Problem Solutions: Topics 1 and 2 ACCT Evaluating Financial Performance Fall 2015

Transcription

1 Problem Solutions: Topics 1 and 2 ACCT Evaluating Financial Performance Fall 2015 Note: All problems are organized by Topic. Each problem is numbered with the topic number first followed by a dash and then the problem number for that topic. Many of the problems in this set are from the Dyckman, Magee and Pfeiffer (4th edition) textbook. For those problems, the topic-problem number is followed by the textbook reference number in parentheses. Note that some of the problems extracted from the textbook have been revised or reworded.

2 Topic 1 Solutions: Financial Accounting Theory and Concepts 1-1 (Q1.1) 1-2 (Q1.2) 1-3 (Q1.3) 1-4 (Q1.4) Organizations undertake planning activities that subsequently shape three major activities: financing, investing, and operating. Financing is the means used to pay for resources. Investing refers to the buying and selling of resources necessary to carry out the organization s plans. Operating activities are the actual carrying out of these plans. (Planning is the glue that connects these activities, including the organization s ideas, goals and strategies.) An organization s financing activities (liabilities and equity sources of funds) pay for investing activities (assets uses of funds). An organization cannot have more or less assets than its liabilities and equity combined and, similarly, it cannot have more or less liabilities and equity than its total assets. This means: assets liabilities + equity. This relation is called the accounting equation (sometimes called the balance sheet equation, or BSE), and it applies to all organizations at all times. The four main financial statements are: income statement, balance sheet, statement of stockholders equity, and statement of cash flows. The income statement provides information relating to the company s revenues, expenses and profitability over a period of time. The balance sheet lists the company s assets (what it owns), liabilities (what it owes), and stockholders equity (the residual claims of its owners) as of a point in time. The statement of stockholders equity reports on the changes to each stockholders equity account during the year. Some changes to stockholders equity, such as those resulting from the payment of dividends and unrealized gains (losses) on marketable securities, can only be found in this statement as they are not included in the computation of net income. The statement of cash flows identifies the sources (inflows) and uses (outflows) of cash, that is, from what sources the company has derived its cash and how that cash has been used. All four statements are necessary in order to provide a complete picture of the financial condition of the company. The balance sheet provides information that helps users understand a company s resources (assets) and claims to those resources (liabilities and stockholders equity) as of a given point in time. 2

3 1-5 (Q1.6) An income statement reports whether the business has earned a net income (also called profit or earnings) or a net loss. Importantly, the income statement lists the types and amounts of revenues and expenses making up net income or net loss. The income statement covers a period of time. The statement of cash flows reports on the cash inflows and outflows relating to a company s operating, investing, and financing activities over a period of time. The sum of these three activities yields the net change in cash for the period. This statement is a useful complement to the income statement which reports on revenues and expenses, but conveys relatively little information about cash flows. 1-6 (Q1.7) Articulation refers to the updating of the balance sheet by information contained in the income statement or the statement of cash flows. For example, retained earnings is increased each period by any profit earned during the period (as reported in the income statement) and decreased each period by the payment of dividends (as reported in the statement of cash flows and the statement of stockholders equity). It is by the process of articulation that the financial statements are linked. 1-7 (Q1.14) Generally Accepted Accounting Principles (GAAP) are the various methods, rules, practices, and other procedures that have evolved over time in response to the need to regulate the preparation of financial statements. They are primarily set by the Financial Accounting Standards Board (FASB), an entity of the private sector with representatives from companies that issue financial statements, accounting firms that audit those statements, and users of financial information. 1-8 (Q2-2) The revenue recognition principle requires that revenues be recognized when earned. Revenues are earned when the product has been delivered to the buyer and is usually signified by a formal transfer of title. A good test of whether revenue has been earned is whether the rights, risks and obligations of ownership have been transferred to the buyer. If a service is involved, revenues are not earned until the service has been provided. The matching principle prescribes that the expenses incurred in providing the service or product be matched against the revenues recognized from the sale or the provision of the service. When these two principles are followed, income can be properly measured in a given accounting reporting period. 3

4 1-9 (Q2-3) Accrual accounting entails the recognition of revenue under the revenue recognition principle (record revenues when earned), and the recognition of expenses using the matching principle (record expenses when incurred). The recognition of revenues or the expenses does not require that cash be received or disbursed. For example the recognition of revenues on sale can lead to an account receivable, and wage expense can be accrued using a wages payable (accrued) liability account. This differs from a cash-based accounting system, where revenues are recognized only when cash is received and expenses are recognized only when cash is expended (M1.20) Financing and Investing Relations, and Financing Sources ($ millions) Assets Liabilities + Equity $72,921 $41,604 $31,317 Coca-Cola receives slightly more of its financing from creditors ($41,604 million) versus owners ($31,317 million). Its owner financing comprises 42.9% of its total financing ($31,317 mil./ $72,921 mil.). Several years ago, the percentage was 50% (M2-16) Applying the Accounting Equation to the Balance Sheet a. $375,000 - $105,000 $270,000 equity b. $43,000 + $11,000 $54,000 assets c. $878,000 - $422,000 $456,000 liabilities 1-12 (M1.21) Applying the Accounting Equation and Computing Financing Proportions ($ millions) Assets Liabilities + Equity Hewlett-Packard $129,517 $90,513 (a)$39,004 General Mills $ 18,675 (b)$12,063 $ 6,612 Harley-Davidson (c) $ 9,674 $ 7,254 $ 2,420 4

5 The percent of owner financing for each company follows: Hewlett-Packard, 30.1% ($39,004 mil./ $129,517 mil.); General Mills, 35.4% ($6,612 mil./ $18,675 mil.); Harley-Davidson, 25.0% ($2,420 mil./ $9,674 mil.). The creditor percent of financing is computed as 100% minus the owner percent. Therefore, Hewlett-Packard is more owner-financed than the other two firms, while Harley-Davidson and General Mills rely more on creditor financing (E1-28) Applying the Accounting Equation and Financial Statement Articulation ($ millions) a. Using the accounting equation: ($ millions) Assets Liabilities + Equity Intel $63,186 $13,756 $49,430 b. Starting with the accounting equation at the beginning of the year: ($ millions) Assets Liabilities + Equity JetBlue $6,549 $5,003 $1,546 Using the accounting equation at the end of the year: ($ millions) Assets Liabilities + Equity JetBlue $6,549+$44 $5,003-$64 $1,654 c. Starting with the accounting equation at the end of the year: ($ millions) Assets Liabilities + Equity Walt Disney $72,124 $29,864+$2,807 $39,453 Using the accounting equation at the beginning of the year: ($ millions) Assets Liabilities + Equity Walt Disney $72,124- $2,918 $29,864 $39,342 5

