Chapter 4

Adjustments, Financial Statements, and the

Closing Process

ANSWERS TO QUESTIONS

1. Adjusting entries are made at the end of the accounting period to record all
revenues and expenses that have not been recorded but belong in the current
period. They update the balance sheet and income statement accounts at the end
of the accounting period.

2. The four different types are adjustments are when:

(1) Revenues are earned, but cash was received in the past and a liability was
recordedà Deferred revenues (e.g., Unearned Ticket Revenue - liability) that
need to be decreased for the portion of revenues earned in the current period:
Increase revenues and decrease liability.
(2) Revenues are earned, but cash will be received in the future and no entry has
yet been madeà Accrued revenues (e.g., Interest Receivable – asset) that
need to be recorded: Increase revenues and increase asset (receivables).
(3) Expenses are incurred, but cash was paid in the past and an asset was
recordedà Deferred expenses (e.g., Prepaid Insurance Expense – an asset)
that need to be decreased for the portion of the asset’s cost used during the
period: Increase expenses and decrease asset.
(4) Expenses are incurred, but cash will be paid in the future and no entry has yet
been madeà Accrued expenses (e.g., Utilities Payable – liability) that need to
be recorded: Increase expenses and increase liability (payables).

3. A contra-asset is an account related to an asset that is an offset, or reduction of, the

primary account or section. Accumulated Depreciation is a contra-account to the
equipment and buildings accounts.

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 4. The net income on the income statement is included in determining ending retained
earnings on the statement of stockholders’ equity and the balance sheet.

5. (a) Income statement:

Operating Revenues (and gains)
– Operating Expenses (and losses)
Operating Income
+/– Other Items (interest expense/revenue and gains/losses on investments)
Pretax Income
– Income Tax Expense
Net Income (Loss)
(b) Balance sheet:
Current Assets
+ Noncurrent Assets
Total Assets
Current Liabilities
+ Noncurrent Liabilities
+ Stockholders' Equity
Total Liabilities and Stockholders’ Equity
(c) Statement of stockholders' equity:
Beginning Common Stock + new issuances
+ Beginning Additional Paid-in Capital + new issuances
– Beginning Treasury Stock + new stock purchases
+ Beginning Retained Earnings + Net Income (or – Loss) – dividends declared
Ending Stockholders’ Equity

6. Adjusting entries have no effect on cash. For deferred revenues and deferred
expenses, cash was received or paid at some point in the past. For accruals, cash
will be received or paid in a future accounting period. At the time of the adjusting
entry, there is no cash being received or paid.

7. Earnings per share = Net income ÷ Weighted average number of shares of stock
outstanding during the period.

Earnings per share measures the average amount of net income for the year
attributable to one share of common stock.

8. Total asset turnover ratio = Net Sales (or Operating Revenues) ÷ Average Total
Assets

The total asset turnover ratio measures sales generated during the period per dollar
of assets, which suggests how effective the company is at generating sales by
utilizing assets. If the ratio increases over time, the company is more effective.

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 9. The purposes for closing the books at the end of the accounting period are to (1)
transfer the balances in the temporary income statement accounts to retained
earnings and (2) reduce the revenue, gain, expense, and loss accounts to a zero
balance so that they can be used for the accumulation process during the next
period. A closing entry must be entered into the system through the journal and
posted to the ledger accounts to state properly the temporary and permanent
account balances (i.e., zero balances in the temporary accounts).

10. Permanent accounts -- balance sheet accounts; that is, the asset, liability, and
stockholders’ equity accounts (these are not closed at the end of each period).
Temporary accounts -- income statement accounts; that is, revenues, gains,
expenses, and losses (these are closed at the end of each period).

11. The income statement accounts are closed at the end of the accounting period
because, in effect, they are temporary subaccounts to retained earnings (i.e., a part
of stockholders' equity). They are used only for accumulation during the accounting
period. When the period ends, these accumulated accounts must be transferred
(closed) to retained earnings. The closing process serves to:

(1) correctly state retained earnings by transferring income statement account

balances (= Net Income) to Retained Earnings, and
(2) clear out the balances of the temporary accounts for the year just ended so that
these subaccounts can be used again during the next period for accumulation
and classification purposes.

Balance sheet accounts are not closed at the end of the period because they reflect
permanent accumulated balances of assets, liabilities, and stockholders' equity.
Permanent accounts show the entity's financial position at the end of the period and
are the beginning amounts for the next period.

12. A post-closing trial balance is a listing taken from the ledger after the adjusting and
closing entries have been journalized and posted. It is not a necessary part of the
accounting information processing cycle but it is useful because it demonstrates the
equality of the debits and credits in the ledger after the closing entry has been
journalized and posted and that all temporary accounts have zero balances.

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ANSWERS TO MULTIPLE CHOICE
1. c
2. a
3. b
4. d
5. b
6. c
7. d
8. c
9. a
10. c

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 Authors' Recommended Solution Time
(Time in minutes)

Alternate Comprehensive Cases and

Mini-exercises Exercises Problems Problems Problems Projects
No. Time No. Time No. Time No. Time No. Time No. Time
1 5 1 10 1 15 1 15 1 60 1 25
2 5 2 10 2 20 2 20 2 60 2 25
3 5 3 10 3 20 3 20 3 25
4 5 4 10 4 20 4 20 4 20
5 5 5 15 5 20 5 20 5 25
6 5 6 15 6 25 6 25 6 40
7 5 7 10 7 30 7 30 7 35
8 5 8 20 8 50
9 5 9 20 9 25
10 5 10 20 10 *
11 5 11 20
12 3 12 15
13 5 13 15
Continuing
14 20
Problem
15 15
16 20 1 15
17 20
18 20
19 20
20 20
21 15
22 10

* Due to the nature of this project, it is very difficult to estimate the amount of time
students will need to complete the assignment. As with any open-ended project, it is
possible for students to devote a large amount of time to these assignments. While
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
companies or industries.

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MINI-EXERCISES

M4–1.
Nash Company
Adjusted Trial Balance
At June 30

Debit Credit

Cash 175
Accounts receivable 420
Inventories 710
Prepaid expenses 30
Buildings and equipment 1,300
Accumulated depreciation 250
Land 300
Accounts payable 250
Accrued expenses payable 160
Income taxes payable 50
Unearned fees 90
Long-term debt 1,360
Common stock 100
Additional paid-in capital 300
Retained earnings 150
Sales revenue 2,400
Interest income 60
Cost of sales 780
Salaries expense 640
Rent expense 460
Depreciation expense 150
Interest expense 70
Income taxes expense 135
Totals 5,170 5,170

M4–2.
(1) D
(2) C
(3) A
(4) D
(5) A
(6) B
(7) B
(8) C
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M4–3. (1) D (4) B
(2) C (5) B
(3) A (6) A

M4–4.

(a) 1. Rent revenue is now earned.

2. Cash was received in the past – a deferred revenue was recorded.

Revenue is understated and liabilities are overstated by $300 earned ($1,200

÷ 4 months). Increase revenue and decrease liabilities.

Adjusting entry –
Unearned rent revenue (-L) ......................... 300
Rent revenue (+R, +SE) ........................ 300

(b) 1. Depreciation Expense on the equipment is now incurred.

2. Cash was paid in the past when the equipment was purchased – a deferred
expense was recorded. The net book value of the equipment is overstated.
Accumulated Depreciation (the contra-account) needs to be increased for
the amount used during the period.

Expense is understated and assets are overstated. Increase expense and

decrease assets (by increasing contra-account) by $3,200 (given).

Adjusting entry –
Depreciation expense (+E, -SE) .................. 3,200
Accumulated depreciation (+XA, -A) .... 3,200

(c) 1. Insurance expense was incurred in the period.

2. Cash was paid for the insurance in the past – a deferred expense was
recorded.

Expense is understated and assets are overstated. Increase expenses and

decrease asset by $1,250 used ($5,000 x 6/24).

Adjusting entry –
Insurance expense (+E, -SE) ...................... 1,250
Prepaid insurance (-A).......................... 1,250

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M4–5.
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. NE –300 +300 +300 NE +300
b. –3,200 NE –3,200 NE +3,200 –3,200
c. –1,250 NE –1,250 NE +1,250 –1,250

M4–6.
(a) 1. Utilities Expense is incurred.
2. Cash will be paid in the future for utilities used in the current period – an
accrued expense needs to be recorded.

Expenses are understated and liabilities are understated. Increase expenses

and increase liabilities by $450 (given).

Adjusting entry –
Utilities expense (+E, -SE)........................... 450
Utilities payable (+L) .............................. 450

(b) 1. Interest revenue is now earned on the note receivable.

2. Cash for the interest will be received in the future – an accrued revenue
needs to be recorded.

Revenue is understated and assets are understated. Increase revenue and

increase assets by $280 earned (= $6,000 principal x 0.14 annual rate x
4/12 of a year).

Adjusting entry –
Interest receivable (+A) ................................ 280
Interest revenue (+R, +SE) ................... 280

(c) 1. Wages expense was incurred in the period.

2. Cash will be paid in the future to the employees who worked in the current
period – an accrued expense needs to be recorded.

Expenses are understated and liabilities are understated. Increase expenses

and increase liabilities by $8,000 incurred (= 10 employees x 4 days x
$200 per day).

Adjusting entry –
Wages expense (+E, -SE) ........................... 8,000
Wages payable (+L) .............................. 8,000
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M4–7.
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. NE +450 –450 NE +450 –450
b. +280 NE +280 +280 NE +280
c. NE +8,000 –8,000 NE +8,000 –8,000

M4–8.
CATENA’S MARKETING COMPANY
Income Statement
For the Current Year

Operating Revenues:
Sales revenue $ 38,500
Rent revenue 800
Total operating revenues 39,300
Operating Expenses:
Wages expense 19,500
Depreciation expense 1,800
Utilities expense 380
Insurance expense 750
Rent expense 9,000
Total operating expenses 31,430
Operating Income 7,870
Other Item:
Interest revenue 100
Pretax Income 7,970
Income tax expense 1,680

Net Income $ 6,290

Earnings per share* $11.44

* calculated as $6,290 ÷ [(300 + 800) ÷ 2] = $6,290 ÷ 550 = $11.44

Average number of shares

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M4–9.
CATENA’S MARKETING COMPANY
Statement of Stockholders’ Equity
For the Current Year

Additional Total
Common Paid-in Retained Stockholders’
Stock Capital Earnings Equity
Balance, January 1 $ 30 $ 670 $ 2,000 $ 2,700
Share issuance 50 2,950 3,000
Net income 6,290 6,290
Dividends declared (600) (600)
Balance, December 31 $ 80 $ 3,620 $ 7,690 $ 11,390

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M4–10.

CATENA’S MARKETING COMPANY

Balance Sheet
At the End of the Current Year

Assets
Current Assets:
Cash $ 1,500
Accounts receivable 2,200
Interest receivable 100
Prepaid insurance 1,600
Total current assets 5,400
Notes receivable 2,800
Equipment (net of accumulated depreciation, $3,000) 12,290
Total Assets $ 20,490

Liabilities
Current Liabilities:
Accounts payable $ 2,400
Dividends payable 600
Accrued expenses payable 3,920
Income taxes payable 1,680
Unearned rent revenue 500
Total current liabilities 9,100
Stockholders’ Equity
Common stock ($0.10 par value) 80
Additional paid-in capital 3,620
Retained earnings 7,690
Total Stockholders’ Equity 11,390
Total Liabilities and Stockholders’ Equity $ 20,490

M4–11.

The adjustments in M4–4 and M4–6 have no effect on the operating, investing, and
financing activities on the statement of cash flows because no cash is paid or received
at the time of the adjusting entries.

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M4–12.

Assets:
Cash $ 1,500
Accounts receivable 2,200
Interest receivable 100
Prepaid insurance 1,600
Long-term notes receivable 2,800
Equipment 15,290
Accumulated depreciation (3,000)
Total assets (current year) $ 20,490

Total asset turnover = Sales (or Operating revenues) ÷ Average total assets
= $39,300 ÷ ($16,050 + $20,490)/2 = $18,270
= $39,300 ÷ $18,270 = 2.15

M4–13.

Sales revenue (-R, -SE) ........................................ 38,500

Interest revenue (-R, -SE) ..................................... 100
Rent revenue (-R, -SE) .......................................... 800
Wages expense (-E, +SE) ........................... 19,500
Depreciation expense (-E, +SE) .................. 1,800
Utilities expense (-E, +SE) .......................... 380
Insurance expense (-E, +SE) ...................... 750
Rent expense (-E, +SE) .............................. 9,000
Income tax expense (-E, +SE) .................... 1,680
Retained earnings (+SE)............................... 6,290

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EXERCISES

E4–1.

