ACG 2021Chapter 3 Power Points S15-3
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Transcript of ACG 2021Chapter 3 Power Points S15-3
Participation Questions Chap. 3 – due 2/8/15Which publicly traded Company is used as an example in class for the revenue recognition principle?
Apple Computers, JC Penney, Sears, or Walmart
The second example for the revenue recognition principle discusses Calvin actually taking a cruise in which month?
April 2013, November 2012, March 2013, or May 2013
Which depreciation method did we discuss for the $24,000 in Equipment purchased by Eagle Golf Academy, where the depreciation expense equals $1,000 per month if the useful life of the equipment is 24 months?
Straight-line, Double declining balance, or Activity based depreciation After all of the adjusting entries were completed for Eagle Golf Academy and the Income statement was prepared, was the income for Golf Eagle positive or negative?
Positive or Negative
The example of Eagle Golf Academy showed that companies can pay dividends even when there is a net loss for the month.
True or False
Announcements – 1/29/15 Handout for today–Chapter 3 PowerPoints Pg. 76 & Chapter 1 – 3 Review PowerPoint pg. 18 (Also, in the
Class Materials under Chapter 3 handout).
Assignments – Due 2/1/15
Homework Assignment #2 (Connect) – unlimited attempts Participation Questions for Chapter #2 questions (Webcourses) – 1 attempt Definitions Quiz (Webcourses) – 2 attempts
Due 2/8/15 Chapter 3 Homework (Connect) – unlimited attempts Participation questions for Chapter 3 (Webcourses) – 1 attempt Accounting Cycle Project (Connect) – unlimited attempts.
This assignment will take extra time – 2 to 3 hours, plan accordingly.
Exam 1 – February 9-11 @ CBA Testing Center BA2 room #104
Learn Smart – 5 points Extra Credit for Block 1 ends February 11th at 11:59 PM
Exam Review session during regular class time on 2/5/14
Announcements – 2/3/15 Handout for today–Chapter 3 PowerPoints Pg. 94 & Review PowerPoint pg. 18
Assignments – Due 2/8/15
Chapter 3 Homework (Connect) – unlimited attempts Participation questions for Chapter 3 (Webcourses) – 1 attempt Accounting Cycle Project (Connect) – unlimited attempts.
This assignment will take extra time – 2 to 3 hours, plan accordingly. Due 2/15/15
SEC Financial Statement Project (Webcourses) – 1 attempt
Exam 1 – February 9-11 @ CBA Testing Center BA2 room #104
Learn Smart – 5 points Extra Credit for Block 1 ends February 11th at 11:59 PM
Exam Review session during regular class time on 2/5/14
Questions to be Answered
Overall - What is financial reporting’s role in today’s American society?
Chapter 3 – Once we have all of the transactions aggregated, how do we communicate this information to decision-makers?
3-5
Chapter 03
The Financial Reporting Process
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
PART A - Accrual-Basis Accounting
3-7
LO1 Revenue and Expense Reporting
Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
Accrual-basis accounting records revenues when earned (the revenue recognition principle) and expenses with related revenues (the matching principle).
Revenue Recognition Principle
When to record
• After revenue is earned:• When good or
service has been delivered to customer
Amount to record
• Cash value of goods or services transferred to customer
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 8
9
Walmart Statement of Income
Consolidated Statements Of Income (Audited) (USD $)
In Millions, except Per Share data, unless otherwise specified
12 Months Ended
Jan. 31, 2014 Jan. 31, 2013 Jan. 31, 2012
Revenues:
Net sales $ 473,076 $ 465,604 $ 443,416
Membership and other income 3,218 3,047 3,093
Total revenues 476,294 468,651 446,509
Costs and expenses:
Cost of sales 358,069 352,297 334,993
Operating, selling, general and administrative expenses
91,353 88,629 85,025
Operating income 26,872 27,725 26,491
Interest:
Debt 2,072 1,977 2,034
Capital leases 263 272 286
Interest income (119) (186) (161)
Interest, net 2,216 2,063 2,159
Income from continuing operations before income taxes
24,656 25,662 24,332
Current 8,619 7,976 6,722
Deferred (514) (18) 1,202
Provision for income taxes 8,105 7,958 7,924
Income from continuing operations 16,551 17,704 16,408
Income (loss) from discontinued operations, net of income taxes
144 52 (21)
Consolidated net income 16,695 17,756 16,387
Walmart – Revenue Recognition Sales
Walmart recognizes sales revenue, net of sales taxes and estimated sales returns, at the time it sells merchandise to the customer.
