tax Expense... 12,000 Income Summary... 29,320 OR Sales ,000 Income Summary ,000 Income Summary ,680 Cost of Goods Sold... 90,280 Sales Returns and Allowances... 4,800 Sales Discounts... 6,000 Selling Expense... 6,400 Administrative Expense... 15,200 Income Tax Expense... 12,000 Income Summary... 29,320 Retained Earnings... 29,320 Retained Earnings... 7,200 Dividends... 7,200 EXERCISE 3-15 (10 15 minutes) Sales ,000 Sales Returns and Allowances... 13,000 Sales Discounts... 8,000 Income Summary ,000 Income Summary ,

30 EXERCISE 3-15 (Continued) Cost of Goods Sold ,000 Freight-out... 7,000 Insurance Expense... 12,000 Rent Expense... 20,000 Salary Expense... 61,000 Income Summary... 21,000 Retained Earnings... 21,000 EXERCISE 3-16 (10 15 Minutes) (a) Sales... \$800,000 Less: Sales returns and allowances... \$24,000 Sales discount... 15,000 39,000 Net sales... \$761,000 (b) Sales ,000 Income Summary ,000 Income Summary... 39,000 Sales Returns and Allowances... 24,000 Sales Discounts... 15,

31 EXERCISE 3-17 (10 15 minutes) (a) \$9,000 (d) \$100,000 (b) \$25,000 (e) \$57,000 (c) \$10,000 EXERCISE 3-18 (10 15 minutes) Inventory, September 1, 2006 \$ 19,250 Purchases \$164,340 Less: Purchase returns and allowances (2,200) Net purchases 162,140 Add: Freight-in 4,400 Cost of goods purchased 166,540 Cost of goods available for sale 185,790 Inventory, August 31, 2007 (27,500) Cost of goods sold \$158,290 EXERCISE 3-19 (20 25 minutes) (a) Sales \$78,000 *Sales returns (4,000) Net sales \$74,000 (b) Beginning inventory \$16,000 Purchases 88,000 Purchase returns (6,000) Goods available for sale 98,000 *Ending inventory (34,000) Cost of goods sold \$64,000 (c) *Sales \$99,000 Sales returns (5,000) Net sales \$94,

32 EXERCISE 3-19 (Continued) (d) *Beginning inventory \$ 30,000 Purchases 100,000 Purchase returns (10,000) Goods available for sale 120,000 Ending inventory (48,000) Cost of goods sold \$ 72,000 (e) Beginning inventory \$ 44,000 *Purchases 108,000 Purchase returns (8,000) Goods available for sale 144,000 Ending inventory (30,000) Cost of goods sold \$114,000 from (f) below (f) Net sales \$132,000 *Cost of goods sold (114,000) Gross profit \$ 18,000 (g) Sales \$100,000 Sales returns (9,000) *Net sales \$ 91,000 (h) Beginning inventory \$ 24,000 Purchases 85,000 *Purchase returns (9,000) Goods available for sale 100,000 Ending inventory (28,000) Cost of goods sold \$ 72,

33 EXERCISE 3-19 (Continued) (i) Net sales \$91,000 Cost of goods sold (72,000) *Gross profit \$19,000 *EXERCISE 3-20 (10 15 minutes) (a) Wayne Rogers Corp. Income Statement (Cash Basis) For the Year Ended December 31, Sales \$295,000 \$515,000 Expenses 225, ,000 Net income \$ 70,000 \$243,000 (b) Wayne Rogers Corp. Income Statement (Accrual Basis) For the Year Ended December 31, Sales* \$485,000 \$445,000 Expenses** 277, ,000 Net income \$208,000 \$190,000 *2006: \$295,000 + \$160,000 + \$30,000 = \$485, : \$355,000 + \$90,000 = \$445,000 **2006: \$185,000 + \$67,000 + \$25,000 = \$277, : \$40,000 + \$160,000 + \$55,000 = \$255,