Jameson Consultants, Inc.

Unadjusted Trial Balance
At the End of the Current Year

Debit Credit

Cash 153,000
Accounts receivable 225,400
Supplies 12,200
Prepaid expenses 10,200
Investments 325,000
Buildings and equipment 623,040
Accumulated depreciation 18,100
Land 60,000
Accounts payable 96,830
Salaries payable 25,650
Unearned consulting fees 32,500
Income taxes payable 3,030
Notes payable 160,000
Common stock 3,370
Additional paid-in capital 220,000
Retained earnings* 144,510
Consulting fees revenue 2,564,200
Investment income 10,800
Gain on sale of land 6,000
Salaries expense 1,610,000
Utilities expense 25,230
Travel expense 23,990
Rent expense 152,080
Professional development expense 18,600
Depreciation expense 8,000
Supplies expense 21,050
Interest expense 17,200
Totals 3,284,990 3,284,990

* Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
equal credits (a “plugged” figure).

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E4–2.
Req. 1
Types Accounts to be Adjusted
Deferred Revenues:
Deferred Revenues and Deposits may Increase Revenue (R); decrease Deferred
need to be adjusted for any revenue Revenue (L)
earned during the period.
Accrued Revenues:
Interest and/or dividend revenue may be Increase Interest (or Dividend) Revenue (R);
earned on marketable securities increase Interest (or Dividends)
(short-term investments) Receivable (A)

Any unrecorded revenue from selling Increase Revenue (R); increase Accounts
advertising will need to be recorded. Receivable (A)

Deferred Expenses:
Prepaid Expenses and Other Current Increase a variety of expenses (Cost of
Assets may include supplies, prepaid Revenue, Research and Development,
rent, prepaid insurance, and/or Marketing and Sales, and/or General and
prepaid advertising. Administrative) (E); decrease Prepaid
Expenses and Other Current Assets (A)
Any additional use of property, plant, and Increase depreciation expense as part of a
equipment during the period will variety of expenses (Cost of Revenue,
need to be recorded. Research and Development, Marketing
and Sales, and/or General and
Administrative) (E); increase
Accumulated Depreciation (XA, -A)

Accrued Expenses:
Interest expense on lease liabilities Increase Interest Expense (E) [included in
Interest and Other Income]; increase
Accrued Expenses and Other Current
Liabilities (L)
There are likely many other accrued Increase a variety of expenses as needed;
expenses to be recorded, including increase Accrued Expenses and Other
wages, warranties, and utilities; Current Liabilities (L)
pension; and contingencies.
Income taxes must be computed for the Increase Provision for Income Taxes;
period and accrued. increase Accrued Expenses and Other
Current Liabilities (L)

Req. 2
Temporary accounts that accumulate during the period are closed at the end of the year to the
permanent account Retained Earnings. These include: Revenue, Interest and Other Income,
Cost of Revenue, Research and Development Expense, Marketing and Sales expense, General
and Administrative expense, and Provision for Income Taxes.

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E4–3.

Req. 1

The annual reporting period for this company is January 1 through December 31.

Req. 2 (Adjusting entries)

Both transactions are accruals because revenue has been earned and expenses
incurred but no cash has yet been received or paid.

(a) 1. Wages expense is incurred.

2. Cash will be paid in the next period to employees who worked in the current
period – an accrued expense needs to be recorded.

Increase Wages Expense and increase Wages Payable for $4,000 (given).

Adjusting entry – December 31

Wages expense (+E, -SE) ........................... 4,000
Wages payable (+L).............................. 4,000
To record wages accrued at year-end.

(b) 1. Interest revenue is now earned.

2. Cash will be received in the future – an accrued revenue needs to be recorded.

Increase Interest Revenue and increase Interest Receivable for $1,500 (given).

Adjusting entry – December 31

Interest receivable (+A) ................................ 1,500
Interest revenue (+R, +SE) .................. 1,500
To record interest earned at year-end.

Req. 3

Adjusting entries are necessary at the end of the accounting period to ensure that (1) all
revenues that have been earned and expenses that have been incurred are recorded in
the proper accounting period and (2) the related assets and liabilities are measured
properly. The entries above are accruals; entry (a) is an accrued expense (incurred but
not yet recorded) and entry (b) is an accrued revenue (earned but not yet recorded). In
applying the accrual basis of accounting, revenues should be recognized when earned
and measurable and expenses should be recognized when incurred in generating
revenues.

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E4–4.

Req. 1

The annual reporting period for this company is January 1 through December 31.

Req. 2 (Adjusting entries)

Both transactions are accruals because expenses have been incurred but no cash has
yet been paid.

(a) 1. Interest expense is incurred.

2. Cash will be paid in the next period to the bank for using the borrowed
funds in the current period -- an accrued expense needs to be recorded.

Increase Interest Expense; increase Interest Payable for $5,000

($60,000 principal x 0.10 rate x 10 months/12 months)

Adjusting entry – December 31

Interest expense (+E, -SE)........................... 5,000
Interest payable (+L) .............................. 5,000
To record interest accrued at year-end.

(b) 1. Utilities expense is incurred.

2. Cash will be paid in the future – an accrued expense needs to be recorded.

Increase Utilities Expense; increase Utilities Payable for $360 (given).

Adjusting entry – December 31

Utilities expense (+E, -SE)........................... 360
Utilities payable (+L) .............................. 360
To record utilities incurred at year-end.

Req. 3

Adjusting entries are necessary at the end of the accounting period to ensure that (1) all
revenues that have been earned and expenses that have been incurred are recorded in
the proper accounting period and (2) the related assets and liabilities are measured
properly. The entries above are accruals; entries (a) and (b) are both accrued expenses
(incurred but not yet recorded). In applying the accrual basis of accounting, expenses
should be recognized when incurred in generating revenues.

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E4–5.

Req. 1
Prepaid Insurance is a deferred expense that needs to be adjusted each period for the
amount used during the period.
Increase Insurance Expense; decrease Prepaid Insurance for $600 used ($4,800 x 3/24).
Adjusting entry:
Insurance expense (+E, -SE) .................................... 600
Prepaid insurance (-A) .................................... 600

Req. 2
Shipping Supplies is a deferred expense that needs to be adjusted at the end of the
period for the amount of the supplies used during the period.
Increase Shipping Supplies Expense; decrease Shipping Supplies for $68,000:
The amount is computed as follows: Beginning balance $13,000
Supplies purchased 75,000
Supplies on hand at year-end (20,000)
Supplies used $68,000
Adjusting entry:
Shipping supplies expense (+E, -SE) ........................ 68,000
Shipping supplies (-A) ..................................... 68,000

Req. 3
Prepaid Insurance Insurance Expense
10/1 4,800
AJE 600 AJE 600
End. 4,200 End. 600

Shipping Supplies Shipping Supplies Expense

Beg. 13,000
Purch. 75,000 AJE 68,000 AJE 68,000
End. 20,000 End. 68,000

Income statement: Insurance expense $ 600

Shipping supplies expense $68,000

Req. 4
Balance sheet: Prepaid insurance $ 4,200
Shipping supplies $20,000

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E4–6.

Req. 1
Prepaid Advertising is a deferred expense that needs to be adjusted each period for the
amount used during the period.
Increase Advertising Expense; decrease Prepaid Advertising for $900
($1,800 x 3 months/6 months).
Adjusting entry:
Advertising expense (+E, -SE) .................................. 900
Prepaid advertising (-A) .................................. 900

Req. 2
Construction Equipment is a deferred expense that needs to be adjusted at the end of
the period for the amount of the equipment’s cost used during the period.
Increase Depreciation Expense; increase Accumulated Depreciation (which decreases
assets) for $34,000 (given).
Adjusting entry:
Depreciation expense (+E, -SE) ................................ 34,000
Accumulated depreciation (+XA, -A)............... 34,000

Req. 3
Prepaid Advertising Advertising Expense
1/1 1,800
AJE 900 AJE 900
End. 900 End. 900
Accumulated Depreciation Depreciation Expense
132,000 Beg.
34,000 AJE AJE 34,000
166,000 End. End. 34,000

Construction Equipment

End. 340,000
Income statement: Advertising expense $ 900
Depreciation expense $ 34,000

Req. 4
Balance sheet:
Prepaid advertising $900 Construction equipment $340,000
Less: Accumulated depreciation (166,000)
Construction equipment (net) $174,000
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E4–7.
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
E4–3 (a) NE +4,000 –4,000 NE +4,000 –4,000
E4–3 (b) +1,500 NE +1,500 +1,500 NE +1,500
E4–5 (a) –600 NE –600 NE +600 –600
E4–5 (b) –68,000 NE –68,000 NE +68,000 –68,000

E4–8.
Computations
a. Wages expense (+E, -SE) ...........................................
2,700 Given
Wages payable (+L) ........................................... 2,700

b. Office supplies expense (+E, -SE) ..............................

675 $450 + $500
Office supplies (-A) ............................................ 675 - $275 = $675 used

c. Rent receivable (+A) ....................................................

1,120 $560 x 2 months
Rent revenue (+R, +SE) ..................................... 1,120 = $1,120 earned

d. Depreciation expense (+E, -SE) ..................................

12,100 Given
Accumulated depreciation (+XA, -A) 12,100

e. Insurance expense (+E, -SE) ......................................

600 $2,400 x 6/24 =
Prepaid insurance (-A)....................................... 600 $600 used

f. 3,200
Unearned rent revenue (-L) ......................................... $9,600 x 2/6 =
Rent revenue (+R, +SE) ..................................... 3,200 $3,200 earned

g. Repair accounts receivable (+A) ..................................

800 Given
Repair shop revenue (+R, +SE) ......................... 800

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E4–9.
Computations
a. Accounts receivable (+A) .............................................
3,300 Given
Service revenue (+R, +SE) ................................ 3,300

b. Advertising expense (+E, -SE) ....................................

1,650 $2,200 x 9/12 =
Prepaid advertising (-A) ..................................... 1,650 $1,650 used

c. Interest expense (+E, -SE) ..........................................

5,500 $300,000 x 0.11
Interest payable (+L) .......................................... 5,500 x 2/12 (since last
payment) = $5,500
incurred

d. 750
Unearned storage revenue (-L) ................................... $4,500 x 1/6 =
Storage revenue (+R, +SE) ................................ 750 $750 earned

e. Depreciation expense (+E, -SE) ..................................

18,000 Given
Accumulated depreciation (+XA, -A) 18,000

f. Supplies expense (+E, -SE) ........................................

48,500 $18,900 +
Supplies (-A) ......................................................48,500 $45,200 – $15,600
= $48,500 used

g. Wages expense (+E, -SE) ...........................................

5,600 Given
Wages payable (+L) ........................................... 5,600

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E4–10.
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
(a) NE +2,700 –2,700 NE +2,700 –2,700
(b) –675 NE –675 NE +675 –675
(c) +1,120 NE +1,120 +1,120 NE +1,120
(d) –12,100 NE –12,100 NE +12,100 –12,100
(e) –600 NE –600 NE +600 –600
(f) NE –3,200 +3,200 +3,200 NE +3,200
(g) +800 NE +800 +800 NE +800

E4–11
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
(a) +3,300 NE +3,300 +3,300 NE +3,300
(b) –1,650 NE –1,650 NE +1,650 –1,650
(c) NE +5,500 –5,500 NE +5,500 –5,500
(d) NE –750 +750 +750 NE +750
(e) –18,000 NE –18,000 NE +18,000 –18,000
(f) –48,500 NE –48,500 NE +48,500 –48,500
(g) NE +5,600 –5,600 NE +5,600 –5,600

Financial Accounting, 11/e 4-21

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E4–12.