Membership Fee Revenue Walmart recognizes membership fee revenue both in the United States
and internationally over the term of the membership, which is typically 12 months.
Membership fee revenue is included in membership and other income in Walmart's Consolidated Statements of Income. The deferred membership fee is included in accrued liabilities in Walmart's Consolidated Balance Sheets.
Shopping Cards Customer purchases of shopping cards are not recognized as revenue
until the card is redeemed and the customer purchases merchandise using the shopping card
3-11
Revenue Recognition Principle
Recognize revenue when it is earnedo Calvin books a cruise with Carnival Cruise Lines,
the world’s largest cruise line. He makes reservations and pays for the cruise in November 2014, but the cruise is not scheduled to sail until April 2015.
o When does Carnival report revenue from the ticket sale?
Recognize revenue when it is earnedo Calvin books a cruise with Carnival Cruise Lines,
the world’s largest cruise line. He makes reservations and pays for the cruise in November 2014, but the cruise is not scheduled to sail until April 2015.
o When does Carnival report revenue from the ticket sale?
3-12
Revenue Recognition Principle
1. In November 2014???
No.
Because it has not substantially fulfilled its obligation to Calvin.
2. In April 2015???
Yes.
Because it is in April 2015 that the cruise occurs.
1. In November 2014???
No.
Because it has not substantially fulfilled its obligation to Calvin.
2. In April 2015???
Yes.
Because it is in April 2015 that the cruise occurs.
3-133-13
Revenue Recognition Principle
Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy.
Rather than paying cash, Calvin uses his Best Buy card to buy the CD on account.
When does Best Buy recognize revenue?
Suppose that, anticipating the cruise, Calvin buys a Jimmy Buffet CD from Best Buy.
Rather than paying cash, Calvin uses his Best Buy card to buy the CD on account.
When does Best Buy recognize revenue?
3-143-14
Revenue Recognition Principle
Even though Best Buy doesn’t receive cash
immediately from Calvin, it still records the
revenue at the time it sells the CD.
Even though Best Buy doesn’t receive cash
immediately from Calvin, it still records the
revenue at the time it sells the CD.
3-153-15
Matching Principle
Recognize expenses in the same period as the revenue they help generate.
Recognize expenses in the same period as the revenue they help generate.
Matching Principle
Identify expenses incurred
Measure the expenses
Match against revenues earned
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 16
3-18
LO2 Accrual–Basis Compared with Cash–Basis Accounting
There are no receivables or payables in the cash basis of accounting.
Special Bonus Material
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.
What is an extroverted accountant like?
He’ll look at your shoes while talking to you instead of his own.
Two accountants are in a bank when armed robbers burst in. While several of the robbers take the money from the tellers, others line the customers up against a wall and proceed to take their wallets, watches, and other valuables. In the midst of the chaos, accountant No. 1 jams something in accountant No. 2’s hand. Without looking down, accountant No. 2 whispers, "What is this?" to which accountant number one replies, "It's that $50 I owe you."
Part B The Measurement Process
3-213-21
Closing Process
LO3 Adjusting Entries
Reporting Process
External Transactions of Eagle Golf Academy – Page 43
Transaction Date External Transactions in JanuaryType of Activity
(1) Jan. 1 Sell shares of common stock for $25,000 to obtain the funds necessary to start the business.
Financing
(2) Jan. 1 Borrow $10,000 from the local bank and sign a note promising to repay the full amount of the debt in three years.
Financing
(3) Jan. 1 Purchase equipment necessary for giving golf training, $24,000.