34 *EXERCISE 3-21 (15 20 minutes) Jill Accardo, M.D. Conversion of Cash Basis to Accrual Basis For the Year 2007 Excess of cash collected over cash disbursed (\$142,600 \$55,470) \$87,130 Add increase in accounts receivable (\$9,250 \$15, 927) 6,677 Deduct increase in unearned service revenue (\$2,840 \$4,111) (1,271) Add decrease in accrued liabilities (\$3,435 \$2,108) 1,327 Add increase in prepaid expenses (\$1,917 \$3,232) 1,315 Net income on an accrual basis \$95,178 Alternate solution: Jill Accardo, M.D. Conversion of Income Statement Data from Cash Basis to Accrual Basis For the Year 2007 Cash Adjustments Accrual Basis Add Deduct Basis Collections from customers: \$142,600 Accounts receivable, Jan. 1 \$9,250 +Accounts receivable, Dec. 31 \$15,927 +Unearned service revenue, Jan. 1 2,840 Unearned service revenue, Dec. 31 4,111 Service revenue \$148,006 Disbursements for expenses: 55,470 Accrued liabilities, Jan. 1 3,435 +Accrued liabilities, Dec. 31 2,108 +Prepaid expenses, Jan. 1 1,917 Prepaid expenses, Dec. 31 3,232 Operating expenses 52,828 Net income cash basis \$ 87,130 \$ 95,178 Net income accrual basis 3-34

35 EXERCISE 3-22 (20 25 minutes) (a) Adjusting Entries: 1. Insurance Expense... 1,500 Prepaid Insurance... 1, Rental Revenue Unearned Rental Revenue Advertising Materials Advertising Expense Interest Expense Interest Payable (b) Reversing Entries: 1. No reversing entry required. 2. Unearned Rental Revenue Rental Revenue Advertising Expense Advertising Materials Interest Payable Interest Expense *EXERCISE 3-23 (10 15 minutes) Jurassic Park Co. Worksheet (partial) For Month Ended February 28, 2007 Adjusted Trial Trial Income Balance Adjustments Balance Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Supplies 1,756 (a) 1, Accumulated depreciation 6,939 (b) 257 7,196 7,

36 *EXERCISE 3-23 (Continued) Interest payable 150 (c) Supplies expense (a) 1,041 1,041 1,041 Depreciation expense (b) Interest expense (c) The following accounts and amounts would be shown in the February income statement: Supplies expense \$1,041 Depreciation expense 257 Interest expense 50 *EXERCISE 3-24 (10 15 minutes) Adjusted Trial Income Accounts Balance Statement Balance Sheet Dr. Cr. Dr. Cr. Dr. Cr. Cash 9,000 9,000 Merchandise Inventory 80,000 80,000 Sales 450, ,000 Sales Returns and Allowances 10,000 10,000 Sales Discounts 5,000 5,000 Cost of Goods Sold 250, ,

37 *EXERCISE 3-25 (20 25 minutes) Ed Bradley Co. Worksheet (partial) For the Month Ended April 30, 2007 Adjusted Trial Balance Income Statement Balance Sheet Account Titles Dr. Cr. Dr. Cr. Dr. Cr. Cash 19,472 19,472 Accounts receivable 6,920 6,920 Prepaid rent 2,280 2,280 Equipment 18,050 18,050 Accum. depreciation 4,895 4,895 Notes payable 5,700 5,700 Accounts payable 5,472 5,472 Bradley, capital 34,960 34,960 Bradley, drawing 6,650 6,650 Services revenue 11,590 11,590 Salaries expense 6,840 6,840 Rent expense 2,260 2,260 Depreciation expense Interest expense Interest payable Totals 62,700 62,700 9,328 11,590 53,372 51,110 Net income 2,262 2,262 Totals 11,590 11,590 53,372 53,

38 *EXERCISE 3-25 (Continued) Ed Bradley Co. Balance Sheet April 30, 2007 Assets Current Assets Cash... \$19,472 Accounts receivable... 6,920 Prepaid rent... 2,280 Total current assets... 28,672 Property, plant, and equipment Equipment... \$18,050 Less Accumulated depreciation... (4,895) 13,155 Total assets... \$41,827 Liabilities and Owner s Equity Current liabilities Accounts payable... \$ 5,472 Interest payable Notes payable... 5,700 Total current liabilities... 11,255 Owner s equity Bradley, Capital... 30,572* Total liabilities and owner s equity... \$41,827 *Beg. Balance Drawings + Net Income = Ending Balance \$34,960 \$6,650 + \$2,262 = \$30,

40 SOLUTIONS TO PROBLEMS PROBLEM 3-1 (a) (Explanations are omitted.) and (d) Cash Furniture and Equipment Sept. 1 20,000 Sept Sept. 2 17, , ,600 Yasunari Kawabata, Capital 19 3,000 Sept. 19 3,000 Sept. 1 20, , , Bal , Bal 12,133 Accounts Receivable Sept. 14 5,820 Sept ,110 Accounts Payable Bal. 30 6,950 Sept. 18 3,600 Sept. 2 17,280 Bal ,680 Rent Expense Sept Sept Supplies on Hand Service Revenue Sept Sept Sept. 30 9,620 Sept. 8 1,690 Bal , ,110 9,620 9,620 Miscellaneous Office Expense Accumulated Depreciation Sept Sept Sept Office Salaries Expense Sept. 30 1,800 Sept. 30 1,800 Supplies Expense Sept Sept