Debit Credit
Independent Situations Code Amount Code Amount
a. Accrued wages, unrecorded and unpaid at R 400 H 400
year-end, $400 (example).
b. Service revenue earned but not yet collected D 600 O 600
at year-end, $600.
c. Dividends declared during the year, $900, to N 900 K 900
be paid next year.
d. Office supplies on hand during the year, $400; U 240 C 240
supplies on hand at year-end, $160.
($400 available during year - $160 remaining
= $240)
e. Service revenue collected from customers A 1,500 J 1,500
during the year, $1,500.
f. Depreciation expense for the year, $1,000. S 1,000 F 1,000
g. Earned all but $800 of (e) by the end of the J 700 O 700
year.
($1,500 unearned revenue - $800 remaining
to be satisfied = $700 earned)
h. Sold $2,000 in investments at a gain of $150. A 2,150 B 2,000
Q 150
i. Interest on $5,000, 8 percent note payable T 100 I 100
(borrowed on October 1 of this year); not yet
recorded or paid at year end.
($5,000 principal x 0.08 annual rate x
3 months/12 months = $100)
j. Balance at year-end in O 186,000 R 130,000
• Service revenue, $186,000 P 35 S 1,000
• Interest revenue, $35 Q 150 T 100
• Gain on sale of investments, $150 U 240
• Wage expense, $130,000 V 1,100
• Depreciation expense, $1,000 N 53,745
• Interest expense, $100
• Supplies expense, $240
• Dividends payable, $900
• Income tax expense, $1,100
Prepare the closing entry.
(Dividends payable is a permanent account
and not closed. Debit revenues and gain;
credit expenses; difference to retained
earnings to balance the entry)

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E4–13.
Amounts to
Selected Balance Sheet Accounts at December 31 Be Reported
Assets:
Equipment (recorded at cost per cost principle) $25,000
Accumulated depreciation (for one year, as given) (2,500)
Net book value of equipment (difference) 22,500

Office supplies (on hand, as given) 800

Prepaid insurance (remaining coverage, $1,000 x 18/24 750

months)

Selected Income Statement Accounts for the Year Ended December 31

Expenses:
Depreciation expense (for one year, as given) $ 2,500
Office supplies expense (used = $0 beginning + $3,000
purchased - $800 on hand) 2,200
Insurance expense (for 6 months, $1,000 x 6/24 months) 250

Financial Accounting, 11/e 4-23

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E4–14.

Year 1:
April 1 Notes receivable (+A) 30,000
Accounts receivable (–A) 30,000

August 1 Cash (+A) 20,000

Notes payable (+L) 20,000

December 31
AJE 1 Interest receivable (+A) 2,250
Interest revenue (+R, +SE) 2,250
Computation: $30,000 x 0.10 x 9/12

AJE 2 Interest expense (+E, –SE) 1,000

Interest payable (+L) 1,000
Computation: $20,000 x 0.12 x 5/12

Year 2:
January 31 Interest payable (–L) 1,000
Interest expense (+E, –SE) 200
Note payable (–L) 20,000
Cash (–A) 21,200
Computation: $20,000 x 0.12 x 1/12

March 31 Cash (+A) 33,000

Interest receivable (–A) 2,250
Interest revenue (+R, +SE) 750
Notes receivable (–A) 30,000
Computation: $30,000 x 0.10 x 3/12

Visual

For the note receivable: Received

AJE at Principal + Interest
Received Note Year End $30,000 + $3,000
$30,000 Interest revenue accrues
Interest revenue accrues $2,250 $750

Interest expense Interest

For the
accrues $1,000 expense
note payable:
accrues $200
Borrowed
$20,000 Repaid
Principal + Interest
$20,000 + $1,200

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E4–15.

Req. 1 (a) Cash paid on accrued income taxes payable.

(b) Accrual of additional income tax expense.
(c) Cash paid on accrued compensation and benefits payable.
(d) Accrual of compensation and benefits for the period.
(e) Cash paid on accrued interest payable.
(f) Accrual of additional interest expense.

Req. 2 Computations (dollars in millions):

(a)
Beg. Bal. + income tax expense - cash paid = End. Bal.
$15 + $174 - ? = $24
? = $165 paid

(c)
Beg. Bal. + compensation expense - cash paid = End. Bal.
$234 + $429 - ? = $252
? = $411 paid

(f)
Beg. Bal. + interest expense - cash paid = End. Bal.
$97 + ? - $363 = $79
? = $345 accrued

Financial Accounting, 11/e 4-25

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E4–16.

Req. 1 Adjusting entries that were or should have been made at December 31:

(a) No entry was made. Entry that should have been made:
Rent receivable (+A)................................................... 1,400
Rent revenue (+R, +SE) .................................. 1,400

(b) Entry that was made:

Depreciation expense (+E, -SE) ................................ 15,000 Not
Accumulated depreciation (+XA, -A) ………… 15,000 enough
expense
Entry that should have been made: by
Depreciation expense (+E, -SE) ................................ 20,000 $5,000
Accumulated depreciation (+XA, -A) ………… 20,000

(c) No entry was made. Entry that should have been made:
Unearned fee revenue (-L) ........................................ 1,500
Fee revenue (+R, +SE) ................................... 1,500

(d) Entry that was made:

Interest expense (+E, -SE) ....................................... 1,530 Too
Interest payable (+L) ....................................... 1,530 much
($17,000 x .09 x 12/12 months) expense
by
Entry that should have been made: $1,275
Interest expense (+E, -SE) ........................................ 255
Interest payable (+L)........................................ 255
($17,000 x .09 x 2/12 months)

(e) No entry was made. Entry that should have been made:
Insurance expense (+E, -SE) .................................... 650
Prepaid insurance (-A) .................................... 650

Req. 2
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
(a) U 1,400 NE U 1,400 U 1,400 NE U 1,400
(b) O 5,000 NE O 5,000 NE U 5,000 O 5,000
(c) NE O 1,500 U 1,500 U 1,500 NE U 1,500
(d) NE O 1,275 U 1,275 NE O 1,275 U 1,275
(e) O 650 NE O 650 NE U 650 O 650

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E4–17.

Net Total Total Stockholders’

Items Income Assets Liabilities Equity
Balances reported $65,000 $185,000 $ 90,000 $95,000
Additional adjustments:
a. Wages (37,000) 37,000 (37,000)
b. Depreciation (19,000) (19,000) (19,000)
c. Rent revenue 3,500 (3,500) 3,500
Adjusted balances 12,500 166,000 123,500 42,500
d. Income taxes (2,625) 2,625 (2,625)
Correct balances $ 9,875 $166,000 $126,125 $39,875

Computations:
a. Given, $37,000 accrued and unpaid.
b. Given, $19,000 depreciation expense.
c. $10,500 x 1/3 = $3,500 rent revenue earned. The remaining $7,000 in unearned
revenue is a liability for two months of occupancy "owed'' to the renter.
d. $12,500 income before taxes x 21% = $2,625.

Financial Accounting, 11/e 4-27

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E4–18.

Req. 1

a. Rent receivable (+A).................................... 2,500

Revenues (rent) (+R, +SE) ................... 2,500

b. Expenses (depreciation) (+E, -SE) ............. 4,500

Accumulated depreciation (+XA, -A) ... 4,500

c. Income tax expense (+E, -SE).................... 5,100

Income taxes payable (+L) ................... 5,100

Req. 2
Effects of
As Adjusting Corrected
Prepared Entries Amounts
Income statement:
Revenues $97,000 a $2,500 $99,500
Expenses (73,000) b (4,500) (77,500)
Income tax expense c (5,100) (5,100)
Net income $24,000 (7,100) $16,900

Balance Sheet:
Assets
Cash $20,000 $20,000
Accounts receivable 22,000 22,000
Rent receivable a 2,500 2,500
Equipment 50,000 50,000
Accumulated depreciation (10,000) b (4,500) (14,500)
$82,000 (2,000) $80,000
Liabilities
Accounts payable $10,000 $10,000
Income taxes payable c 5,100 5,100

Stockholders' Equity
Common stock 10,000 10,000
Additional paid-in capital 30,000 30,000
Retained earnings 32,000 (7,100) 24,900
$82,000 (2,000) $80,000

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E4–19.

Req. 1

a. Salaries and wages expense (+E, -SE)................. 730

Salaries and wages payable (+L) .................... 730

b. Utilities expense (+E, -SE) .................................... 440

Utilities payable (+L)........................................ 440

c. Depreciation expense (+E, -SE) ............................ 24,000

Accumulated depreciation (+XA, -A) .............. 24,000

d. Interest expense (+E, -SE) .................................... 300

Interest payable (+L) ....................................... 300
($15,000 x .08 x 3/12)

e. Maintenance expense (+E, -SE) ........................... 1,100

Maintenance supplies (-A) .............................. 1,100

f. No adjustment is needed because the revenue

will not be earned until January (next year).

g. Income tax expense (+E, -SE) .............................. 5,800

Income tax payable (+L).................................. 5,800

Financial Accounting, 11/e 4-29

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E4–19. (continued)

Req. 2
JAY, INC.
Income Statement
For the Current Year Ended December 31

Operating Revenue:
Rent revenue $109,000
Operating Expenses:
Salaries and wages ($26,500 + $730) 27,230
Maintenance expense ($12,000 + $1,100) 13,100
Rent expense 8,800
Utilities expense ($4,300 + $440) 4,740
Gas and oil expense 3,000
Depreciation expense 24,000
Miscellaneous expenses 1,000
Total expenses 81,870
Income from Operations 27,130
Other Item:
Interest expense ($15,000 x .08 x 3/12) 300
Pretax income 26,830
Income tax expense 5,800
Net income $ 21,030

Earnings per share: $21,030 ÷ 7,000 shares $3.00

Req. 3

Total asset turnover ratio = Net Sales (or Operating Revenues) ÷ Average Total Assets
= $109,000 ÷ [($58,020 + $65,180)/2]
= $109,000 ÷ $61,600 = 1.77

The total asset turnover ratio indicates that, for every $1 of assets, Jay earns $1.77 in
rental revenue. This ratio is lower than the industry average total asset turnover of 2.31,
implying that Jay is less effective at utilizing assets to generate revenue than the
average company in the industry.

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E4–20.

Req. 1

(a) Insurance expense (+E, -SE) ................................... 6

Prepaid insurance (-A) .................................... 6

(b) Wages expense (+E, -SE) ......................................... 4

Wages payable (+L) ........................................ 4

(c) Depreciation expense (+E, -SE) ................................ 9

Accumulated depreciation (+XA, -A)............... 9

(d) Income tax expense (+E, -SE)................................... 7

Income tax payable (+L) .................................. 7

Req. 2
GREEN VALLEY COMPANY
Trial Balance
December 31
(in thousands of dollars)

Unadjusted Adjustments Adjusted

Account Titles Debit Credit Ref. Debit Credit Debit Credit
Cash 20 20
Accounts receivable 13 13
Prepaid insurance 8 a 6 2
Machinery 85 85
Accumulated depreciation c 9 9
Accounts payable 11 11
Wages payable b 4 4
Income taxes payable d 7 7
Common stock 4 4
Additional paid-in capital 67 67
Retained earnings 6 6
Revenues (not detailed) 82 82
Expenses (not detailed) 32 a 6 58
b 4
c 9
d 7
Totals 164 164 26 26 184 184

Financial Accounting, 11/e 4-31

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
E4–21.
GREEN VALLEY COMPANY
Income Statement
For the Current Year Ended December 31
(in thousands of dollars)
Revenues (not detailed) $82
Expenses ($32 + $6 + $9 + $4) 51
Pretax income 31
Income tax expense 7
Net income $24

EPS* $12

*$24,000 net income ÷ [(0 beginning shares + 4,000 ending shares)/2

average shares outstanding]

GREEN VALLEY COMPANY

Statement of Stockholders' Equity
For the Current Year Ended December 31
(in thousands of dollars)
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
Beginning balances $ 0 $ 0 $ 0 $ 0
Stock issuance 4 67 71
Net income 24 24
Dividends declared (6) * (6)
Ending balances $ 4 $ 67 $ 18 $ 89
* The amount of dividends declared can be inferred because the unadjusted trial
balance amount for retained earnings is a negative $6. Since this is the first year of
operations, we can assume the entire amount is due to a dividend declaration.

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E4–21. (continued)
GREEN VALLEY COMPANY
Balance Sheet
At December 31
(in thousands of dollars)
Assets Liabilities and Stockholders’ Equity
Current Assets: Current Liabilities:
Cash $ 20 Accounts payable $ 11
Accounts receivable 13 Wages payable 4
Prepaid insurance ($8 - $6) 2 Income taxes payable 7
Total current assets 35 Total current liabilities 22
Machinery 85 Stockholders' Equity:
Accumulated depreciation (9) Common stock 4
Net machinery 76 Additional paid-in capital 67
Retained earnings 18
Total stockholders’ equity 89
Total liabilities and
Total assets $111 stockholders' equity $111

E4–22.

Req. 1

The purposes for “closing the books” at the end of the accounting period are to:
• Transfer the balances in the temporary accounts to a permanent account
(Retained Earnings).
• Create a zero balance in each of the temporary accounts for accumulation of
activities in the next accounting period.