6 Topic 2 Solutions: Accounting for Transactions and Preparing Financial Statements 2-1 (Q2-1) An asset is something that we own that is expected to provide future benefits. A liability is a current obligation that will require a future sacrifice. Equity is the difference between assets and liabilities. It represents the claims of the company s owners to its income and assets. The following are some examples of each: ASSETS Receivables Inventories Plant, property and equipment LIABILITIES Accounts payable Accrued liabilities Notes payable Long-term debt EQUITY Contributed capital (common and preferred stock) Additional paid-in capital Earned capital (retained earnings) Treasury stock 2-2 (Q3-8) 2-3 (Q3-9) Many of the transactions reflected in the accounting records through the first two steps of the accounting cycle affect the net income of more than one period. Therefore, adjustments to the account balances are ordinarily necessary at the end of each accounting period to record the proper amount of revenue and to match expenses with revenue properly. This process is also intended to achieve a more accurate picture of financial position by adjusting balance sheet amounts to show unexpired costs, up-to-date amounts of obligations, and so on. 1. Allocating assets to expense to reflect expenses incurred during the period. Example: Recording supplies used by debiting Supplies and crediting Supplies. 2. Allocating payments received in advance by crediting the revenue account to reflect revenues earned during the period. Example: Recording service fees earned by debiting Unearned Service Fees and crediting Service Fees Earned. 6

7 2-4 (Q3-11) 2-5 (Q3-12) 2-6 (Q3-16) 2-7 (Q3-18) 3. Accruing expenses to reflect expenses incurred during the period that are not yet paid or recorded. Example: Recording unpaid wages by debiting Wages and crediting Wages Payable. 4. Accruing revenues to reflect revenues earned during the period that are not yet received or recorded. Example: Recording commissions earned by debiting Commissions Receivable and crediting Commissions Earned. A contra account is an account that is related to, and deducted from, another account when financial statements are prepared or when book values are computed. Accumulated depreciation is deducted from the cost of a depreciable asset in computing and portraying the asset's book value. The building is five years old by the end of 2014, so the accumulated depreciation of $800,000 represents five years of depreciation at an annual rate of $160,000 ($800,000/5). If the annual depreciation is $160,000, then the expected life of the building must be 25 years. At the end of 2021, the building will be twelve years old, and the accumulated depreciation will be 12 $160,000, or $1,920,000. The book value of the building (defined as original cost less accumulated depreciation) will be $2,080,000. The temporary accounts sometimes called nominal accounts are closed at year-end. They consist principally of the income statement accounts (expense and revenue accounts). (The Income Summary account and the Dividend account are also closed if they are used.) A post-closing trial balance ensures that an equality of debits and credits has been maintained throughout the adjusting and closing procedures and that the general ledger is in balance to start the next period. Only balance sheet accounts appear in a post-closing trial balance. Depreciation and Supplies are temporary accounts that should have been closed and should not appear in the post-closing trial balance. 7

8 2-8 (M1.24) Identifying Financial Statement Line Items and Accounts a. BS d. BS g. SCF and SE b. IS e. SCF h. SCF and SE c. BS f. BS and SE i. IS, SE, and SCF 2-9 (E1-30) Financial Statement Relations to Compute Dividends Computation of dividends earnings, $13,157 + Net income... 2,203 dividends... (?) earnings, $14,329 Thus, dividends were $1,031 million for This dividends amount comprises 46.8% ($1,031/ $2,203) of its 2010 net income (P1-39) Formulating a Statement of Stockholders Equity from Raw Data DP Systems, Inc. Statement of Stockholders Equity For Year Ended December 31, 2013 Common Stock Stockholders Equity December 31, $ 550 $2,437 $2,987 Net income dividends... (281) (281) December 31, $ 550 $3,015 $3,565 8

9 2-11 (M2-14) Determining and Net Income Using the Balance Sheet Use the accounting equation. a. $ 8,000 Accounts receivable 23,000 Supplies 9,000 Equipment 138, ,000 Accounts payable $ 11,000 Common stock 110, ,000 earnings $ 57,000 b. : December 31, 2013 $ 57,000 January 1, ,000 Increase 27,000 Add: Dividends 12,000 Net Income 2013 $ 39, (M2-18) Analyzing Transaction Effects on Equity a. no effect b. decrease c. decrease d. no effect e. increase f. increase g. increase 9

10 2-13 (M2-19 Identifying and Classifying Financial Statement Items a. Balance sheet b. Income statement c. Balance sheet d. Income statement e. Balance sheet f. Balance sheet g. Balance sheet h. Balance sheet i. Income statement j. Income statement k. Balance sheet l. Balance sheet 2-14 (M2-25 Analyzing the Effect of transactions on the Balance Sheet a. Increase assets () Increase equity (Service Revenues) b. Increase assets (Office Supplies) Increase liabilities (Accounts Payable) c. Increase assets () Increase equity (Contributed Capital or Common Stock) d. Decrease liabilities (Accounts Payable) Decrease assets () e. Increase assets () Increase liabilities (Notes Payable) f. Increase assets (Accounts Receivable) Increase equity (Service Revenues) g. Increase assets (Office Equipment) Decrease assets () h. Decrease equity (Interest ) Decrease assets () i. Decrease equity (Utilities ) Increase liabilities (Accounts Payable 10

11 2-15 (M2-29) Analyzing Transactions using the Financial Statement effects Template Balance Sheet Income Statement Transaction + Noncash Liabil- + Contrib. Earned Net + Revenues - s Asset Assets ities Capital Capital Income a. Issue stock for $1,000 cash. +1,000 +1,000 - Common Stock b. Purchase inventory for $500 cash Inventory - c. Sell inventory for $2,000 on credit. +2,000 Accts Rec +2,000 +2,000 Sales - +2,000 d. Record $500 for cost of inventory sold in c Inventory COGS -500 e. Receive $2,000 cash on receivable from c. +2,000-2,000 Accts Rec - Totals 2, , ,500 2, ,500 11

12 2-16 (M2-30) Journalizing Business Transactions a. (+A)... Common stock (+SE)... b. Inventory (+A)... (-A)... c. Accounts receivable (+A)... Sales (+R, +SE)... d. Cost of goods sold (+E, -SE)... Inventory (-A)... e. (+A)... Accounts receivable (-A)... 1, , ,000 1, , , (M2-31) Posting to T-Accounts + (A) - + Accounts Receivable (A) - (a) 1,000 (e) 2,000 (b) 500 (c) 2,000 (e) 2,000 - Sales (R) + (c) 2,000 + Inventory (A) - (b) 500 (d) Cost of Goods Sold (E) - (d) Common Stock (SE) + (a) 1,000 12

13 2-18 (E2-34) Preparing Balance Sheets, Computing Income and Applying the Current and Quick Ratios. Lang Services a. Balance Sheet December 31, Assets $10,000 $ 8,000 Accounts receivable 22,800 17,500 Supplies 4,700 4,200 Equipment 32,000 27,000 Total assets $69,500 $56,700 Liabilities Accounts payable $25,000 $25,000 Notes payable 1,800 1,600 Total liabilities 26,800 26,600 Stockholders equity Equity 42,700 30,100 Total liabilities and stockholders equity $69,500 $56,700 b. Equity, December 31, 2013 $42,700 Equity, December 31, ,100 Increase 12,600 Add: Dividends 17,000 29,600 Less: Common Stock issued 5,000 Net Income for 2013 $24,600 13