Investing
(4) Jan. 1 Pay one year of rent in advance, $6,000 ($500 per month).
Operating
(5) Jan. 6 Purchase supplies on account, $2,300. Operating
2-22
Transaction Date External Transactions in JanuaryType of Activity
(6) Jan. 12 Provide golf training to customers for cash, $3,600.
Operating
(7) Jan. 17 Provide golf training to customers on account, $2,500.
Operating
(8) Jan. 23 Receive cash in advance for 10 golf training sessions to be given in the future, $600.
Operating
(9) Jan. 28 Pay salaries to employees, $2,800. Operating(10) Jan. 30 Pay cash dividends of $200 to
shareholders.Financing
Unadjusted Trial Balance of Eagle Golf Academy
Account Title Debit CreditCash $6,200 Accounts Receivable 2,500Supplies 2,300Prepaid Rent 6,000Equipment 24,000Accounts Payable $2,300 Unearned Revenue 600Notes Payable 10,000Common Stock 25,000Retained Earnings 0Dividends 200Service Revenue 6,100Salaries Expense 2,800
Totals $44,000 $44,000
Eagle Golf AcademyTrial BalanceJanuary 31
2-23
3-243-24
Purpose of Adjusting Entries
To record events that have occurred but we have not yet recorded.o To record revenues in the period earned.
o To record expenses in the period they are incurred in the generation of those revenues.
o Financial statements issued at end of periodo Several accounts on unadjusted trial balance need to be brought up-
to-date
To record events that have occurred but we have not yet recorded.o To record revenues in the period earned.
o To record expenses in the period they are incurred in the generation of those revenues.
o Financial statements issued at end of periodo Several accounts on unadjusted trial balance need to be brought up-
to-date
3-253-25
Adjusting Entries - Classifications
Prepayments:
o Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense.
o Depreciation - The process of allocating the cost of plant assets to expense over estimated useful lives
o Unearned revenues – we received cash and recorded a liability before we earned the revenue.
Accruals:
o Accrued expenses – we paid cash after we incurred the expense and recorded a liability.
o Accrued revenues – we received cash after we earned the revenue and recorded an asset.
Prepayments:
o Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense.
o Depreciation - The process of allocating the cost of plant assets to expense over estimated useful lives
o Unearned revenues – we received cash and recorded a liability before we earned the revenue.
Accruals:
o Accrued expenses – we paid cash after we incurred the expense and recorded a liability.
o Accrued revenues – we received cash after we earned the revenue and recorded an asset.
3-263-26
Prepayments - Prepaid Expenses
o Costs of assets acquired in one period that will be expensed in a future period.
o Business has paid cash first before the asset was used to generate revenue
o Examples: Purchase of equipment or supplies, payment of rent in advance, payment of insurance in advance.
Adjusting Entry:
Debit expense account (increase an expense)
Credit asset account (decrease an asset)
o Costs of assets acquired in one period that will be expensed in a future period.
o Business has paid cash first before the asset was used to generate revenue
o Examples: Purchase of equipment or supplies, payment of rent in advance, payment of insurance in advance.