Req. 2

Revenues (-R) ........................................................... 82

Expenses ($32 + $6 + $9 + $4 + $7) (-E) ....... 58
Retained earnings (+SE) ................................. 24

Financial Accounting, 11/e 4-33

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PROBLEMS
P4–1. Req. 1 Papa John’s International Inc.
Adjusted Trial Balance
At the End of a Recent Year
(in millions of dollars) Debit Credit
Cash 22
Short-term notes receivable 4
Accounts receivable 65
Inventories 31
Income tax receivable 4
Prepaid expenses and other current assets 45
Land 34
Buildings and leasehold improvements 228
Equipment 379
Lease right-of-use assets 158
Accumulated depreciation 406
Long-term notes receivable 16
Intangible assets 87
Other assets 48
Accounts payable 32
Accrued expenses payable 68
Current lease liabilities 25
Unearned revenue 6
Income taxes payable 11
Long-term debt 470
Long-term lease liabilities 133
Other long-term liabilities 73
Common stock 1
Additional paid-in capital 184
Treasury stock 597
Retained earnings 126
Restaurant and franchise sales revenue 1,784
Cost of sales 1,059
Salaries and benefits expense 240
Rent and utilities expense 62
Advertising expense 72
General and administrative expenses 78
Depreciation expense 44
Loss on impairment of assets 2
Interest revenue 1
Interest expense 11
Income tax expense 34
Totals 3,320 3,320

Req. 2
Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
equal credits (a “plugged” figure).
4-34 Solutions Manual
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P4–2.
Req. 1

a. Deferred revenue e. Deferred expense

b. Accrued expense f. Accrued revenue
c. Deferred expense g. Accrued expense
d. Deferred revenue h. Accrued expense

Req. 2

a. Unearned rent revenue (-L) ......................................... 6,400

Rent revenue (+R, +SE) ...................................... 6,400
($9,600 ÷ 6 months = $1,600 per month x 4 months)

b. Interest expense (+E, -SE) .......................................... 540

Interest payable (+L) ............................................ 540
($18,000 x 0.12 x 3/12)

c. Depreciation expense (+E, -SE).................................. 4,400

Accumulated depreciation (+XA, -A) .................. 4,400

d. Unearned service revenue (-L) ................................... 500

Service revenue (+R, +SE) .................................. 500
($3,000 x 2/12)

e. Insurance expense (+E, -SE) ...................................... 1,400

Prepaid insurance (-A) ........................................ 1,400
($8,400 ÷ 12 months = $700 per month x 2 months of coverage)

f. Accounts receivable (+A) ............................................. 4,000

Service revenue (+R, +SE) .................................. 4,000

g. Wages expense (+E, -SE)........................................... 14,000

Wages payable (+L) ............................................. 14,000

h. Property tax expense (+E, -SE) .................................. 400

Property tax payable (+L) .................................... 400

Financial Accounting, 11/e 4-35

© McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
 P4–3.

Req. 1
a. Deferred expense e. Accrued revenue
b. Deferred expense f. Deferred expense
c. Accrued expense g. Accrued expense
d. Accrued expense h. Accrued expense

Req. 2

a. Depreciation expense (+E, -SE).................................. 3,800

Accumulated depreciation (+XA, -A) .................. 3,800

b. Supplies expense (+E, -SE) ........................................ 1,220

Supplies (-A) ..................................................... 1,220
(Beg. Inventory of $400 + Purchases $1,000 – Ending Inventory $180)

c. Repairs expense (+E, -SE) ......................................... 2,600

Accounts payable (+L) ....................................... 2,600

d. Property tax expense (+E, -SE) .................................. 1,900

Property tax payable (+L) .................................... 1,900

e. Accounts receivable (+A) ............................................. 4,000

Service revenue (+R, +SE) ................................ 4,000

f. Insurance expense (+E, -SE) ...................................... 150

Prepaid insurance (-A) ..................................... 150
($900 ÷ 36 months x 6 months of coverage)

g. Interest expense (+E, -SE) .......................................... 625

Interest payable (+L) ............................................ 625
($25,000 x 0.10 x 3/12)

h. Income tax expense (+E, -SE) .................................... 4,978

Income tax payable (+L) ...................................... 4,978
To accrue income tax expense incurred but not paid:
Income before adjustments (given) $30,000
Effect of adjustments (a) through (g) (6,295) (= – $3,800 – $1,220 – $2,600
Income before income taxes 23,705 – $1,900 + $4,000 – $150 – $625)
Income tax rate x 21%
Income tax expense $ 4,978 (rounded to nearest dollar)

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P4–4.

Req. 1
a. Deferred revenue e. Deferred expense
b. Accrued expense f. Accrued revenue
c. Deferred expense g. Accrued expense
d. Deferred revenue h. Accrued expense

Req. 2
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. NE –6,400 +6,400 +6,400 NE +6,400
b. NE +540 –540 NE +540 –540
c. –4,400 NE –4,400 NE +4,400 –4,400
d. NE –500 +500 +500 NE +500
e. –1,400 NE –1,400 NE +1,400 –1,400
f. +4,000 NE +4,000 +4,000 NE +4,000
g. NE +14,000 –14,000 NE +14,000 –14,000
h. NE +400 –400 NE +400 –400

Computations:

a. $9,600 ÷ 6 months = $1,600 per month x 4 months = $6,400 earned

b. $18,000 principal x 0.12 x 3/12 = $540 interest incurred

c. Amount is given.

d. $3,000 unearned x 2/12 = $500 earned

e. $8,400 ÷ 12 months = $700 per month x 2 months of coverage = $1,400 incurred

f. Amount is given.

g. Amount is given.

h. Amount is given.

Financial Accounting, 11/e 4-37

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P4–5.

Req. 1
a. Deferred expense e. Accrued revenue
b. Deferred expense f. Deferred expense
c. Accrued expense g. Accrued expense
d. Accrued expense h. Accrued expense

Req. 2
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. - 3,800 NE - 3,800 NE + 3,800 - 3,800
b. - 1,220 NE - 1,220 NE + 1,220 – 1,220
c. NE + 2,600 - 2,600 NE + 2,600 - 2,600
d. NE + 1,900 - 1,900 NE + 1,900 - 1,900
e. + 4,000 NE + 4,000 + 4,000 NE + 4,000
f. - 150 NE - 150 NE + 150 - 150
g. NE + 625 - 625 NE + 625 - 625
h. NE +4,978 - 4,978 NE +4,978 - 4,978

Computations:

a. Amount is given.

b. Beg. inventory, $400 + Purchases, $1,000 - Ending inventory, $180 = $1,220 used

c. Amount is given.

d. Amount is given.

e. Amount is given.

f. $900 x 6/36 = $150 used

g. $25,000 x 10% x 3/12 = $625 interest expense for the period

h. Adjusted income = $30,000 - $3,800 - $1,220 - $2,600 - $1,900 + $4,000 - $150 -

$625 = $23,705 x 21% tax rate = $4,978 income tax expense (rounded).

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P4–6.

Req. 1
December 31 Adjusting Entries
(1) Accounts receivable (+A) ......................................... 1,820 (b)
Service revenue (+R, +SE) ........................... 1,820 (i)
To record service revenue earned, but not collected.

(2) Insurance expense (+E, -SE) ................................. 130 (l)

Prepaid insurance (-A) ................................. 130 (c)
To record expired insurance as an expense.

(3) Depreciation expense (+E, -SE) ............................. 6,000 (k)

Accumulated depreciation, equipment (+XA, -A) 6,000 (e)
To record depreciation expense.

(4) Income tax expense (+E, -SE) ............................... 1,155 (m)

Income taxes payable (+L) ........................... 1,155 (f)
To record income taxes for the current year.

Req. 2
Amounts before Amounts after
Adjusting Entries Adjusting Entries
Revenues:
Service revenue $64,400 $66,220
Expenses:
Salary expense 55,470 55,470
Depreciation expense 6,000
Insurance expense 130
Income tax expense 1,155
Total expense 55,470 62,755
Net income (loss) $ 8,930 $ 3,465

Net income of $3,465 is correct because this amount includes all revenues and all
expenses (after the adjusting entries). This amount incorporates the effects of the
revenue recognition and expense recognition (matching) principles applied to all
transactions whose effects extend beyond the period in which the transactions
occurred. Net income of $8,930 was not correct because expenses of $7,285 and
revenues of $1,820 were excluded that should have been recorded in the current year.

Req. 3

Earnings per share = $3,465 net income ÷ 3,000 shares = $1.16 per share

Financial Accounting, 11/e 4-39

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P4–6. (continued)

Req. 4

Total asset turnover ratio = Net Sales (or Operating Revenue) ÷ Average Total Assets
= $66,220 ÷ [($110,000 + $136,220)/2]
= $66,220 ÷ $123,110 = 0.54 (rounded to two decimal places

The total asset turnover ratio indicates that, for every $1 of assets, Ramirez generated
$0.54 in revenues. Compared to the industry average of 0.49, Ramirez is more effective
at utilizing assets to generate revenues than the average company in the industry.

Req. 5

Service revenue (-R, -SE) ...................................... 66,220

Salary expense (-E, +SE)................................ 55,470
Depreciation expense (-E, +SE)...................... 6,000
Insurance expense (-E, +SE) .......................... 130
Income tax expense (-E, +SE) ........................ 1,155
Retained earnings (+SE) ................................ 3,465

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P4–7.
Req. 1
December 31 Adjusting Entries:
(a) Supplies expense (+E, -SE) ..................................... 600
Supplies (-A) .................................................. 600
(b) Insurance expense (+E, -SE) ................................... 800
Prepaid insurance (-A) ................................... 800
(c) Depreciation expense (+E, -SE) ............................... 3,700
Accumulated depreciation (+XA, -A) .............. 3,700
(d) Wages expense (+E, -SE) ......................................... 640
Wages payable (+L) ....................................... 640
(e) Interest expense (+E, -SE) ....................................... 425
Interest payable (+L) ....................................... 425
$17,000 principal x 0.10 annual rate x 3/12 of a year
(f) Income tax expense (+E, -SE) .................................. 5,540
Income taxes payable (+L) ............................. 5,540

Req. 2
TUNSTALL, INC.
Income Statement
For the Current Year Ended December 31

Operating Revenue:
Service revenue $61,360
Operating Expenses:
Supplies expense ($900 - $300) 600
Insurance expense 800
Depreciation expense 3,700
Wages expense ($16,200 + $640) 16,840
Remaining expenses (not detailed) 17,160
Total expenses 39,100
Operating Income 22,260
Other Item:
Interest expense 425
Income before taxes 21,835
Income tax expense 5,540
Net Income $16,295

Earnings per share ($16,295 ÷ 5,000 shares) $3.26

Financial Accounting, 11/e 4-41

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 P4–7. (continued)

Req. 2 (continued)
TUNSTALL, INC.
Balance Sheet
At December 31 of the Current Year

Assets Liabilities and Stockholders’ Equity

Current Assets: Current Liabilities:
Cash $42,000 Accounts payable $ 3,000
Accounts receivable 11,600 Wages payable 640
Supplies 300 Interest payable 425
Total current assets 53,900 Income taxes payable 5,540
Service trucks 19,000 Total current liabilities 9,605
Accumulated depreciation (12,900) Note payable, long term 17,000
Other assets (not detailed) 8,300 Total liabilities 26,605
Stockholders' Equity
Common stock 400
Additional paid-in capital 19,000
Retained earnings* 22,295
Total stockholders' equity 41,695
Total liabilities and
Total assets $68,300 stockholders' equity $68,300

*Unadjusted balance, $6,000 + Net income, $16,295 = Ending balance, $22,295.

Req. 3

December 31 Closing Entry:

Service revenue (-R, -SE) ......................................... 61,360

Supplies expense (-E, +SE) ........................... 600
Insurance expense (-E, +SE) ......................... 800
Depreciation expense (-E, +SE) .................... 3,700
Wages expense (-E, +SE) ............................. 16,840
Remaining expenses (not detailed) (-E, +SE) 17,160
Interest expense (-E, +SE) ............................ 425
Income tax expense (-E, +SE) ....................... 5,540
Retained earnings (+SE) ................................ 16,295

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ALTERNATE PROBLEMS

AP4–1.
Req. 1 Tesla, Inc.
Adjusted Trial Balance
At December 31 (in millions)
Cash 6,514
Accounts receivable 1,324
Inventory 3,552
Prepaid expenses and other current assets 713
Equipment 9,747
Land and buildings 3,788
Computer equipment 595
Accumulated depreciation 3,734
Operating lease right-of-use assets 3,665
Intangible assets 537
Customer notes receivable 393
Other assets 9,662
Accounts payable 3,771
Accrued liabilities 3,222
Deferred revenue 1,163
Customer deposits 726
Current lease liabilities 1,785
Long-term lease liabilities 11,634
Other long-term liabilities 3,898
Common stock 1
Additional paid-in capital 14,228
Accumulated deficit 2,897
Automotive revenues 20,821
Energy generation revenues 1,531
Services revenues 2,226
Automotive cost of revenues 16,398
Energy generation cost of revenues 1,341
Services cost of revenues 2,770
Research and development expenses 1,343
Selling, general, and administrative expenses 2,646
Other operating expenses 149
Interest income 89
Interest expense 685
Provision for income taxes 110
Totals 68,829 68,829

Financial Accounting, 11/e 4-43

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AP4–1. (continued)
Req. 2
Since debits are supposed to equal credits in a trial balance, the balance in
Accumulated deficit is determined as the amount in the debit column necessary to make
debits equal credits (a “plugged” figure). In this case, Tesla has an accumulated deficit
of $2,897 million.