14 2-19 (E2-35) Constructing Balance Sheets and Determining Income LYNCH SERVICES a. BALANCE SHEETS December 31, Assets $ 23,000 $ 20,000 Accounts receivable 42,000 33,000 Supplies 20,000 18,000 Land 40,000 40,000 Building 250, ,000 Equipment 43,000 45,000 Total assets $418,000 $416,000 Liabilities Accounts payable $ 6,000 $ 9,000 Mortgage payable 90, ,000 Total liabilities 96, ,000 Stockholders' equity Common stock 220, ,000 earnings 102,000 87,000 Total stockholders' equity 322, ,000 Total liabilities and stockholders' equity $418,000 $416,000 b., December 31, 2013 $102,000, December 31, ,000 Increase during ,000 Add: Dividend for ,000 Net Income for 2013 $ 25,000 14

15 2-20 (E2-44) Constructing Balance Sheets Bettis Contractors a. and b. Balance Sheets June 30, July 2, Assets $ 14,700 $ 2,200 Accounts receivable 9,200 9,200 Supplies 30,500 30,500 Current assets 54,400 41,900 Land 25,000 25,000 Equipment 98, ,000 Total assets $177,400 $174,900 Liabilities Accounts payable 8,900 8,900 Current liabilities 8,900 8,900 Notes payable $ 30,000 $ 33,000 Total liabilities 38,900 41,900 Stockholders' Equity Common stock 100, ,000 earnings 38,500 33,000 Total stockholders' equity 138, ,000 Total liabilities and stockholders' equity $177,400 $174,900 15

16 2-21 (E2-45) Analyzing Transactions Using the Financial Statement Effects Template Transaction Asset Balance Sheet + Noncash Liabil- + Contrib. + Assets ities Capital Earned Capital Income Statement Net Revenues - s Income 1. Receive $20,000 cash in exchange for common stock. +20, ,000 Common Stock - 2. Purchase $2,000 of inventory on credit. +2,000 Inventory +2,000 Accounts Payable - 3. Sell inventory for $3,000 on credit. +3,000 Accounts Receivable +3,000 +3,000 Sales - +3, Record cost of goods sold in 3. -2,000 Inventory -2, ,000 COGS - 2, Collect $3,000 +3,000 cash from transaction 3. -3,000 Accounts Receivable - 6. Acquire $5,000 of equipment by signing a note. 7. Pay wages of -1,000 $1,000 in cash. +5,000 Equipment +5,000 Notes Payable -1, ,000 - Wages - 1, Pay $5,000 cash on a note payable. 9. Pay $2,000 cash dividend. -5,000-5,000 Notes Payable -2,000-2, TOTALS 15, ,000 2, , ,000 3,000-3,

17 2-22 (E2-46) Recording Transactions using Journal Entries and T-Accounts Part a: 1. (+A)... 20,000 Common stock (+SE)... 20, Inventory (+A)... 2,000 Accounts payable (+L)... 2, Accounts receivable (+A)... 3,000 Sales (+R, +SE)... 3, Cost of goods sold (+E, -SE)... 2,000 Inventory (-A)... 2, (+A)... 3,000 Accounts receivable (-A)... 3, Equipment (+A)... 5,000 Notes payable (+L)... 5, Wages expense (+E, -SE)... 1,000 (-A)... 1, Notes payable (-L)... 5,000 (-A)... 5, earnings (-SE)... 2,000 (-A)... 2,000 17

18 Part b: + (A) - (1) 20,000 (5) 3,000 1,000 (7) 5,000 (8) 2,000 (9) - Common Stock (SE) + 20,000 (1) - Sales Revenue (R) + 3,000 (3) + Inventory (A) - (2) 2,000 2,000 (4) + Cost of Goods Sold (E) - (4) 2,000 + Wages (E) - (7) 1,000 + Accounts Receivable (A) - (3) 3,000 3,000 (5) - Accounts Payable (L) + 2,000 (2) + Equipment (A) - (6) 5,000 - (SE) + (9) 2,000 - Notes Payable (L) + (8) 5,000 5,000 (6) 18

19 2-23 (P2-51) Preparing a Balance Sheet, Computing Net Income, and Understanding Equity Transactions. Barth Company Balance Sheet a. December 31, 2013 Assets Liabilities...$ 8,800 Accounts payable... $ 7,500 Accounts receivable...18,400 Equipment...9,000 Land...50,000 Equity Stockholders equity... 78,700 Total assets $86,200 Total liabilities & equity... $86,200 b. Increase in Equity ($78,700-$67,500) $11,200 Add: Dividends 12,000 Net Income for ,200 c. Increase in Equity ($78,700-$67,500) $11,200 Add: Dividends 21,000 32,200 Less: Additional Investment 13,500 Net Income for 2013 $18,700 19

20 2-24 (P2-55) Analyzing Transactions using the Financial Statement Effects Template and Preparing an Income Statement. a. Balance Sheet Income Statement Transaction + Noncash Liabil- + Contrib. Earned + Asset Assets ities Capital Capital Revenues - s 1. Issued common +7,000 +7,000 stock $7,000. Common - Stock 2. Paid rent $ Rent 3. Received $ invoice for Accounts advertising Payable expense. 4. Borrowed $15, , ,000 cash from bank. Notes Payable 5. $1,200 received for services. +1, ,200 +1,200 Counseling Services Revenue +6,800 Services Revenue Advertising Billed clients $6,800 +6,800 +6,800 for services. Accounts - Receivable 7. Paid $2,200 cash -2,200-2,200 for salary. 8. Paid $370 cash for utilities. 9. Paid $900 cash dividend Acquired land for +13,000 $13, Paid $100 interest in cash. -13,000 Land -100 Net Income ,200 +6,800 +2,200-2,200 - Salary Utilities Interest Totals $5,880 + $19,800 $15,500 + $7,000 + $3,180 $8,000 - $3,920 $4,080 20

21 b. Lambert Services Income Statement For the Month of December 2013 Counseling services revenue $8,000 s Rent expense $ 750 Advertising expense 500 Salary expense 2,200 Utilities expense 370 Interest expense 100 Total expenses 3,920 Net income $4,080 21