41 PROBLEM 3-1 (Continued) Depreciation Expense Income Summary Sept Sept Sept Sept. 30 9, , Inc. 6,007 9,620 9,620 (b) YASUNARI KAWABATA, D.D.S. Trial Balance September 30 Debit Credit Cash... 12,133 Accounts Receivable... 6,950 Supplies on Hand Furniture and Equipment... 17,280 Accumulated Depreciation Accounts Payable... 13,680 Yasunari Kawabata, Capital... 17,000 Service Revenue... 9,620 Rent Expense Miscellaneous Office Expense Office Salaries Expense... 1,800 Supplies Expense Depreciation Expense Totals... 40,588 40,

42 PROBLEM 3-1 (Continued) (c) YASUNARI KAWABATA, D.D.S. Income Statement For the Month of September Service revenue... \$9,620 Expenses: Office salaries expense... \$1,800 Rent expense Supplies expense Depreciation expense Miscellaneous office expense Total expenses... 3,613 Net income... \$6,007 YASUNARI KAWABATA, D.D.S. Statement of Owner s Equity For the Month of September Kawabata, Capital September 1... \$20,000 Add: Net income for September... 6,007 26,007 Less: Withdrawal by owner... 3,000 Kawabata, Capital September \$23,

43 PROBLEM 3-1 (Continued) YASUNARI KAWABATA, D.D.S. Balance Sheet As of September 30 Assets Liabilities and Owner s Equity Cash... \$12,133 Accounts payable... \$13,680 Accounts receivable... 6,950 Yasunari Kawabata, Capital... 23,007 Supplies on Hand Furniture and equip ,280 Accum. depreciation... (288) Total liabilities and Total assets... \$36,687 owner s equity... \$36,687 (e) YASUNARI KAWABATA, D.D.S. Post-Closing Trial Balance September 30 Debit Credit Cash... 12,133 Accounts Receivable... 6,950 Supplies on Hand Furniture and Equipment... 17,280 Accumulated Depreciation Accounts Payable... 13,680 Yasunari Kawabata, Capital... 23,007 Totals... 36,975 36,

44 PROBLEM 3-2 (a) Dec. 31 Accounts Receivable... 3,500 Advertising Revenue... 3, Unearned Advertising Revenue... 1,400 Advertising Revenue... 1, Art Supplies Expense... 5,400 Art Supplies... 5, Depreciation Expense... 5,000 Accumulated Depreciation... 5, Interest Expense Interest Payable Insurance Expense Prepaid Insurance Salaries Expense... 1,300 Salaries Payable... 1,

45 PROBLEM 3-2 (Continued) (b) MASON ADVERTISING AGENCY Income Statement For the Year Ended December 31, 2010 Revenues Advertising revenue... \$63,500 Expenses Salaries expense... \$11,300 Art supplies expense... 5,400 Depreciation expense... 5,000 Rent expense... 4,000 Insurance expense Interest expense Total expenses... 27,050 Net income... \$36,450 MASON ADVERTISING AGENCY Statement of Retained Earnings For the Year Ended December 31, 2010 Retained earnings, January 1... \$ 3,500 Add: Net income... 36,450 Retained earnings, December \$39,

46 PROBLEM 3-2 (Continued) MASON ADVERTISING AGENCY Balance Sheet December 31, 2010 Assets Cash... \$11,000 Accounts receivable... 23,500 Art supplies... 3,000 Prepaid insurance... 2,500 Printing equipment... \$60,000 Less: Accumulated depreciation printing equipment... 33,000 27,000 Total assets... \$67,000 Liabilities and Stockholders Equity Liabilities Notes payable... \$ 5,000 Accounts payable... 5,000 Unearned advertising revenue... 5,600 Salaries payable... 1,300 Interest payable Total liabilities... \$17,050 Stockholders equity Common stock... \$10,000 Retained earnings... 39,950 49,950 Total liabilities and stockholders equity... \$67,000 (c) 1. Interest is \$50 per month or 1% of the note payable. 1% X 12 = 12% interest per year. 2. Salaries Expense, \$11,300 less Salaries Payable 12/31/10, \$1,300 = \$10,000. Total Payments, \$12,500 \$10,000 = \$2,500 Salaries Payable 12/31/