AP4–2.
Req. 1
a. Deferred expense e. Deferred revenue
b. Deferred revenue f. Accrued expense
c. Accrued expense g. Accrued expense
d. Deferred expense h. Accrued revenue

Req. 2

a. Insurance expense (+E, -SE) ....................................... 1,600

Prepaid insurance (-A) ...................................... 1,600
($3,200 ÷ 6 months x 3 months of coverage)

b. Unearned maintenance revenue (-L) ........................... 225

Maintenance revenue (+R, +SE) ........................ 225
($450 ÷ 2 months x 1 month)

c. Wages expense (+E, -SE) ........................................... 900

Wages payable (+L) ........................................... 900

d. Depreciation expense (+E, -SE) .................................. 3,000

Accumulated depreciation (+XA, -A) ................... 3,000

e. Unearned service revenue (-L) .................................... 700

Service revenue (+R, +SE) .................................. 700
($4,200 ÷ 12 months x 2 months)

f. Interest expense (+E, -SE) .......................................... 675

Interest payable (+L)............................................. 675
($18,000 x 0.09 x 5/12)

g. Property tax expense (+E, -SE) ................................... 500

Property tax payable (+L) ..................................... 500

h. Accounts receivable (+A) .............................................. 2,000

Service revenue (+R, +SE) ................................. 2,000

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AP4–3.

Req. 1
a. Deferred expense e. Deferred expense
b. Accrued revenue f. Deferred expense
c. Deferred expense g. Accrued revenue
d. Accrued expense h. Accrued expense

Req. 2

a. Supplies expense (+E, -SE) ........................................ 1,250

Supplies (-A) ..................................................... 1,250
(Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400)

b. Accounts receivable (+A) ............................................. 7,440

Catering revenue (+R, +SE) .............................. 7,440

c. Insurance expense (+E, -SE) ...................................... 200

Prepaid insurance (-A) ...................................... 200
($1,200 x 2/12 months of coverage)

d. Repairs expense (+E, -SE) ......................................... 600

Accounts payable (+L) ....................................... 600

e. Rent expense (+E, -SE) .............................................. 700

Prepaid rent (-A) ................................................ 700
($2,100 x 1/3 months of rent used)

f. Depreciation expense (+E, -SE).................................. 2,570

Accumulated depreciation (+XA, -A) ................ 2,570

g. Interest receivable (+A) ................................................ 80

Interest income (+R, +SE) ................................. 80
($4,000 x .12 x 2/12)

h. Income tax expense (+E, -SE) .................................... 6,150

Income tax payable (+L) .................................... 6,150
To accrue income tax expense incurred but not paid:
Income before adjustments (given) $22,400
Effect of adjustments (a) through (g) + 2,200 (-$1,250+$7,440
Income before income taxes 24,600 -$200-$600-$700
Income tax rate x 25% -$2,570+$80)
Income tax expense $ 6,150

Financial Accounting, 11/e 4-45

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AP4–4.

Req. 1
a. Deferred expense e. Deferred revenue
b. Deferred revenue f. Accrued expense
c. Accrued expense g. Accrued expense
d. Deferred expense h. Accrued revenue

Req. 2
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. –1,600 NE –1,600 NE +1,600 –1,600
b. NE –225 +225 +225 NE +225
c. NE +900 –900 NE +900 –900
d. –3,000 NE –3,000 NE +3,000 –3,000
e. NE –700 +700 +700 NE +700
f. NE +675 –675 NE +675 –675
g. NE +500 –500 NE +500 –500
h. +2,000 NE +2,000 +2,000 NE +2,000

Computations:

a. $3,200 prepaid insurance x 3/6 months of coverage = $1,600 used

b. $450 unearned revenue x 1/2 months = $225 earned

c. Amount is given.

d. Amount is given.

e. $4,200 unearned revenue x 2/12 months = $700 earned

f. $18,000 principal x .09 x 5/12 months = $675 interest expense

g. Amount is given.

h. Amount is given.

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AP4–5.

Req. 1
a. Deferred expense e. Deferred expense
b. Accrued revenue f. Deferred expense
c. Deferred expense g. Accrued revenue
d. Accrued expense h. Accrued expense

Req. 2
Balance Sheet Income Statement
Stockholders’ Net
Transaction Assets Liabilities Equity Revenues Expenses Income
a. –1,250 NE –1,250 NE +1,250 –1,250
b. +7,440 NE +7,440 +7,440 NE +7,440
c. –200 NE –200 NE +200 –200
d. NE +600 –600 NE +600 –600
e. –700 NE –700 NE +700 –700
f. –2,570 NE –2,570 NE +2,570 –2,570
g. +80 NE +80 +80 NE +80
h. NE +6,150 –6,150 NE +6,150 –6,150

Computations:

a. Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400 = $1,250

used for the period.

b. Amount is given.

c. $1,200 prepaid expense x 2/12 months = $200 insurance used

d. Amount is given.

e. $2,100 x 1/3 months = $700 rent used

f. Amount is given.

g. $4,000 principal x 0.12 x 2/12 months = $80 interest earned

h. Adjusted income = $22,400 - $1,250 + $7,440 - $200 - $600 - $700 - $2,570 + $80
= $24,600 x 25% tax rate = $6,150 income tax expense

Financial Accounting, 11/e 4-47

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AP4–6.

Req. 1
December 31 Adjusting Entries
(1) Accounts receivable (+A) ........................................ 1,500 (b)
Service revenue (+R, +SE) ........................... 1,500 (j)
To record service revenue earned, but not collected.

(2) Rent expense (+E, -SE) ......................................... 400 (m)

Prepaid rent (-A) ........................................... 400 (c)
To record rent expired as an expense.

(3) Depreciation expense (+E, -SE) ............................ 17,500 (l)

Accumulated depreciation (+XA, -A) 17,500 (e)
To record depreciation expense.

(4) Unearned revenue (-L) ........................................... 8,000 (g)

Service revenue (+R, +SE) ........................... 8,000 (j)
To record service revenue earned.

(5) Income tax expense (+E, -SE) ............................... 4,650 (n)

Income taxes payable (+L) ........................... 4,650 (f)
To record income taxes for the current year.

Req. 2
Amounts before Amounts after
Adjusting Entries Adjusting Entries
Revenues:
Service revenue $ 83,000 $ 92,500
Expenses:
Salary expense 56,000 56,000
Depreciation expense 17,500
Rent expense 400
Income tax expense 4,650
Total expense 56,000 78,550
Net income $ 27,000 $ 13,950

Net income of $13,950 is correct because this amount includes all revenues and all
expenses (after the adjusting entries). This amount incorporates the effects of the
revenue and matching principles applied to all transactions whose effects extend
beyond the period in which the transactions occurred. Net income of $27,000 was not
correct because expenses of $22,550 and revenues of $9,500 were excluded that
should have been recorded in the current year.

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AP4–6. (continued)

Req. 3

Earnings per share = $13,950 net income ÷ 5,000 shares = $2.79 per share

Req. 4

Total asset turnover = Net Sales (or Operating Revenue) ÷ Average Total Assets
= $92,500 ÷ [($136,000 + $158,300)/2]
= $92,500 ÷ $147,150 = 0.63 (rounded to two decimal places)

The total asset turnover ratio indicates that, for every $1 of assets, Taos generated
$0.63 of service revenue. This ratio is a measure of the company’s effectiveness at
utilizing assets to generate revenue.

Req. 5

Service revenue (-R, -SE) ...................................... 92,500

Salary expense (-E, +SE)................................ 56,000
Depreciation expense (-E, +SE)...................... 17,500
Rent expense (-E, +SE) .................................. 400
Income tax expense (-E, +SE) ........................ 4,650
Retained earnings (+SE) 13,950

Financial Accounting, 11/e 4-49

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AP4–7.

Req. 1
December 31 Adjusting Entries:

(a) Depreciation expense (+E, -SE) ............................... 3,000

Accumulated depreciation (+XA, -A) .............. 3,000

(b) Insurance expense (+E, -SE) ................................... 450

Prepaid insurance (-A) ................................... 450

(c) Wages expense (+E, -SE) ......................................... 2,100

Wages payable (+L) ....................................... 2,100

(d) Supplies expense (+E, -SE) ..................................... 500

Supplies (-A) .................................................. 500

(e) Interest expense (+E, -SE) ....................................... 350

Interest payable (+L) ....................................... 350
$5,000 principal x 0.12 annual rate x 7/12 of a year

(f) Income tax expense (+E, -SE) .................................. 1,914

Income tax payable (+L) ................................. 1,914

Req. 2
SOUTH BEND REPAIR SERVICE CO.
Income Statement
For the Current Year Ended December 31
Operating Revenue:
Service revenue $48,000
Operating Expenses:
Depreciation expense 3,000
Insurance expense 450
Wages expense ($25,200 + $2,100) 27,300
Supplies expense ($1,300 unadjusted balance - $800 on hand) 500
Remaining expenses (not detailed) 7,700
Total expenses 38,950
Operating Income 9,050
Other Item:
Interest expense 350
Income before taxes 8,700
Income tax expense 1,914
Net Income $ 6,786
Earnings per share ($6,786 ÷ 3,000 shares) $2.26

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AP4–7. (continued)

SOUTH BEND REPAIR SERVICE CO.

Balance Sheet
At December 31 of the Current Year

Assets Liabilities and Stockholders’ Equity

Current Assets: Current Liabilities:
Cash $19,600 Accounts payable $ 2,500
Accounts receivable 7,000 Wages payable 2,100
Supplies 800 Interest payable 350
Prepaid insurance 450 Income tax payable 1,914
Total current assets 27,850 Total current liabilities 6,864
Equipment 27,000 Note payable, long term 5,000
Accumulated depreciation (15,000) Total liabilities 11,864
Other assets (not detailed) 5,100 Stockholders' Equity
Common stock 300
Additional paid-in capital 15,700
Retained earnings* 17,086
Total stockholders' equity 33,086
Total liabilities and
Total assets $44,950 stockholders' equity $44,950

*Unadjusted balance, $10,300 + Net income, $6,786 = Ending balance, $17,086.

Req. 3

December 31 Closing Entry:

Service revenue (-R, -SE) ......................................... 48,000

Depreciation expense (-E, +SE) .................... 3,000
Insurance expense (-E, +SE) ......................... 450
Wages expense (-E, +SE) ............................. 27,300
Supplies expense (-E, +SE) ........................... 500
Remaining expenses (not detailed) (-E, +SE) 7,700
Interest expense (-E, +SE) ............................ 350
Income tax expense (-E, +SE) ....................... 1,914
Retained earnings (+SE) ................................ 6,786

Financial Accounting, 11/e 4-51

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CONTINUING PROBLEM
CON4-1.
Req. 1
Adjusting Entries Debit Credit
a. Wages expense (+E, -SE) 7,500
Wages payable (+L) 7,500

b. Unearned revenue (-L) 4,000

Pool cleaning revenue (+R, +SE) 4,000
Amount: $24,000 x 2/12 = $4,000 earned

c. Utilities expense (+E, -SE) 520

Utilities payable (+L) 520

d. Interest expense (+E, -SE) 3,950

Interest payable (+L) 3,950
Amount: $79,000 principal x 0.12 x 5/12 months

e. Accounts receivable (+A) 800

Pool cleaning revenue (+R, +SE) 800

f. Insurance expense (+E, -SE) 350

Prepaid expense (-A) 350
Amount: $4,200 x 2/24 months

g. Supplies expense (+E, -SE) 22,300

Supplies (-A) 22,300
Amount: $25,400 purchased - $3,100 ending =
$22,300 used

h. Depreciation expense (+E, -SE) 8,300

Accumulated depreciation (+XA, -A) 8,300

i. Interest receivable (+A) 110

Interest revenue (+R, +SE) 110

j. Income tax expense (+E, -SE) 7,184

Income taxes payable (+L) 7,184
Amount: $127,185 revenues - $94,530
expenses = $32,655 pretax income
x 0.22 income tax rate
(rounded) $ 7,184 income tax expense

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CON4-1. (continued)
Req. 2

Penny's Pool Service & Supply, Inc.