22 Transaction 1. Issued common stock for cash. 2. Rent paid in cash $4, Invoice for entertainment expense: $1, paid for 2-25 (P2-60) Analyzing Transactions using the Financial Statement Effects Template and Preparing an Income Statement. a. Balance Sheet Income Statement Asset + Noncash Assets +$50,000-4,800 Liabilities +1,600 Accounts Payable Contrib. + Capital +$50,000 Common Stock + Earned Capital -4,800-1, advertising: $ July insurance premium prepaid in cash: $1, Flight services collected in cash $22, Billed for flight services $15, , ,700 +1,800 Prepaid Insurance +15,900 Accounts Receivable Revenues - s - +4,800 - Rent +1,600 - Entertainment Advertising - +22, , ,700 Flight Services Revenue +15,900 Flight Services Revenue Paid $1,500 on -1,500-1,500 accounts. Accounts - Payable 9. Received $13,200 on +13,200-13,200 account. Accounts - Receivable 10. Paid wages in cash: $16, Invoice received for fuel; $3, dividend paid: $3, ,000 +3,500 Accounts Payable -3,000-16,000-3, ,000 - Wages expense +3,500 - Fuel Net Income -4,800-1, , ,900-16,000-3,500-3,000 - TOTALS $57,900 + $4,500 $3,600 + $50,000 + $8,800 $38,600 - $26,800 $11,800 22

23 b. Outback Flights INCOME STATEMENT FOR THE MONTH OF JUNE 2013 Revenue Services fees earned $38,600 s Rent expense $4,800 Entertainment expense 1,600 Advertising expense 900 Wages expense 16,000 Fuel expense 3,500 Total expenses 26,800 Net income $11,800 Note that the insurance premium paid is for the next month (July) and is not an expense, but a prepaid asset, at the end of June. 23

24 2-26 (P2-61) Recording Transactions in Journal Entries and T-Accounts a. 1. (+A)... Common stock (+SE) Rent expense (+E,-SE)... (-A) Entertainment expense (+E,-SE)... Accounts payable (+L) Advertising expense (+E,-SE)... (-A) Prepaid insurance (+A)... (-A) (+A)... Flight services revenue (+R,+SE) Accounts receivable (+A)... Flight services revenue (+R,+SE) Accounts payable (-L)... (-A) (+A)... Accounts receivable (-A) Wages expense (+E,-SE)... (-A) Fuel expense (+E,-SE)... Accounts payable (+L) earnings (dividend paid) (-SE)... (-A)... 50,000 4,800 1, ,800 22,700 15,900 1,500 13,200 16,000 3,500 3,000 50,000 4,800 1, ,800 22,700 15,900 1,500 13,200 16,000 3,500 3,000 24

25 b. + (A) - (1) 50,000 (6) 22,700 (9) 13,200 4,800 (2) 900 (4) 1,800 (5) 1,500 (8) 16,000 (10) 3,000 (12) - Accounts Payable (L) + (8) 1,500 1,600 (3) 3,500 (11) - Common Stock (SE) + 50,000 (1) + Accounts Receivable (A) - (7) 15,900 (9) 13,200 - (SE) + (12) 3,000 + Prepaid Insurance (A) - (5) 1,800 - Flight Services Revenue (R) + 22,700 (6) 15,900 (7) + Rent (E) - (2) 4,800 + Entertainment (E) - (3) 1,600 + Advertising (E) - (4) Wages (E) - (10) 16,000 + Fuel (E) - (11) 3,500 25

26 2-27 (P2-64) Preparing the Income Statement, Statement of Stockholders Equity, and the Balance Sheet. a. Geyer, Inc. Income Statement For Year Ended December 31, 2013 Service fee revenue... $67,600 Supplies expense... $ 9,700 Insurance expense... 1,500 Salaries expense... 30,000 Advertising expense... 1,700 Rent expense... 7,500 Miscellaneous expense Total expenses... 50,600 Net income... $17,000 b. Geyer, Inc. Statement of Stockholders Equity For Year Ended December 31, 2013 Common Total Stockholders Stock Equity Balance at December 31, $4,000 $6,200 $10,200 Stock issuance... 1,400 1,400 Dividends... (13,500) (13,500) Net income... 17,000 17,000 Balance at December 31, $5,400 $9,700 $15,100 26

27 c. Geyer, Inc. Balance Sheet December 31, $14,800 Accounts payable... $ 1,800 Supplies... 6,100 Notes payable... 4,000 Total assets... $20,900 Total liabilities 5,800 Common stock. 5,400 earnings*. 9,700 Total liabilities and equities.. $20,900 * $6,200 beginning balance + $17,000 net income - $13,500 dividend 27

28 2-28 (P2-65) Analyzing Transactions Using the Financial Statement Effects Template and Preparing Financial Statements. a & b. Balance Sheet Income Statement Transaction + Noncash Liabil-ities + Contrib. Earned Net + Asset Assets Capital Capital Revenues - s Income Beginning Balances +5,000 +5,200 +3,500 +5,500 +1, Paid $600 cash toward accounts Accounts payable Payable - 2. Paid rent in cash: $3, Billed clients $11, $500 invoice received for advertising -3, ,500 Accounts Receivable +500 Accounts Payable -3, , , Services Revenue +3,600 - Rent , , Advertising 5. collected on account: $10, ,000-10,000 Accounts Receivable - 6. Paid wages -2,400-2,400 +2,400-2,400 expense in cash: $2,400 - Wages 7. Invoiced for utility expense: $680 Accounts - Utilities Payable 8. Paid $20 cash for interest on note - Interest 9. Paid $900 cash dividend Paid $4,000 cash for sound equipment -4,000 +4,000 Equipment - TOTALS $3,480 + $10,700 $4,080 + $5,500 + $4,600 $11,500 - $7,200 $4,300 28

29 2-29 (M3-23) Journalizing Transactions and Adjusting Accounts. Transaction a. 1. Received $20,100 in advance for contract work. Balance Sheet Income Statement Noncash + Liabil- Asset Assets ities Contrib. + + Capital Earned Capital Revenues - s +20, ,100U nearned - ervice Fees Net Income Transaction 2. Adjusting entry for work completed by Jan. 31. Jan. 1 (+A) 20,100 Unearned service fees (+L) 20,100 To record fee received in advance. b. Asset + Noncash Assets Balance Sheet Liabil- ities + - 3,350 Unearned ervice Fees Contrib. Capital + Earned Capital +3,350 Income Statement Revenues - s +3,350 Service Fees - Net Income +3,350 Jan. 31 Unearned service fees (- L) 3,350 Service fees (+R, +SE) 3,350 To reflect January service fees earned on contract ($20,100/6 $3,350). c. Balance Sheet Income Statement Transaction 3. Adjusting entry for fees earned but not billed. Asset + Noncash Assets +570 Fees Receivable Liabil- ities + Contrib. Capital + Earned Capital +570 Revenues - s +570 Service Fees - Net Income +570 Jan. 31 Fees receivable (+A) 570 Service fees (+R, +SE) 570 To record unbilled service fees earned at January