Adjusting Entry:
Debit expense account (increase an expense)
Credit asset account (decrease an asset)
Prepaid Expenses - Future Benefit Recorded as assets when purchased
JOURNAL
Date Accounts and explanation Debit Credit
Jan 1 Prepaid rent 6,000
Cash 6,000
Jan 6 Supplies 2,300
Cash 2,300
3-283-28
Example: Prepaid Rent
Prepaid rent expires
$500
Adjustingentry
$5,500Remaining
prepaid rentJan. 31
$6,000 Cash paid for prepaid rent
Jan. 1
3-293-29
Example: Supplies
Supplies used during January
$1,200
Adjustingentry
$1,100Supplies On-handJan. 31
$2,300 Cash paid for
Supplies Jan. 6
Prepaid Expenses - Benefit Received Expensed when expired or used
JOURNAL
Date Accounts and explanation Debit Credit
Jan 31 Rent expense 500
Prepaid rent 500
Jan 31 Supplies expense 1,200
Supplies 1,200
Prepaid Rent
Prepaid rentJan 1 $6,000 Jan 31$500
$5,500
Rent expense$500Jan 31
Amount expiredAmount
remaining
Balance Sheet
Income Statement
Supplies
SuppliesJan 6 $2,300 Jan 31$1,200
$1,100
Supplies expense$1,200Jan 31
Amount usedAmount on hand
Balance Sheet
Income Statement
Prepayments - Depreciation Expense
As the Asset is used, the cost is transferred to Depreciation Expense – Matching principle
Examples of plant assets: Buildings, Equipment, Furniture
Accumulated Depreciation
Sum of all depreciation expense Increases over plant asset’s life
Contra-asset Normal credit balance Always has a companion account
Normal balance is opposite the companion account Book value
Cost of plant asset less accumulated depreciation
Apartment Investment & Management (AIV)
Condensed Consolidated Balance Sheets (Unaudited) (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2013 Dec. 31, 2012
ASSETS
Buildings and improvements $ 6,481,745 $ 6,212,176
Land 1,937,239 1,915,683
Total real estate 8,418,984 8,127,859
Less accumulated depreciation (2,908,941) (2,728,660)
Net real estate ($420,079 and $599,302 related to VIEs)
5,510,043 5,399,199
Cash and cash equivalents ($20,721 and $23,599 related to VIEs)
67,622 84,413
Restricted cash ($38,918 and $38,576 related to VIEs)
130,511 146,281
Accounts receivable, net 32,925 34,020
Notes receivable 215,821 102,897
Other assets ($218,811 and $220,317 related to VIEs)
513,409 516,018
Assets held for sale 19,175 118,552
Total assets 6,489,506 6,401,380
LIABILITIES AND EQUITY
Non-recourse property debt ($374,444 and $495,012 related to VIEs)
4,530,971 4,570,719
Revolving credit facility borrowings 298,550 0
Total indebtedness 4,829,521 4,570,719
Accounts payable 27,438 30,747
Accrued liabilities and other ($156,157 and $160,590 related to VIEs)
328,910 315,637
Deferred income 111,390 128,098
Liabilities related to assets held for sale 17,118 121,239
Total liabilities 5,314,377 5,166,440
Preferred noncontrolling interests in Aimco Operating Partnership
79,969 80,046
Commitments and contingencies (Note 8)
0 0
Equity:
Perpetual Preferred Stock 68,114 68,114
Common Stock, $0.01 par value, 505,787,260 shares authorized, 145,916,439 and 145,563,903 shares issued/outstanding at September 30, 2013 and December 31, 2012, respectively
1,459 1,456
Additional paid-in capital 3,704,393 3,712,684
Accumulated other comprehensive loss (5,467) (3,542)
Distributions in excess of earnings (2,886,352) (2,863,287)
Total Aimco equity 882,147 915,425
Noncontrolling interests in consolidated real estate partnerships
245,735 271,065
Common noncontrolling interests in Aimco Operating Partnership
(32,722) (31,596)
Total equity 1,095,160 1,154,894
Total liabilities and equity 6,489,506 6,401,380
AIV – Income StatementCondensed Consolidated Statements
of Operations (Unaudited) (USD $) In Thousands, except Per Share data,
unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2013 Sep. 30, 2012 Sep. 30, 2013 Sep. 30, 2012
REVENUES
Rental and other property revenues $ 247,117 [1] $ 242,149 [1] $ 732,112 [1] $ 716,307 [1]
Tax credit and asset management revenues
7,397
10,696
22,458
27,681
Total revenues 254,514
252,845
754,570
743,988
OPERATING EXPENSES
Property operating expenses 98,463 [1] 100,988 [1] 295,492 [1] 293,105 [1]
Investment management expenses 373