Trial Balance on December 31 (end of first year of operations)
Unadjusted Adjusted
Trial Balance Adjustments Trial Balance
Debit Credit Ref. Debit Credit Debit Credit
Cash 28,765 28,765
Short-term investments 5,000 5,000
Accounts receivable 5,200 (e) 800 6,000
Interest receivable - (i) 110 110
Supplies 25,400 (g) 22,300 3,100
Prepaid expenses 6,300 (f) 350 5,950
Land 18,000 18,000
Equipment 82,500 82,500
Buildings 72,000 72,000
Accumulated depreciation - (h) 8,300 8,300
Accounts payable 4,100 4,100
Wages payable 400 (a) 7,500 7,900
Utilities payable - (c) 520 520
Unearned revenue 24,000 (b) 4,000 20,000
Interest payable - (d) 3,950 3,950
Income taxes payable - (j) 7,184 7,184
Notes payable (current) 4,000 4,000
Notes payable (noncurrent) 79,000 79,000
Common stock 200 200
Additional paid-in capital 60,800 60,800
Retained earnings - -
Pool cleaning revenue 122,200 (b) 4,000 127,000
(e) 800
Interest revenue 75 (i) 110 185
Advertising expense 2,600 2,600
Wages expense 46,000 (a) 7,500 53,500
Supplies expense - (g) 22,300 22,300
Repairs expense 310 310
Utilities expense 2,100 (c) 520 2,620
Insurance expense - (f) 350 350
Depreciation expense - (h) 8,300 8,300
Property tax expense 600 600
Interest expense - (d) 3,950 3,950
Income tax expense - (j) 7,184 7,184
Totals 294,775 294,775 55,014 55,014 323,139 323,139
Financial Accounting, 11/e 4-53
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CON4-1. (continued)

Req. 3

Penny’s Pool Service & Supply, Inc.

Income Statement
For the year ended December 31
Operating Revenues:
Pool cleaning revenue $127,000
Operating Expenses:
Advertising expense 2,600
Wages expense 53,500
Supplies expense 22,300
Repairs expense 310
Utilities expense 2,620
Insurance expense 350
Depreciation expense 8,300
Property tax expense 600
Total operating expenses 90,580
Income from operations 36,420
Other Items:
Interest revenue 185
Interest expense (3,950)
Income before taxes 32,655
Income tax expense 7,184
Net Income $ 25,471
Earnings per share $12.74

Penny’s Pool Service & Supply, Inc.

Income Statement
For the year ended December 31 (first year of operations)
Common Additional Retained Total Stockholder’s
Stock Paid-in Capital Earnings Equity
Beginning balances $ 0 $ 0 $ 0 $ 0
Issued stock 200 60,800 61,000
Net income 25,471 25,471
March 31 balances $200 $60,800 $25,471 $86,471

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CON4-1. (continued)

Req. 3 (continued)

Penny’s Pool Service & Supply, Inc.

Balance Sheet
On December 31
Assets
Current Assets:
Cash $ 28,765
Short-term investments 5,000
Accounts receivable 6,000
Interest receivable 110
Supplies 3,100
Prepaid expenses 5,950
Total current assets 48,925
Land 18,000
Equipment 82,500
Buildings 72,000
Accumulated depreciation (8,300)
Net property and equipment 164,200
Total Assets $213,125

Liabilities and Stockholder’s Equity

Current Liabilities:
Accounts payable $ 4,100
Wages payable 7,900
Utilities payable 520
Unearned revenue 20,000
Interest payable 3,950
Income taxes payable 7,184
Notes payable 4,000
Total current liabilities 47,654
Notes payable 79,000
Total liabilities 126,654
Stockholder’s Equity:
Common stock 200
Additional paid-in capital 60,800
Retained earnings 25,471
Total stockholder’s equity 86,471
Total Liabilities and Stockholder’s Equity $213,125

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CON4-1. (continued)

Req. 4

Debit Credit
(CE) Pool cleaning revenue (-R, -SE) 127,000
Interest revenue (-R, -SE) 185
Advertising expense (-E, +SE) 2,600
Wages expense (-E, +SE) 53,500
Supplies expense (-E, +SE) 22,300
Repairs expense (-E, +SE) 310
Utilities expense (-E, +SE) 2,620
Insurance expense (-E, +SE) 350
Depreciation expense (-E, +SE) 8,300
Property tax expense (-E, +SE) 600
Interest expense (-E, +SE) 3,950
Income tax expense (-E, +SE) 7,184
Retained earnings (+SE) 25,471

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 COMPREHENSIVE PROBLEMS
COMP4–1. Req. 1, 2, 3, and 6 T-accounts (dollars in millions)
Cash Accounts Receivable Supplies
Bal. 6 13 (c) Bal. 5 Bal. 13
(a) 15 94 (e) (d) 52 34 (f) (h) 27 22 (m)
(b) 4 15 (g)
(d) 163 26 (i)
(f) 34 25 (l)
Bal. 49 Bal. 23 Bal. 18
Accumulated
Land Equipment Depreciation
Bal. 0 Bal. 78 8 Bal.
(c) 13 10 (n)
Bal. 13 Bal. 78 18 Bal.
Other Noncurrent Accounts Income Taxes Dividends
Assets Payable Payable Payable
Bal. 7 0 Bal. 0 Bal. 0 Bal.
(g) 15 (i) 26 20 (e) 11 (q) 25 (j)
27 (h) (l) 25
Bal. 22 21 Bal. 11 Bal. 0 Bal.

Wages Payable Interest Payable LT Notes Payable

0 Bal. 0 Bal. 0 Bal.
16 (p) 1 (o) 15 (a)
16 Bal. 1 Bal. 15 Bal.
Common Additional Paid-in Retained
Stock Capital Earnings
4 Bal. 80 Bal. 17 Bal.
2 (b) 2 (b) (j) 25
41 CE
6 Bal. 82 Bal. 33 Bal.
Service Depreciation Income Tax Interest
Revenue Expense Expense Expense
0 Bal. Bal. 0 Bal. 0 Bal. 0
CE 215 215 (d) (n) 10 10 CE (q) 11 11 CE (o) 1 1 CE
0 Bal. Bal. 0 Bal. 0 Bal. 0
Supplies Expense Wages Expense Miscellaneous Expenses
Bal. 0 Bal. 0 Bal. 0
(m) 22 (e) 89 (e) 25
22 CE (p) 16 105 CE 25 CE
Bal. 0 Bal. 0 Bal. 0

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COMP4–1. (continued)

Req. 2 (dollars in millions)

a. Cash (+A) .......................................................... 15

Long-term notes payable (+L) ................. 15

b. Cash (+A) .......................................................... 4

Common stock (+SE) .............................. 2
Additional paid-in capital (+SE)………….. 2

c. Land (+A)........................................................... 13
Cash (-A) ................................................ 13

d. Cash (+A) .......................................................... 163

Accounts receivable (+A) .................................. 52
Service revenue (+R, +SE) ..................... 215

e. Wages expense (+E, -SE) ................................ 89

Miscellaneous expenses (+E, -SE)................... 25
Accounts payable (+L)............................. 20
Cash (-A) ................................................ 94

f. Cash (+A) .......................................................... 34

Accounts receivable (-A) ........................ 34

g. Other noncurrent assets (+A) ............................ 15

Cash (-A) ................................................ 15

h. Supplies (+A) ..................................................... 27

Accounts payable (+L)............................. 27

i. Accounts payable (-L) ....................................... 26

Cash (-A) ................................................ 26

j. Retained earnings (-SE) ................................... 25

Dividends payable (+L)............................ 25

k. No entry required; no revenue earned in 2023.

l. Dividends payable (-L) ...................................... 25

Cash (-A) ................................................ 25

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COMP4–1. (continued)

Req. 3 (dollars in millions)

m. Supplies expense (+E, -SE) ............................. 22

Supplies (-A) ............................................ 22
($40 in account – $18 at year end)

n. Depreciation expense (+E, -SE) ....................... 10

Accumulated depreciation (+XA, -A) ....... 10

o. Interest expense (+E, -SE) ............................... 1

Interest payable (+L) ................................ 1
($15 x 0.08 x 10/12)

p. Wages expense (+E, -SE) ................................ 16

Wages payable (+L) ................................. 16

q. Income tax expense (+E, -SE).......................... 11

Income taxes payable (+L) ....................... 11

Req. 4
H & H TOOL
Income Statement
For the Year Ended December 31, 2023
(amounts in millions)

Operating Revenues:
Service revenue $215
Operating Expenses:
Depreciation expense 10
Supplies expense 22
Wages expense 105
Miscellaneous expenses 25
Total operating expenses 162
Operating Income 53
Other Items:
Interest expense 1
Pretax income 52
Income tax expense 11
Net Income $ 41

Earnings per share $3.42

[$41 million ÷ 12 million shares all year]

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 COMP4–1. (continued)

H & H TOOL
Statement of Stockholders' Equity
For the Year Ended December 31, 2023
(amounts in millions)
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
Balance, January 1, 2023 $4 $80 $17 $101
Additional stock issuance 2 2 4
Net income 41 41
Dividends declared (25) (25)
Balance, December 31, 2023 $6 $82 $33 $121

H & H TOOL
Balance Sheet
At December 31, 2023
(amounts in millions)
Assets Liabilities and Stockholders’ Equity
Current Assets: Current Liabilities:
Cash $ 49 Accounts payable $ 21
Accounts receivable 23 Interest payable 1
Supplies 18 Wages payable 16
Total current assets 90 Income taxes payable 11
Total current liabilities 49
Land 13 Notes payable 15
Equipment 78 Total liabilities 64
Less: Accumulated depreciation (18)
Net book value 60 Stockholders' Equity:
Common stock 6
Other noncurrent assets 22 Additional paid-in capital 82
Retained earnings 33
Total stockholders'
equity 121
Total liabilities and
Total assets $185 stockholders' equity $185

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COMP4–1. (continued)

Req. 5 (dollars in millions)

Type of Effect on Direction and

Transaction Cash Flows Amount of Effect
a. F +15
b. F +4
c. I -13
d. O +163
e. O -94
f. O +34
g. I -15
h. NE NE
i. O -26
j. NE NE
k. NE NE
l. F -25

Req. 6

December 31, 2023, Closing Entry (CE) (in millions)

Service revenue (-R, -SE) ................................ 215

Depreciation expense (-E, +SE) ............. 10
Interest expense (-E, +SE) ..................... 1
Supplies expense (-E, +SE) ................... 22
Wages expense (-E, +SE) ...................... 105
Miscellaneous expenses (-E, +SE) ......... 25
Income tax expense (-E, +SE) ................ 11
Retained earnings (+SE) ......................... 41

Financial Accounting, 11/e 4-61

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COMP4–1. (continued)

Req. 7

(a) Current ratio = Current assets ÷ Current liabilities

= $90 ÷ $49
= 1.84

This suggests that H & H Tool has sufficient current assets to pay current
liabilities.

(b) Total asset turnover = Sales ÷ Average total assets

= $215 ÷ [($101 + $185) ÷ 2]
= $215 ÷ $143
= 1.50

This suggests that H & H Tool generated $1.50 of service revenue for every
dollar of assets.

(c) Net profit margin = Net income ÷ Operating revenues

= $41 ÷ $215
= 0.191 or 19.1%

This suggests that H & H Tool earned $0.191 for every dollar of service revenue
that it generated.

For all the ratios, a comparison across time and a comparison against an
industry average or competitors will need to be analyzed to determine the
liquidity (current ratio) of the company and the efficiency (total asset turnover)
and effectiveness (net profit margin) of H & H Tool’s management.

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 COMP4-2.
Req. 1, 2, 3, and 6 T-accounts (in thousands)
Accounts
Cash Receivable Supplies
Bal. 5 Bal. 4 Bal. 2
(a) 5 18 (c) (d) 14 8 (g) (i) 10 8 (m)
(b) 20 28 (e)
(d) 56 3 (f)
(g) 8 11 (h)
(k) 3 10 (l)
Bal. 27 Bal. 10 Bal. 4

Accumulated
Small Tools Equipment Depreciation
Bal. 6 Bal. 0 0 Bal.
(f) 3 1 (m) (c) 18 2 (n)
Bal. 8 Bal. 18 2 Bal.

Other Noncurrent Accounts Notes Dividends

Assets Payable Payable Payable
Bal. 9 7 Bal. 0 Bal. 0 Bal.
(h) 11 7 (e) 20 (b) 10 (j)
10 (i) (l) 10
Bal. 9 13 Bal. 20 Bal. 0 Bal.

Income Taxes Unearned

Wages Payable Interest Payable Payable Revenue
0 Bal. 0 Bal. 0 Bal. 0 Bal.
3 (p) 1 (o) 4 (q) 3 (k)
3 Bal. 1 Bal. 4 Bal. 3 Bal.
Common Additional Paid-in Retained
Stock Capital Earnings
6 Bal. 9 Bal. (j) 10 4 Bal.
1 (a) 4 (a) 16 CE
7 Bal. 13 Bal. 10 Bal.