30 2-30 (M3-24) Adjusting Accounts. 1. Balance Sheet Income Statement Transaction 1. Adjusting entry for prepaid insurance. Asset + Noncash Assets Prepaid Insurance Liabil- ities + Contrib. Capital + Earned Capital Revenues - s Insurance Net Income Transaction 2. Adjusting entry for supplies used. Jan. 31 Insurance expense (+E, - SE) 185 Prepaid insurance (- A) 185 To record January insurance expense ($6,660/36 $185). 2. Balance Sheet Income Statement Asset + Noncash Assets - 1,080 Supplies Liabil- ities + Contrib. Capital + Earned Capital - 1,080 Revenues - s - +1,080 Supplies Net Income - 1,080 Jan. 31 Supplies expense (+E, - SE) 1,080 Supplies (- A) 1,080 To record January supplies expense ($1,930 - $850 $1,080). 3. Balance Sheet Income Statement Transaction 3. Adjusting entry for depreciation of equipment. Asset + Noncash Assets - - Contra Assets +62 Accumulated Depreciation Liabil- ities + Contrib. Capital + Earned Capital Revenues - s Depreciation Net Income -62 Jan. 31 Depreciation expense Equipment (+E, - SE) 62 Accumulated depreciation Equipment (+XA, - A) 62 To record January depreciation on office equipment ($5,952/96 $62). 30

31 4. Balance Sheet Income Statement Transaction Asset + Noncash Assets Liabil- ities 4. Adjusting entry for rent Unearned Rent Revenue + Contrib. Capital + Earned Capital +875 Revenues - s +875 Rent Revenue - Net Income +875 Transaction Jan. 31 Unearned rent revenue (- L) 875 Rent revenue (+R, +SE) 875 To record portion of advance rent earned in January. 5. Balance Sheet Income Statement Asset + Noncash Assets 5. Adjusting entry for accrued salaries. Liabil- ities +490 Salaries Payable + Contrib. Capital + Earned Capital Revenues - s Salaries Net Income Jan. 31 Salaries expense (+E, - SE) 490 Salaries payable (+L) 490 To record accrued salaries at January

32 2-31 (M3-25) Inferring Transactions from Financial Statements. Transaction Inventory purchases (total). (All amounts in $ millions.) a. Asset + Noncash Assets +2, Inventory Balance Sheet Liabilities + +2, Contrib. Capital + Earned Capital Income Statement Revenues - s Accounts - Payable Net Income Inventories (+A).. 2, Accounts payable (+L).. 2, To record total purchases made at various dates. b. Beginning AP balance + Purchases Payments Ending AP balance, or Payments Beg AP Balance + Puchases - Ending AP Balance Payments $ $2, $ $2, c. Transaction Asset + Noncash Assets Adjusting entry for cost of goods sold for FYE , Inventory Balance Sheet Liabilities + Contrib. Capital Income Statement + Earned Capital Revenues - s Net Income - 2, * Beginning Inv balance + Purchases Cost of goods sold Ending Inv balance, or COGS Beg Inv Balance +Purchases Ending Inv Balance COGS $ $2, $ $2, , Cost of Goods Sold - 2, Cost of goods sold (+E, - SE)... 2, Inventories (- A) 2, To record cost of goods sold for the year ended 1/28/

33 2-32 (M3-28) Preparing Closing Entries Using Journal Entries and T-Accounts. Part a. Date 2014 Description Debit Credit Dec. 31 Commissions revenue (- R) 84,900 earnings (+SE) 84,900 To close the revenue account. 31 earnings (- SE) 55,900 Wages expense (- E) 36,000 Insurance expense (- E) 1,900 Utilities expense (- E) 8,200 Depreciation expense (- E) 9,800 To close the expense accounts. Closing the revenue and expense accounts into retained earnings has the effect of increasing the retained earnings balance by an amount equal to net income (revenue minus expenses). The balance of Smith s after closing entries are posted is $101,100 credit ($72,100 + $29,000). Part b. + Wages (E) - Bal. 36,000 36,000 (2)Dec. 31 Bal. 0 + Utilities (E) - Bal. 8,200 8,200 (2) Dec. 31 Bal. 0 + Insurance (E) - Bal. 1,900 1,900 (2)Dec. 31 Bal. 0 - Commissions Revenue (R) + (1)Dec ,000 84,900 Bal. 0 Bal. + Depreciation (E) - Bal. 9,800 9,800 (2)Dec. 31 Bal. 0 - (SE) + (2)Dec ,900 72,100 Bal. 84,900 (1)Dec ,100 Bal. Dec.31 33

34 2-33 (E3-32) Preparing and Journalizing Adjusting Entries. Part a. Balance Sheet Income Statement Transaction Noncash Asset + Assets - Contra Assets Liabilities + Contrib. Capital + Earned Capital Revenues - s Net Income 1. Adjusting entry for depreciation: equipment. - Accumulated Depreciation Depreciation 2. Adjusting entry for -1,890-1, ,890-1,890 supplies expense. Supplies - Supplies 3. Adjusting entry for Utilities -390 utilities expense. - Utilities Payable 4. Adjusting entry for rent expense Prepaid Rent Rent Adjusting entry for premium revenues Unearned Premium Premium Revenue Revenue 6. Adjusting entry for wage expense. - Wages Wage Payable 7. Adjusting entry for interest earned. Interest - Interest Receivable Income TOTALS , , ,555-3,787 34

35 Part b. 1. Depreciation expense Equipment (+E,-SE) 610 Accumulated depreciation Equip (+XA) 610 To record depreciation for the period. 2. Supplies expense (+E,-SE) 1,890 Supplies (-A) 1,890 To record supplies expense for the period ($2,990 - $1,100 $1,890). 3. Utilities expense (+E, - SE) 390 Utilities payable (+L) 390 To record accrued utilities expense. 4. Rent expense (+E,-SE) 700 Prepaid rent (-A) 700 To record rent expense for the month ($2,800/4 $700). 5. Unearned premium revenue (-L) 468 Premium revenue (+R,+SE) 468 To record premium revenue earned [($624/12) * 9 $468]. 6. Wages expense (+E,-SE) 965 Wages payable (+L) 965 To record accrued wages at the end of the period. 7. Interest receivable (+A) 300 Interest income (+R,+SE) 300 To accrue interest earned but not yet received. 35

36 2-34 (E3-34) Analyzing Accounts Using Adjusted Data a. Balance, January 1 $960 + $800 - $620 $1,140. b. Amount of premium $82 * 12 $984. Therefore, five months' premium ($984 - $574 $410à 410/825) has expired by January 31. The policy has been in effect since September 1, The policy term began on September 1 of the previous year. c. Wages paid in January $3,200 - $500 $2,700. d. Monthly depreciation expense $8,700/60 months $145. Fields has owned the truck for 18 months ($2,610/$145 18) (E3-37) Preparing Closing Procedures. Part a. Dec. 31 Service fees earned (-R) 92,500 Interest income (-R) 2,200 earnings (+SE) 94,700 To close the revenue accounts. 31 earnings (-SE) 64,700 Salaries expense (-E) 41,800 Advertising expense (-E) 4,300 Depreciation expense (-E) 8,700 Income tax expense (-E) 9,900 To close the expense accounts. 36