47 PROBLEM Dec. 31 Salaries Expense... 2,120 Salaries Payable... 2,120 (5 X \$700 X 2/5) = \$1,400 (3 X \$600 X 2/5) = 720 Total accrued salaries \$2, Unearned Rent Revenue... 94,000 Rent Revenue... 94,000 (5 X \$6,000 X 2) = \$60,000 (4 X \$8,500 X 1) = 34,000 Total rent earned \$94, Advertising Expense... 4,900 Prepaid Advertising... 4,900 (A650 \$500 per month for 8 months) = \$4,000 (B974 \$300 per month for 3 months) = 900 Total advertising expense \$4, Interest Expense... 4,200 Interest Payable (\$60,000 X 12% X 7/12)... 4,

48 PROBLEM 3-4 (a) Nov. 30 Store Supplies Expense... 4,000 Store Supplies... 4, Depr. Expense Store Equipment... 9,000 Accumulated Depreciation Store Equipment... 9, Depr. Expense Delivery Equipment... 6,000 Accumulated Depreciation Delivery Equipment... 6, Interest Expense... 11,000 Interest Payable... 11,

49 PROBLEM 3-4 (Continued) (b) BELLEMY FASHION CENTER Adjusted Trial Balance November 30, 2010 Dr. Cr. Cash... 28,700 Accounts Receivable... 33,700 Merchandise Inventory... 45,000 Store Supplies... 1,500 Store Equipment... 85,000 Accumulated Depr. Store Equipment... 27,000 Delivery Equipment... 48,000 Accumulated Depr. Delivery Equipment... 12,000 Notes Payable... 51,000 Accounts Payable... 48,500 Common Stock... 90,000 Retained Earnings... 8,000 Sales ,200 Sales Returns and Allowances... 4,200 Cost of Goods Sold ,400 Salaries Expense ,000 Advertising Expense... 26,400 Utilities Expense... 14,000 Repair Expense... 12,100 Delivery Expense... 16,700 Rent Expense... 24,000 Store Supplies Expense... 4,000 Depreciation Expense Store Equipment... 9,000 Depreciation Expense Delivery Equipment... 6,000 Interest Expense... 11,000 Interest Payable... 11,000 Totals... 1,004,700 1,004,

50 PROBLEM 3-4 (Continued) (c) BELLEMY FASHION CENTER Income Statement For the Year Ended November 30, 2010 Sales revenue Sales... \$757,200 Less: Sales returns and allowanc es... 4,200 Net sales ,000 Cost of goods sold ,400 Gross profit ,600 Operating expenses Selling expenses Salaries expense (\$140,000 X 70%)... \$98,000 Advertising expense... 26,400 Rent expense (\$24,000 X 80%)... 19,200 Delivery expense... 16,700 Utilities expense (\$14,000 X 80%)... 11,200 Depr. exp. store equipment... 9,000 Depr. exp. deliv. equipment... 6,000 Store supplies expense... 4,000 Total selling expenses... \$190,500 Administrative expenses Salaries expense (\$140,000 X 30%)... 42,000 Repair expense... 12,100 Rent expense Utilities (\$24,000 X 20%)... 4,800 expense (\$14,000 X 20%)... 2,800 Total admin. expenses... 61,700 Total oper. expenses ,200 Income from operations... 5,400 Other expenses and losses Interest expense... 11,000 Net loss... (\$ 5,600) 3-50

51 PROBLEM 3-4 (Continued) BELLEMY FASHION CENTER Retained Earnings Statement For the Year Ended November 30, 2010 Retained earnings, December 1, \$8,000 Less: Net loss... 5,600 Retained earnings, November 30, \$2,400 BELLEMY FASHION CENTER Balance Sheet November 30, 2010 Assets Current assets Cash... \$28,700 Accounts receivable... 33,700 Merchandise inventory... 45,000 Store supplies... 1,500 Total current assets... \$108,900 Property, plant, and equipment Store equipment... \$85,000 Accum. depr. store equipment... 27,000 58,000 Delivery equipment... 48,000 Accum. depr. delivery equipment... 12,000 36,000 94,000 Total assets... \$202,900 Liabilities and Stockholders Equity Current liabilities Notes payable due next year... \$30,000 Accounts payable... 48,500 Interest payable... 11,000 Total current liabilities... \$ 89,500 Long-term liabilities Notes payable... 21,000 Total liabilities ,500 Stockholders equity Common Stock... 90,000 Retained Earnings... 2,400 92,400 Total liabilities and stockholders equity... \$202,