Service Revenue Income Tax Expense Interest Expense

0 Bal. Bal. 0 Bal. 0
70 (d) (q) 4 (o) 1
CE 70 4 CE 1 CE
0 Bal. Bal. 0 Bal. 0

Depreciation Expense Wages Expense Miscellaneous Expenses

Bal. 0 Bal. 0 Bal. 0
(n) 2 (e) 27 (e) 8
2 CE (p) 3 30 CE (m) 9 17 CE
Bal. 0 Bal. 0 Bal. 0
Financial Accounting, 11/e 4-63
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COMP4-2. (continued)

Req. 2

a. Cash (+A) .......................................................... 5,000

Common stock (+SE) .............................. 1,000
Additional paid-in capital (+SE)………….. 4,000

b. Cash (+A) .......................................................... 20,000

Notes payable (+L) .................................. 20,000

c. Equipment (+A) ................................................. 18,000

Cash (-A) ................................................ 18,000

d. Cash (+A) .......................................................... 56,000

Accounts receivable (+A) .................................. 14,000
Service revenue (+R, +SE) ..................... 70,000

e. Wages expense (+E, -SE) ................................ 27,000

Miscellaneous expenses (+E, -SE)................... 8,000
Accounts payable (+L)............................. 7,000
Cash (-A) ................................................ 28,000

f. Small tools (+A) ................................................. 3,000

Cash (-A) ................................................ 3,000

g. Cash (+A) .......................................................... 8,000

Accounts receivable (-A) ........................ 8,000

h. Accounts payable (-L) ....................................... 11,000

Cash (-A) ............................................... 11,000

i. Supplies (+A) ..................................................... 10,000

Accounts payable (+L)............................. 10,000

j. Retained earnings (-SE) ................................... 10,000

Dividends payable (+L)............................ 10,000

k. Cash (+A) .......................................................... 3,000

Unearned revenue (+L) .......................... 3,000

l. Dividends payable (-L) ...................................... 10,000

Cash (-A) ................................................ 10,000

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COMP4-2. (continued)

Req. 3

m. Miscellaneous expenses (+E, -SE)................... 9,000

Supplies (-A) ............................................ 8,000
Small tools (-A) ........................................ 1,000
[Supplies used ($12,000 – $4,000) and small
tools used ($9,000 – $8,000)]

n. Depreciation expense (+E, -SE) ....................... 2,000

Accumulated depreciation (+XA, -A) ....... 2,000

o. Interest expense (+E, -SE) ............................... 1,000

Interest payable (+L) ................................ 1,000
($20,000 principal x 0.10 x 6/12)

p. Wages expense (+E, -SE) ................................ 3,000

Wages payable (+L) ................................. 3,000

q. Income tax expense (+E, -SE).......................... 4,000

Income taxes payable (+L) ....................... 4,000

Req. 4
FURNITURE REFINISHERS, INC.
Income Statement
For the Year Ended December 31, 2024

Operating Revenues:
Service revenue $70 000
Operating Expenses:
Depreciation expense 2,000
Wages expense 30,000
Miscellaneous expenses 17,000
Total operating expenses 49,000
Operating Income 21,000
Other Item:
Interest expense 1,000
Pretax income 20,000
Income tax expense 4,000
Net Income $16,000

Earnings per share $0.23

($16,000 ÷ 70,000]

Financial Accounting, 11/e 4-65

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 COMP4-2. (continued)

FURNITURE REFINISHERS, INC.

Statement of Stockholders' Equity
For the Year Ended December 31, 2024

Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
Balance, January 1, 2024 $6,000 $ 9,000 $ 4,000 $19,000
Additional stock issuance 1,000 4,000 5,000
Net income 16,000 16,000
Dividends declared (10,000) (10,000)
Balance, December 31, 2024 $7,000 $13,000 $ 10,000 $30,000

FURNITURE REFINISHERS, INC.

Balance Sheet
At December 31, 2024

Assets Liabilities and Stockholders’ Equity

Current Assets: Current Liabilities:
Cash $27,000 Accounts payable $13,000
Accounts receivable 10,000 Notes payable 20,000
Supplies 4,000 Wages payable 3,000
Small tools 8,000 Interest payable 1,000
Total current assets 49,000 Income taxes payable 4,000
Unearned revenue 3,000
Equipment 18,000 Total current liabilities 44,000
Less: Accum. deprec. (2,000) Stockholders' Equity:
Net book value 16,000 Common stock 7,000
Additional paid-in capital 13,000
Other noncurrent assets 9,000 Retained earnings 10,000
Total stockholders' equity 30,000
Total liabilities and
Total assets $74,000 stockholders' equity $74,000

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COMP4-2. (continued)

Req. 5

Type of Effect on Direction and

Transaction Cash Flows Amount of Effect
a. F +5,000
b. F +20,000
c. I -18,000
d. O +56,000
e. O -28,000
f. O -3,000
g. O +8,000
h. O -11,000
i. NE NE
j. NE NE
k. O +3,000
l. F -10,000

Req. 6
December 31, 2024, Closing Entry

Service revenue (-R, -SE) ................................ 70,000

Depreciation expense (-E, +SE) ............. 2,000
Interest expense (-E, +SE) ..................... 1,000
Wages expense (-E, +SE) ...................... 30,000
Miscellaneous expenses (-E, +SE) ......... 17,000
Income tax expense (-E, +SE) ................ 4,000
Retained earnings (+SE) ......................... 16,000

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COMP4-2. (continued)

Req. 7

(a) Current ratio = Current assets ÷ Current liabilities

= $49,000 ÷ $44,000
= 1.11

This result suggests that Furniture Refinishers, Inc., has sufficient current assets
to pay current liabilities in the coming period.

(b) Total asset turnover = Net Sales (or Operating Revenue) ÷ Average total assets
= $70,000 ÷ [($26,000 + $74,000) ÷ 2]
= $70,000 ÷ $50,000
= 1.40

This suggests that Furniture Refinishers, Inc., generates $1.40 of revenue for
every dollar of assets.

(c) Net profit margin = Net income ÷ Sales (or Operating Revenue)
= $16,000 ÷ $70,000
= 0.23 or 23%

This suggests that Furniture Refinishers, Inc., earns $0.23 for every dollar in
service revenue that it generates.

For all of the ratios, a comparison across time and a comparison against an
industry average or competitors will need to be analyzed to determine the
liquidity (current ratio) of the company and the efficiency (total asset turnover)
and effectiveness (net profit margin) of Furniture Refinishers, Inc.’s management.

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CASES AND PROJECTS
ANNUAL REPORT CASES

CP4–1.
1. a. See Note 14
2. c. See Note 10
3. d. See Note 3
4. d.
5. b.
6. a. Computation: Operating revenues $93,561 / Average total assets ($51,248 +
$42,779)/2

CP4–2

1. Paid more by $38.

2. 70.28%
Computation:
This year’s Last year’s Last year’s = Percentage
Accrued Liabilities - Accrued Liabilities / Accrued Liabilities Change
($37,966 - $22,296) / $22,296 = 0.7028
or 70.28%

3. See Note 5.
Deferred gift card revenue (-L) 3,300 Deferred Gift Card Revenue (L)
Sales revenue (+R, +SE) 3,300 1,990 Beg. bal.
AJE 3,300 3,620 New
2,310 End. bal.
4. 2.29
Computation: Operating Revenues / Average Total Assets
This year’s + Last year’s /2 = Average
Total Assets Total Assets Total Assets

$252,496 + $236,495 /2 = $244,495.50

Operating Average Total Asset

Revenues / =
Total Assets Turnover
$559,151 / $244,495.50 = 2.29

5. d.

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CP4–3.

1. Target = 1.99
Computation: Operating revenues $93,561 / Average total assets ($51,248 +
$42,779)/2
Walmart = 2.29
Computation: Operating revenues $559,151 / Average total assets ($252,496 +
$236,495)/2
2. a.
3. b.
4. c.
5.
Percentage Change in: Target1 Walmart2
Total operating revenues 19.78% 6.72%
Cost of sales 20.62% 6.52%
Walmart’s management was more effective at controlling costs over time.
Walmart’s costs increased at a lower rate than Walmart’s revenues, whereas Target’s
costs increased at a higher rate than Target’s revenues.
1
Target percentage change computations:
Operating revenues ($93,561 - $78,112) / $78,112
Cost of sales ($66,177 - $54,864) / $54,864
2
Walmart percentage change computations:
Operating revenues ($559,151 - $523,964) / $523,964
Cost of sales ($420,315 - $394,605) / $394,605

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FINANCIAL REPORTING AND ANALYSIS CASES

CP4–4.

Current
Account Year Financial Effect on
Balance Statement Cash Flows
1. Rent revenue $510,000 Income statement + $500,000
2. Salary expense 73,000 Income statement - 70,000
3. Maintenance supplies expense 13,000 Income statement No effect
4. Rent receivable 10,000 Balance sheet No effect
5. Receivables from employees 2,000 Balance sheet - 2,000
6. Maintenance supplies 2,000 Balance sheet - 8,000
7. Unearned rent revenue 14,000 Balance sheet +14,000
8. Salaries payable 3,000 Balance sheet - 6,000
(1) (2) (3) Maintenance
Rent Revenue Salary Expense Supplies Expense
500,000 (a) (e) 70,000 Used 13,000
10,000 (b) (f) 3,000
510,000 73,000 13,000

(4) (5) Receivables (6) Maintenance

Rent Receivable from Employees Supplies
(b) 10,000 (g) 2,000 (h) 7,000
(i) 8,000 13,000 used
10,000 2,000 (j) 2,000

(7) Unearned (8)

Rent Revenue Salaries Payable
14,000 (c) (d) 6,000 6,000 Bal. Inferred
3,000 (f)
14,000 3,000

Cash
(a) from renters 500,000 6,000 (d) to employees
(c) from renters 14,000 70,000 (e) to employees
2,000 (g) to employees
8,000 (i) to suppliers

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CP4–5.

Req. 1
Unadjusted Adjusted Post-Closing
Trial Balance Trial Balance Trial Balance
Account Debit Credit Debit Credit Debit Credit
Cash 25,000 25,000 25,000
Maintenance supplies 800 300 300
Service equipment 90,000 90,000 90,000
Accumulated depreciation 21,000 30,000 30,000
Remaining assets 44,800 44,800 44,800
Note payable, 6% 10,000 10,000 10,000
Interest payable 600 600
Income taxes payable 13,020 13,020
Wages payable 400 400
Unearned revenue 13,600 3,600 3,600
Common stock 10,000 10,000 10,000
Additional paid-in capital 40,000 40,000 40,000
Retained earnings 12,000 12,000 52,480
Service revenue 214,000 224,000 0
Expenses 160,000 183,520 0
Totals 320,600 320,600 343,620 343,620 160,100 160,100

Ending Retained Earnings = Beg., $12,000 + Net income, ($224,000 - $183,520)

Req. 2

(a) To record the amount of supplies used during the current year, $500, and to
reduce the supplies account to the amount remaining on hand at the end of the
current year.

(b) To accrue interest expense for the current year (the interest is payable in the
next year, computed as $10,000 x .06 = $600) and to record interest payable.

(c) To reduce unearned revenue for the amount of revenue earned during the
current year, $10,000.

(d) To record depreciation expense for the current year, $9,000.

(e) To record current year’s wages of $400 that will be paid in the following year.

(f) To record current year’s income tax expense and the related liability, $13,020.

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CP4–5. (continued)

Req. 3
Closing Entry on December 31 of the Current Year:

Service revenue (from the adjusted trial balance) (-R, -SE) 224,000
Expenses (from the adjusted trial balance) (-E, +SE) 183,520
Retained earnings (+SE) ....................................... 40,480

Req. 4

Pretax income x Average income tax rate = Income tax expense

($224,000 - 170,500) x ? = $13,020
$53,500 x ? = $13,020
? = 24.3%

Req. 5

Number of shares issued x Average issue price = Total issue amount

10,000 x ? = $10,000 + $40,000
? = $5.00 per share

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CP4–6.

Transaction (a):

1. This transaction will affect Carey’s financial statements for 14 years (from the
beginning of 2023 through the end of 2036) in conformity with the matching
principle. [$14,000 ÷ $1,000 per year = 14 years]

2. Income statement:
Depreciation expense, as given $1,000 each year

3. Balance sheet at December 31, 2025:

Assets:
Office equipment $14,000
Less: Accumulated depreciation* 3,000
Net book (carrying) value $11,000
*$1,000 x 3 years = $3,000.