37 Part b. - (SE) + (2) 64,700 42,700 Bal. 94,700 (1) 72,700 Bal. - Service Fees Earned (R) + (1) 92,500 92,500 Bal. 0 Bal. - Interest Income (R) + (1) 2,200 2,200 Bal. 0 Bal. + Salaries (E) - Bal. 41,800 41,800 (2) Bal. 0 + Depreciation (E) - Bal. 8,700 8,700 (2) Bal. 0 + Advertising (E) - Bal. 4,300 4,300 (2) Bal. 0 + Income Tax (E) - Bal. 9,900 9,900 (2) Bal (P3-41) Preparing an Unadjusted Trail Balance and Adjustments SnapShot Company UNADJUSTED TRIAL BALANCE DECEMBER 31, 2013 a. Debit Credit $2,150 Accounts Receivable 3,800 Prepaid Rent 12,600 Prepaid Insurance 2,970 Supplies 4,250 Equipment 22,800 Accounts Payable $1,910 Unearned Photography Fees 2,600 Common Stock 24,000 Photography Fees Earned 34,480 Wages 11,000 Utilities 3,420 $62,990 $62,990 37

38 Transaction b. 1. Fees earned but not received. 2. Recognize depreciation expense for one year. 3. Recognize utilities expense. Asset + Noncash Assets +925 Fees Receivable - Contra Assets Balance Sheet - +2,280 Accumulated - Depreciation Liabilities Utilities Payable 4. Recognize -6,300 rent expense Prepaid Rent - for year. 5. Recognize photo revenues. 6. Recognize -990 insurance expense. 7. Recognize supplies expense. 8. Recognize wages expense. -2,600 - Unearned Photo Fees Prepaid - Insurance -2,730 Supplies Wages Payable Contrib. Capital Income Statement + Earned Capital Revenues - s , Photography Fees Earned -6,300 +2,600 +2,600 Photography Fee Earned , ,280 Depreciation Net Income , Utilities +6,300 - Rent - -6,300 +2, Insurance +2,730-2,730 - Supplies Wages Totals ,095-2,280-1, ,550 3,525-13,075-9,550 38

39 Date 2013 Description Debit Credit Dec. 31 Fees receivable (+A) 925 Photography fees earned (+R, +SE) ` 925 To record revenue earned but not billed. 31 Depreciation expense (+E,-SE) Accum. depreciation Equipment (+XA, -A) To record depreciation for the year ($22,800/10 years $2,280). 2,280 2, Utilities expense (+E, -SE) 400 Utilities payable (+L) 400 To record estimated December utilities expense. 31 Rent expense (+E, -SE) 6,300 Prepaid rent (-A) 6,300 To record rent expense for the year ($12,600/2 years $6,300). 31 Unearned photography fees (-L) 2,600 Photography fees earned (+R, +SE) 2,600 To record advance payments earned during the year. 31 Insurance expense (+E, -SE) 990 Prepaid insurance (-A) 990 To record insurance expense for the year ($2,970/3 years $990). 31 Supplies expense (+E,-SE) 2,730 Supplies (-A) 2,730 To record supplies expense for the year ($4,250 - $1,520 $2,730). 31 Wages expense (+E, -SE) 375 Wages payable(+l) 375 To record unpaid wages at December

40 c. + (A) - - Accounts Payable (L) + Unadj. bal. 2,150 1,910 Unadj. bal. Adj. bal. 2,150 1,910 Adj. bal. + Accounts Receivable (A) - - Unearned Photo Fees (L) + Unadj. bal. 3,800 Dec.31 (5) 2,600 2,600 Unadj. bal. Adj. bal. 3,800 0 Adj. bal. + Fees Receivable (A) - - Utilities Payable (L) + Dec. 31 (1) (3) Dec.31 Adj. bal Adj. bal. + Prepaid Rent (A) - - Wages Payable (L) + Unadj. bal. 12,600 6,300 (4) Dec (8) Dec.31 Adj. bal. 6, Adj. bal. + Prepaid Insurance (A) - - Common Stock (SE) + Unadj. bal. 2, (6) Dec.31 24,000 Unadj. bal. Adj. bal. 1,980 24,000 Adj. bal. + Supplies (A) - - Photo Fees Earned (R) + Unadj. bal. 4,250 2,730 (7) Dec.31 34,480 Unadj. bal Adj. bal. 1, (1) Dec.31 2,600 (5) Dec.31 38,005 Adj. bal. + Equipment (A) - + Wages (E) - Unadj. bal. 22,800 Unadj. bal. 11,000 Adj. bal. 22,800 Dec.31 (8) 375 Adj. Bal. 11,375 - Accum. Depreciation Equip. (XA) + + Utilities (E) - 2,280 (2) Dec.31 Unadj. bal. 3,420 2,280 Adj. Bal. Dec.31 (3) 400 Adj. Bal. 3,820 + Supplies (E) - + Depreciation Equip. (E) - Dec. 31 (7) 2,730 Dec.31 (2) 2,280 Adj. bal. 2,730 + Insurance (E) - Adj. Bal. 2,280 + Rent (E) - Dec. 31 (6) 990 Dec.31 (4) 6,300 Adj. bal. 990 Adj. Bal. 6,300 40

41 2-37 (P3-43) Preparing Adjusting Entries. Part a. Transaction 1. Accrue salary expense. 2. Accrue interest expense. 3. Accrue fees receivable. 4. Accrue maintenance expense. 5. Accrue ad.. 6. Accrue rent expanse. 7. Accrue interest revenue. 8. Accrue depreciation expense. Asset + Noncash Assets +900 Fees Receivable -400 Prepaid Maintenance -300 Prepaid Advertising +38 Interest Receivable Balance Sheet - Contra Assets Liabil- ities + Contrib. Capital Salaries Payable Interest Payable Rent Payable Income Statement + Earned Capital Revenues - s Net Income Salaries Interest ,175 Accumulated Depreciation -2, Printing Revenue +38 Interest Revenue Maintenance Ad Rent ,175 Depreciation -2,175 Totals ,175 1, , ,955-3,017 41

42 b. Date Description Debit Credit Dec 31 Salaries expense (+E, -SE) 720 Salaries payable (+L) 720 To accrue salaries at December 31 ($1,800 * 2/5 $720). 31 Interest expense (+E, -SE) 200 Interest payable (+L) 200 To accrue interest expense at December Fees receivable (+A) 900 Printing revenue (+R, +SE) 900 To record revenue earned but not yet billed. 31 Maintenance expense (+E,-SE) 400 Prepaid maintenance (-A) 400 To record December maintenance expense. 31 Advertising expense (+E, -SE) 300 Prepaid advertising (-A) 300 To record December advertising expense ($900 * 1/3 $300). 31 Rent expense (+E, -SE) 160 Rent payable (+L) 160 To accrue one-half month's rent expense [(400 *$0.80)/2 $160]. 31 Interest receivable (+A) 38 Interest income (+R, +SE) 38 To accrue interest earned in December. 31 Depreciation expense Equipment (+E, -SE) 2,175 Accum. depreciation Equipment (+XA) 2,175 To record annual depreciation on equipment. 42