52 PROBLEM 3-4 (Continued) (d) Nov. 30 Sales ,200 Income Summary , Income Summary ,800 Sales Returns and Allowances... 4,200 Cost of Goods Sold ,400 Salaries Expense ,000 Advertising Expense... 26,400 Utilities Expense... 14,000 Repair Expense... 12,100 Delivery Expense... 16,700 Rent Expense... 24,000 Store Supplies Expense... 4,000 Depreciation Expense Store Equipment... 9,000 Depreciation Expense Delivery Equipment... 6,000 Interest Expense... 11, Retained Earnings... 5,600 Income Summary... 5,

53 PROBLEM 3-4 (Continued) (e) BELLEMY FASHION CENTER Post-Closing Trial Balance November 30, 2010 Debit Credit Cash... \$ 28,700 Accounts Receivable... 33,700 Merchandise Inventory... 45,000 Store Supplies... 1,500 Store Equipment... 85,000 Accumulated Depreciation Store Equipment... \$ 27,000 Delivery Equipment... 48,000 Accumulated Depreciation Delivery Equipment... 12,000 Notes Payable... 51,000 Accounts Payable... 48,500 Interest Payable... 11,000 Common Stock... 90,000 Retained Earnings... 2,400 \$241, 900 \$241,

54 PROBLEM 3-5 (a) -1- Depreciation Expense... 10,500 Accumulated Depreciation Equipment (1/16 X \$168,000)... 10, Interest Expense... 1,440* Interest Payable (\$90,000 X 8% X 72/360)... 1,440* -3- Admissions Revenue... 60,000 Unearned Admissions Revenue (2,000 X \$30)... 60, Prepaid Advertising... 1,100 Advertising Expense... 1, Salaries Expense... 4,700 Salaries Payable... 4,700 (b) 1. Interest expense, \$2,840 (\$1,400 + \$1,440). 2. Admissions revenue, \$320,000 (\$380,000 \$60,000). 3. Advertising expense, \$12,580 (\$13,680 \$1,100). 4. Salaries expense, \$62,300 (\$57,600 + \$4,700). *Note to instructor : If 30-day months are a ssumed, interest expense = \$1,400 (\$90,000 X 8% X 70/360). 3-54

55 PROBLEM 3-6 (a) -1- Service Revenue... 6,000 Unearned Service Revenue... 6, Accounts Receivable... 4,900 Service Revenue... 4, Bad Debt Expense... 1,430 Allowance for Doubtful Accounts... 1, Insurance Expense Prepaid Insurance Depreciation Expense Furniture and Equipment... 2,500 Accum. Depr. Furniture and Equipment (\$25,000 X.10)... 2, Interest Expense Interest Payable (\$7,200 X.10 X 30/360) Prepaid Rent Rent Expense Office Salaries Expense... 2,510 Salaries Payable... 2,

56 PROBLEM 3-6 (Continued) (b) YORKI S PEREZ, CONSULTING ENGINEER Income Statement For the Year Ended December 31, 2010 Service revenue (\$100,000 \$6,000 + \$4,900)... \$98,900 Expenses Office salaries expense (\$30,500 + \$2,510)... \$33,010 Rent expense (\$9,750 \$750)... 9,000 Depreciation expense... 2,500 Bad debt expense... 1,430 Heat, light, and water expense... 1,080 Miscellaneous office expense Insurance expense Interest expense Total expenses... 48,280 Net income... \$50,

57 PROBLEM 3-6 (Continued) YORKIS PEREZ, CONSULTING ENGINEER Statement of Owner s Equity For the Year Ended December 31, 2010 Yorkis Perez, Capital, January 1... \$ 52,010 a Add: Net income... 50,620 Less: Withdrawals... (17,000) Yorkis Perez, Capital, December \$ 85,630 (a) Yorkis Perez, Capital trial balance... \$35,010 Withdrawals during the year... 17,000 Yorkis Perez, Capital, as of January 1, \$52,

58 PROBLEM 3-6 (Continued) YORKIS PEREZ, CONSULTING ENGINEER Balance Sheet December 31, 2010 Assets Current assets Cash... \$29,500 Accounts receivable (\$49,600 + \$4,900)... \$54,500 Less: Allowance for doubtful accounts... (2,180)* 52,320 Engineering supplies inventory... 1,960 Prepaid insurance (\$1,100 \$480) Prepaid rent Total current assets... \$ 85,150 Furniture and equipment... 25,000 Less: Accum. depreciation... (8,750)** 16,250 Total assets... \$101, 400 Liabilities and Owner s Equity Current liabilities Notes payable... \$7,200 Unearned service revenue... 6,000 Salaries payable... 2,510 Interest payable \$ 15,770 Yorkis Perez, Capital (\$35,010 + \$50,620)... 85,630 Total liabilities and owner s equity... \$101,400 *(\$750 + \$1,430) **(\$6,250 + \$2,500) 3-58

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