4. An adjusting entry each year over the life of the asset would be recorded to reflect
the allocation of the cost of the asset when used to generate revenues:

Depreciation expense (+E, -SE) . . . . . . . . 1,000

Accumulated depreciation (+XA, -A) . 1,000

Transaction (b):

1. This transaction will affect Carey’s financial statements for 2 years--2024 and 2025-
-because four months of rent revenue was earned in 2024, and two months of rent
revenue will be earned in 2025.

2. The 2024 income statement should report rent revenue earned of $20,000 ($30,000
x 4/6). Occupancy was provided for only 4 months in 2024. This is in conformity
with the revenue recognition principle.

3. This transaction created a $10,000 Unearned Rent Revenue liability ($30,000 -

$20,000 earned = $10,000 unearned) as of December 31, 2024, because at that
date Carey "owes'' the renter two more months' occupancy for which it has already
collected the cash.

4. Yes, an adjusting entry must be made to (a) increase the Rent Revenue account by
$10,000 for two months’ rent earned in 2025 and (b) to decrease the liability to $0
representing no future occupancy owed (in conformity with the revenue principle).
December 31, 2025--Adjusting entry:
Unearned Rent Revenue (-L) ........................ 10,000
Rent Revenue (+R, +SE)....................... 10,000

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CP4–6. (continued)

Transaction (c):

1. This transaction will directly affect Carey’s financial statements for two years, with
the expense incurred in 2024 and the cash payment in 2025.

2. The $7,500 should be reported as wages expense on the 2024 income statement
and as a liability, Wages Payable, on the 2024 balance sheet. On January 5, 2025,
the liability will be paid. Therefore, the 2025 balance sheet will reflect a reduced
cash balance and reduced liability balance. The transaction will not directly affect
the 2025 income statement (unless the adjusting entry was not made).

3. Yes, an adjusting entry must be made to (a) record the $7,500 as an expense in
2024 (following the expense recognition (matching) principle) and (b) to record the
liability which will be paid in 2025.
December 31, 2024--Adjusting entry:
Wages expense (+E, -SE) ............................. 7,500
Wages payable (+L) ............................. 7,500

Note: On January 5, 2025, the liability, Wages Payable, of $7,500 will be paid. Wages
Expense for 2025 will not include this $7,500. The 2025 related entry will debit
(decrease) Wages Payable, and credit (decrease) Cash, $7,500.

Transaction (d):
1. Yes, service revenue of $45,000 (i.e., $60,000 x 3/4) should be recorded as earned
by Carey in conformity with the revenue principle. Service revenue is recognized as
the service is performed in the amount the company expects to be entitled to
receive.

2. Recognition of revenue earned but not collected by the end of 2024 requires an
adjusting entry. This adjusting entry is necessary to (a) record the revenue earned
(to be reported on the 2024 income statement) and (b) record the related account
receivable (an asset to be reported on the 2024 balance sheet). The adjusting entry
on December 31, 2024 is:
Accounts receivable (+A) ........................................... 45,000
Service revenue (+R, +SE) .............................. 45,000
($60,000 total price x 3/4 completed)

3. February 15, 2025--Completion of the last phase of the service contract and cash
collected in full:
Cash (+A) .................................................................. 60,000
Accounts receivable (-A) ................................. 45,000
Service revenue (+R, +SE) .............................. 15,000

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 CP4–7.

Req. 1
LISA’S DAY SPA AND SALON, INC.
Income Statement
For the Year Ended December 31, 2023
Cash
Basis Per
Lisa’s Corrected
Items Statement Explanation of Changes Basis
Revenues:
Spa fees $1,215,000 See * below. $1,102,000
Expenses:
Office rent 130,000 Exclude rent for Jan. 2024 ($130,000 ÷ 13) (g) 120,000
Utilities 43,600 No change 43,600
Telephone 12,200 See ** below. 11,800
Salaries 562,000 Add December 2023 salary ($24,000 ÷ 12) (e) 564,000
Supplies 31,900 See *** below. 29,825
Miscellaneous 12,400 No change 12,400
Depreciation 0 Given for 2023 (c) 20,500
Total expenses 792,100 802,125
Net income $ 422,900 $ 299,875

* Cash collected for spa fees $1,215,000

Fees earned in prior years (a) -142,000
Fees earned in 2023 but not yet collected (b) + 29,000
Fees earned in 2023 $1,102,000

** (f) $12,200 telephone paid + $1,400 December 2023 telephone bill - $1,800
December 2022 bill paid in 2023 = $11,800

*** Supplies (d)

Beg. 3,125
Purchases 31,900 29,825 Used
End. 5,200

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CP4–7. (continued)

Req. 2

The memo to Lisa Knight and Helen Bailey should include the following:

(1) Net income was overstated by $123,025 because of inappropriate recognition of

revenue (overstated by $113,000) and expenses (understated by $10,025).
Revenue should be recognized when earned, not when the cash is collected.
Similarly, expenses should be matched against revenue in the period when the
services or materials were used (including depreciation expense).

(2) Some other items the parties should consider in the pricing decision:
(a) A correct balance sheet at December 31, 2023.
(b) Collectability of any receivables (if they are to be sold with the business).
(c) Any liabilities of the spa to be assumed by the purchaser.
(d) Current employees -- how will they be affected?
(e) Adequacy of the rented space -- is there a long-term noncancellable lease?
(f) Characteristics of Lisa’s spa practices.
(g) Expected future cash flows of the business.

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CRITICAL THINKING CASES

CP4–8.

Req. 1

2024 Adjusting Entries Debit Credit

12/31
(a) Supplies expense (+E, -SE)………………… 2,200
Supplies (-A)………………………………. 2,200
($4,000 - $1,800 = $2,200)

(b) Insurance expense (+E, -SE)……………………. 3,000

Prepaid insurance (-A)…………………… 3,000
($6,000 ÷ 2 years = $3,000 per year)

(c) Depreciation expense (+E, -SE)………………… 8,000

Accumulated depreciation (+XA, -A)……. 8,000

(d) Salaries expense (+E, -SE)………………………… 3,200

Salaries payable (+L)……………………… 3,200

(e) Transportation revenue (-R, -SE) ……… 7,000

Unearned transportation revenue (+L)…… 7,000
Transportation revenue is too high and needs to be
reduced and an unearned revenue account needs to
be created for the appropriate amount.

(f) Income tax expense (+E, -SE)…………………... 3,650

Income tax payable (+L)…………………… 3,650
To record 2024 income tax computation:
Transportation revenue: $85,000 - $7,000 = $78,000
Expenses: $47,000 + $2,200 + $3,000
+ $8,000 + $3,200 = 63,400
Pretax income $14,600
Income tax expense: $14,600 x 25% = $ 3,650

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CP4–8. (continued)

Req. 2
ZOLTAR MOVING CO.
Corrections to 2024 Financial Statements

Amounts Changes Corrected

Items
Reported Debit Credit Amounts
2024 Income Statement:
Revenue:
Transportation revenue $ 85,000 e 7,000 $ 78,000
Expenses:
Salaries expense 17,000 d 3,200 20,200
Supplies expense 12,000 a 2,200 14,200
Other expenses 18,000 18,000
Insurance expense 0 b 3,000 3,000
Depreciation expense 0 c 8,000 8,000
Income tax expense 0 f 3,650 3,650
Total expenses 47,000 67,050
Net income $ 38,000 27,050 $ 10,950

December 31, 2024, Balance Sheet

Assets:
Current Assets:
Cash $ 2,000 $ 2,000
Receivables 3,000 3,000
Supplies 4,000 a 2,200 1,800
Prepaid insurance 6,000 b 3,000 3,000
Total current assets 15,000 9,800
Equipment 40,000 40,000
Less: Accumulated deprec. 0 c 8,000 (8,000)
Other assets 27,000 27,000
Total assets $82,000 $68,800
Liabilities:
Current Liabilities:
Accounts payable $ 9,000 $ 9,000
Salaries payable 0 d 3,200 3,200
Unearned transportation revenue 0 e 7,000 7,000
Income tax payable 0 f 3,650 3,650
Total current liabilities 9,000 22,850
Stockholders' Equity:
Common stock 30,000 30,000
Retained earnings 43,000 27,050 15,950
Total stockholders' equity 73,000 45,950
Total liabilities and stockholders'
equity $82,000 $68,800

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CP4–8. (continued)

Req. 3
Omission of the adjusting entries caused:
(a) Net income to be overstated by $27,050.
(b) Total assets to be overstated by $13,200.
(c) Total liabilities to be understated by $13,850.

Req. 4
(a) Earnings per share:
Unadjusted -- $38,000 net income ÷ 10,000 shares = $3.80 per share
Adjusted -- $10,950 net income ÷ 10,000 shares = $1.10 per share (rounded)
(b) Total asset turnover:
Unadjusted -- $85,000 revenue ÷ [($46,400 + $82,000)/2] average total assets
$85,000 ÷ $64,200 = 1.32
Adjusted -- $78,000 revenue ÷ [($46,400 + $68,800)/2] average total assets
$78,000 ÷ $57,600 = 1.35

Each of the ratios was affected by inclusion of the adjustments with net income,
revenue, and assets decreasing.
• For earnings per share, the numerator net income decreased while the
denominator did not, resulting in a significantly lower figure.
• For the total asset turnover ratio, both the numerator and denominator
decreased, but the denominator average total assets decreased by a higher
percentage (10.28%) than the percentage decrease (8.24%) in the numerator
revenues, causing an increase in the ratio.

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CP4–8. (continued)

Req. 5

To the Stockholders of Zoltar Moving Co.:

We regret to inform you that your request for a $30,000 loan has been denied.
Our review showed that various adjustments were required to the original set of
financial statements provided to us. The original (unadjusted) financial statements
overstated net income for 2024 by $27,050 (i.e., $38,000 - $10,950). This
overstatement was caused by incorrectly including $7,000 of revenue collected in
advance that had not been earned in 2024. Further, all of the expenses were
understated, and income tax expense had been incorrectly excluded.
Total assets were overstated by $13,200 (i.e., $82,000 - $68,800). Supplies was
overstated by $2,200, prepaid insurance was overstated by $3,000, and the net book
value of the equipment was overstated by $8,000 because annual depreciation was not
properly recognized. Further, total liabilities were understated by $13,850.
A review of key financial ratios indicates that the adjustments caused earnings per
share to decline, although total asset turnover increased from 1.32 to 1.35. The
adjusted ratios, however, would need to be compared to those of other start-up
companies in the same industry.
We require that there be sufficient collateral pledged against the loan before we can
consider it. The current market value of the equipment may be able to provide additional
collateral against which the loan could be secured. Your personal investments may also
be considered viable collateral if you are willing to sign an agreement pledging these
assets as collateral for the loan. This is a common requirement for small start-up
businesses.
If you would like us to reconsider your application, please provide us the current market
values of any assets you would pledge as collateral.
Regards,
(your name)
Loan Application Department, Your Bank

Financial Accounting, 11/e 4-81

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CP4–9.

Req. 1 Cash from Operations: $36,000

Req. 2 Subscriptions Revenue for fiscal year ended March 31, 2024
($36,000 x 7/36): $7,000

Req. 3 March 31, 2024, Unearned Subscriptions Revenue

($36,000 x 29/36) = $29,000 or $36,000 - $7,000 = $29,000.

Req. 4

Adjusting entry (cash receipt credited to Unearned Subscriptions Revenue):

Unearned Subscriptions Revenue (L) Subscriptions Revenue (R)

9/1 36,000
AJE 7,000 AJE 7,000
End. 29,000 End. 7,000

Unearned subscriptions revenue (-L) ........................ 7,000

Subscriptions revenue (+R, +SE) .................... 7,000

Req. 5
a. $9,000 revenue target based on cash sales:
This target is not clearly defined. Does management mean any cash
subscriptions received during the period? Your region generated $36,000 in cash
subscriptions. By this assumption, your region far exceeded the company’s
target. You may be entitled to a generous bonus due to your strong performance.

On the other hand, management may mean any sales revenue earned that has
also been received in cash during the period. Under this assumption, sales
revenue earned and received in cash is $7,000 (the accrual accounting basis
amount). If this is the company’s intention of its target, then your region did not
meet the goal, only generating 77.8% of the target. You may need to provide an
analysis to management regarding this below par performance.

This example demonstrates the need for clear communication of expectations by

management.

b. $9,000 revenue target based on accrual accounting:

This situation is the same as the second assumption under a. Your region earned
$2,000 less than expected by the company.

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YOU AS ANALYST: ONLINE COMPANY RESEARCH

CP4–10.

The solutions to this project will depend on the company and/or accounting period
selected for analysis.

BUSINESS ANALYTICS AND DATA VISUALIZATION IN EXCEL AND

TABLEAU

The solutions to these exercises are auto graded on Connect, as assigned by the
instructor.

Financial Accounting, 11/e 4-83

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