43 2-38 (P3-44) Preparing Financial Statements and Closing Entries. TRUEMAN CONSULTING INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2013 a. Revenue Service fees earned $58,400 s Rent expense $12,000 Salaries expense 33,400 Supplies expense 4,700 Insurance expense 3,250 Depreciation expense Equipment 720 Interest expense 630 Total s 54,700 Net Income $ 3,700 TRUEMAN CONSULTING INC. STATEMENT OF STOCKHOLDERS EQUITY FOR THE YEAR ENDED DECEMBER 31, 2013 Common Stock Total Stockholders Equity Balance at December 31, $1,000 $3,305 $4,305 Stock issuance... Dividends... Net income... 3,700 3,700 Balance at December 31, $1,000 $7,005 $8,005 43

44 TRUEMAN CONSULTING BALANCE SHEET DECEMBER 31, 2013 Assets Liabilities $ 2,700 Accounts payable $ 845 Accounts receivable 3,270 Long-term notes payable 7,000 Supplies 3,060 Total Liabilities 7,845 Prepaid insurance 1,500 Equipment $ 6,400 Owners Equity Less: Accumulated 1,080 Common stock 1,000 depreciation 5,320 earnings 7,005 Total Assets $15,850 Total Liabilities and Owners Equity $15,850 b. Date 2013 Description Debit Credit Dec. 31 Service fees earned (-R) 58,400 earnings (+SE) 58,400 To close the revenue account. 31 earnings (-SE) 54,700 Rent expense (-E) 12,000 Salaries expense(-e) 33,400 Supplies expense (-E) 4,700 Insurance expense (-E) 3,250 Depreciation expense Equip (-E) 720 Interest expense (-E) 630 To close the expense accounts. 44

45 2-39 (P3-47) Journalizing and Posting Transactions, and Preparing a Trial Balance and Adjustments. a, b and d. For part d, the adjusting entries are indicated by the numbers 1-5. The unadjusted trial balance required in part c is calculated before the adjusting entries are made. + (A) - - Accounts Payable (L) + 6/1 24,000 6/2 6,400 6/30 7,800 4,400 6/ / /2 9,480 6/1 21,535 3,600 6/12 1,240 6/ /18 3,600 6/26 1,500 6/30 + Accounts Receivable (A) - 6/10 5,800 6/28 5,200 3,200 7,800 6/30 - Salaries Payable (L) Unearned Service Fees (L) ,200 6,400 6/2 3,200 - Common Stock (SE) + 24,000 6/1 + Prepaid Advertising (A) - 6/ (SE) + 6/30 1,500 + Office Supplies (A) - 6/1 2,840 1, ,530 + Supplies (E) ,310 + Office Equipment (A) - 6/1 11,040 + Travel (E) - 6/15 1,240 - Acc. Depreciation Off. Equip (XA) Depreciation (E)

46 + Advertising (E) / Rent (E) - + Salaries s (E) - 6/12 3,600 6/26 3, ,925 - Service Fees Earned (R) + 5,800 6/10 5,200 6/28 3, ,200 + Postage (E) - 6/ Transaction b. 6/1. Investment for common stock. 6/1. Purchase of assets for cash & on account. Asset +24,000-4,400 + Noncash Assets + 11,040 Office Equipment +2,840 Supplies 6/2. Pay rent $ /2.Purchase $930 of advertising in advance. 6/2Signed research contract. 6/10. Bill customers for services Prepaid Advertising +6,400 +5,800 Accounts Receivable 6/12. Paid salaries. - 3,600 6/15. Paid travel expenses. 6/18. Paid postage ,240 Balance Sheet Liabilities + +9,480 Contrib. Capital +24,000 Common Stock + Earned Capital Income Statement Revenues - s Net Income - Accounts Payable Rent - +6,400 Unearned Service Fees +5,800-3,600-1, ,800 Service +5,800 Fees Earned - +3,600-3,600 - Salaries +1,240 - Travel Postage - 1,

47 6/26. Paid salaries. - 3,600 6/28. Bill customers for services. 6/30. Collect service +7,800 fees. 6/30. dividend - 1,500 paid. +5,200 Accounts Receivable - 7,800 Acts. Rec. - 3,600 +5,200 +5,200 Service Fees Earned +3,600 - Salaries , ,600 +5,200 Date 2014 Description Debit Credit June 1 (+A) 24,000 Common stock (+SE) 24,000 Owner invested cash for common stock. 1 Office equipment (+A) 11,040 Office supplies (+A) 2,840 (-A) 4,400 Accounts payable (+L) 9,480 Purchased equipment and supplies; $4,400 cash paid with the remainder due in 60 days. 2 Rent expense (+E, -SE) 875 (-A) 875 Paid June rent. 2 Prepaid advertising (+A) 930 (-A) 930 Paid three months' advertising in advance. 2 (+A) 6,400 Unearned service fees (+L) 6,400 Received two months' fees in advance on six-month contract. 10 Accounts receivable (+A) 5,800 Service fees earned (+R, +SE) 5,800 Billed customers for services. 47

48 12 Salaries expense (+E, -SE) 3,600 (-A) 3,600 Paid two weeks' salaries to employees. 15 Travel expense (+E, -SE) 1,240 (-A) 1,240 Paid business travel expenses. 18 Postage expense (+E, -SE) 520 (-A) 520 Paid postage for questionnaire mailing. 26 Salaries expense (+E, -SE) 3,600 (-A) 3,600 Paid two weeks' salaries to employees. 28 Accounts receivable (+A) 5,200 Service fees earned (+R, +SE) 5,200 Billed customers for services. 30 (+A) 7,800 Accounts receivable (-A) 7,800 Collections from customers on account. 30 earnings (-SE) 1,500 (-A) 1,500 Declared and paid dividends. 48

49 c. MARKET-PROBE UNADJUSTED TRIAL BALANCE JUNE 30, 2014 Debit Credit $21,535 Accounts Receivable 3,200 Office Supplies 2,840 Prepaid Advertising 930 Office Equipment 11,040 Accounts Payable $9,480 Unearned Service Fees 6,400 Common Stock 24,000 * 1,500 Service Fees Earned 11,000 Salaries 7,200 Rent 875 Travel 1,240 Postage 520 $50,880 $50,880 * The negative (debit) balance in reflects the dividend paid. d. Transaction a. Recognize supplies expense. b. Recognize salaries expense. Asset + Noncash - Assets -1,310 Office - Supplies Contra Assets Balance Sheet Salaries Payable Accumulated Depreciation Liabilities + Contrib. Capital -1,310 Income Statement + Earned Capital Revenues - s ,310 Supplies Salaries Depreciation Net Income -1, c. Accrue depreciation expense. d. Recognize advertising Prepaid - Advertising expense. Advertising e. Recognize -3,200 +3,200 +3, ,200 earned service - Unearned Service Fees fees. Service Fees Earned 49

50 Date 2014 Description Debit Credit June 30 Supplies expense (+E, -SE) 1,310 Office supplies (-A) 1,310 To record supplies used during June ($2,840 - $1,530 $1,310). 30 Salaries expense (+E, -SE) 725 Salaries payable (+L) 725 To record unpaid salaries at June Depreciation expense Office equipment (+E, -SE) 115 Accum. depr. Office equipment (+XA, -A) 115 To record June depreciation ($11,040/96 mo. $115). 30 Advertising expense (+E, -SE) 310 Prepaid advertising (-A) 310 To record one month's advertising expense. 30 Unearned service fees (-L) 3,200 Service fees earned (+R, +SE) 3,200 To record one month's fees earned, received in advance (P3-50) Preparing Financial Statement and Closing Entries. Part a. TRAILS, INC. INCOME STATEMENT FOR THE YEAR ENDED DECEMBER 31, 2013 Revenues Subscription revenue $ 168,300 Advertising revenue 49,700 Total revenues $218,000 s Salaries expense 100,230 Printing and mailing expense 85,600 Rent expense 8,800 Supplies expense 6,100 Insurance expense 1,860 Depreciation expense 5,500 Income tax expense 1,600 Total expenses 209,690 Net income $8,310 50

51 Trails, Inc. Statement of Stockholders Equity For Year Ended December 31, 2013 Common Stock Total Stockholders Equity Balance at December 31, $25,000 $23,220 $48,220 Stock issuance... Dividends... Net income... 8,310 8,310 Balance at December 31, $25,000 $31,530 $56,530 Assets TRAILS, INC. BALANCE SHEET DECEMBER 31, 2013 Liabilities $3,400 Accounts payable $ 2,100 Accounts receivable 8,600 Unearned subscription revenue 10,000 Supplies 4,200 Salaries payable 3,500 Prepaid insurance 930 Total liabilities 15,600 Office equipment $66,000 Less: Acc. Dep 11,000 55,000 Stockholders' equity Common stock $25,000 earnings 31,530 Total stockholders' equity 56,530 Total liabilities and Total assets $72,130 stockholders' equity $72,130 51

52 b. Date 2013 Description Debit Credit Dec. 31 Subscription revenue (-R) 168,300 Advertising revenue (-R) 49,700 earnings (+SE) 218,000 To close the revenue accounts. 31 earnings (-SE) 209,690 Salaries expense (-E) 100,230 Printing and mailing expense (-E) 85,600 Rent expense (-E) 8,800 Supplies expense (-E) 6,100 Insurance expense (-E) 1,860 Depreciation expense (-E) 5,500 Income tax expense (-E) 1,600 To close the expense accounts Zealock Bookstore: Analysis of transactions and preparation of income statement and balance sheet. a. T-accounts. (A) Accounts Receivable (A) (1) 25,000 20,000 (3) (8) 148, ,400 (10) (2) 30,000 4,000 (4) (8) 24,600 10,000 (5) (10) 142,400 8,000 (6) (13) ,700 (11) 139,800 (12) 24,350 5,800 Merchandise Inventory (A) Prepaid Rent (A) (7) 160, ,000 (8) (3) 20,000 10,000 (15) 14,600 (9) 5,400 10,000 Deposit with Suppliers (A) (6) 8,000 (4) 4,000 (5) 10,000 8,000 14,000 Equipment (A) 52

53 Accumulated Depreciation (XA) Note Payable (L) 400 (16) 30,000 (2) 1,500 (17) 1,900 30,000 Accounts Payable (L) Advances from Customers (L) (9) 14, ,000 (7) 850 (13) (12) 139,800 5, Interest Payable (L) Income Tax Payable (L) 900 (14) 1,320 (18) 900 1,320 Common Stock (SE) (SE) 25,000 (1) 1,980 (19) 25,000 1,980 Sales Revenue (SE) Cost of Goods Sold (SE) (19) 172, ,800 (8) (8) 140, ,000 (19) Compensation (SE) Interest (SE) (11) 16,700 16,700 (19)(14) (19) Rent (SE) Depreciation (SE) (15) 10,000 10,000 (19)(16) 400 1,900 (19) (17) 1,500 Income Tax (SE) (18) 1,320 1,320 (19) 53

54 b. ZEALOCK BOOKSTORE Income Statement For the Six Months Ending December 31, 2013 Sales Revenue... $ 172,800 Less s: Cost of Goods Sold... $ 140,000 Compensation... 16,700 Interest Rent... 10,000 Depreciation... 1,900 Income Before Income Taxes... 3,300 Income Tax... 1,320 Net Income... $ 1,980 c. ZEALOCK BOOKSTORE Balance Sheet December 31, 2013 Assets Current Assets:... $ 24,350 Accounts Receivable... 5,800 Merchandise Inventories... 5,400 Prepaid Rent... 10,000 Deposit with Suppliers... 8,000 Total Current Assets... $ 53,550 Equipment... $ 14,000 Less Accumulated Depreciation... (1,900) Equipment (Net)... $ 12,100 Total Assets... $ 65,650 Liabilities and Shareholders' Equity Current Liabilities: Accounts Payable... $ 5,600 Note Payable... 30,000 Advances from Customers Interest Payable Income Tax Payable... 1,320 Total Current Liabilities... $ 38,670 Shareholders' Equity: Common Stock... $ 25, ,980 Total Shareholders' Equity... $ 26,980 Total Liabilities and Shareholders' Equity... $ 65,650 54

55 2-42 Zealock Bookstore: analysis of transactions and preparation of comparative income statements and balance sheet. a. T-accounts. (A) Accounts Receivable (A) 24,350 5,800 (3) 75,000 1,320 (1) (7) 327, ,600 (9) (4) 8,000 31,800 (2) (7) 24,900 20,000 (5) (9) 320,600 29,400 (10) 281,100 (11) 4,000 (12) 85,230 13,150 Merchandise Inventory (A) Prepaid Rent (A) 5,400 10,000 (6) 310, ,400 (7) (5) 20,000 20,000 (13) 22,700 (8) 6,300 10,000 Deposit with Suppliers (A) Equipment (A) 8,000 14,000 8,000 (4) 0 14,000 Accumulated Depreciation (XA) Note Payable (L) 1,900 30, (14) (2) 30,000 75,000 (3) 3,000 (15) 5,700 75,000 Accounts Payable (L) Advance from Customers (L) 5, (8) 22, ,000 (6) (7) 850 (11) 281,100 11,800 0 Interest Payable (L) Income Tax Payable (L) 900 1,320 (2) 900 3,000 (16) (1) 1,320 4,080 (17) 3,000 4,080 Common Stock (SE) (SE) 25,000 1,980 (12) 4,000 6,120 (18) 25,000 4,100 55