2,817
3,503 [1] 9,445
Depreciation and amortization 74,622 [1] 83,438 [1] 229,270
252,948 [1]
Provision for real estate impairment losses
0
0
8,349 [1]
General and administrative expenses 10,962
12,311
33,894
37,491
Other expense, net 2,215
4,440
6,445
9,060
Total operating expenses 186,635
203,994
568,604
610,398
Operating income 67,879
48,851
185,966
133,590
Interest income, net 3,587
1,998
12,663
6,852
Interest expense (61,726)
(61,196)
(182,525)
(182,614)
Equity in income (losses) of unconsolidated real estate partnerships
277
206
905
(2,800)
(Loss) gain on dispositions and other, net (1,899)
16,024
(4,553)
20,630
Income (loss) before income taxes and discontinued operations
8,118
5,883
12,456
(24,342)
Income tax benefit (expense) 77
40
(216)
352
Income (loss) from continuing operations 8,195
5,923
12,240
(23,990)
Income from discontinued operations, net 71,215
47,412
76,982
122,103
Net income 79,410
53,335
89,222
98,113
Depreciation – Equipment has a useful life of 24 months – Straight-line Depreciation
JOURNAL
Date Accounts and explanation Debit Credit
Jan 1 Equipment 24,000
Cash 24,000
Jan 31 Depreciation expense 1,000
Accumulated depreciation 1,000
Depreciation – Straight Line
Equipment
Jan 1 $24,000
Depreciation Expense$1,000Jan 31
Balance Sheet
Income Statement
Accumulated DepreciationJan 31$1,000
Book Value
Balance SheetJanuary 31, 2012
Equipment $24,000
Less: Accumulated Depreciation (1,000)
Book value $23,000
3-403-40
Prepayments - Unearned Revenues
o Received cash first from customer before revenue is earned.
o Once a company has provided products or services, they can record revenue earned and reduce the obligation to the customer. Recorded as a liability when payment is received
Adjusting entry:
Debit liability account (decrease a liability)
Credit revenue account (increase a revenue)
o Received cash first from customer before revenue is earned.
o Once a company has provided products or services, they can record revenue earned and reduce the obligation to the customer. Recorded as a liability when payment is received
Adjusting entry:
Debit liability account (decrease a liability)
Credit revenue account (increase a revenue)
Southwest Airlines
3-41
Consolidated Balance Sheet (USD $) In Millions, unless otherwise specified
Dec. 31, 2012 Dec. 31, 2011
Current assets [Abstract]
Cash and cash equivalents $ 1,113 $ 829
Short-term investments 1,857 2,315
Accounts and other receivables 332 299
Inventories of parts and supplies, at cost 469 401
Deferred income taxes 246 263
Prepaid expenses and other current assets
210 238
Total current assets 4,227 4,345
Property and equipment, at cost [Abstract]
Flight equipment 16,367 15,542
Ground property and equipment 2,714 2,423
Deposits on flight equipment purchase contracts
416 456
Property and equipment, at cost 19,497 18,421
Less allowance for depreciation and amortization
6,731 6,294
Property and equipment, net 12,766 12,127
Goodwill 970 970
Other assets 633 626
Total assets 18,596 18,068
Current liabilities [Abstract]
Accounts payable 1,107 1,057
Accrued liabilities 1,102 996
Air traffic liability 2,170 1,836
Current maturities of long-term debt 271 644
Total current liabilities 4,650 4,533
Long-term debt less current maturities 2,883 3,107
Deferred income taxes 2,884 2,566
Deferred gains from sale and leaseback of aircraft
63 75
Other non-current liabilities 1,124 910
Stockholders' equity [Abstract]
Common stock 808 808
Capital in excess of par value 1,210 1,222
Retained earnings 5,768 5,395
Accumulated other comprehensive income (loss)
(119) (224)
Treasury stock, at cost (675) (324)
Total stockholders' equity 6,992 6,877
Total liabilities and stockholders' equity $ 18,596 $ 18,068
Revenue recognition Tickets sold for Passenger air travel are initially deferred as Air traffic liability. Passenger revenue is recognized and Air traffic liability is reduced when the service is provided (i.e., when the flight takes place). Air traffic liability primarily represents tickets sold for future travel dates and estimated future refunds and exchanges of tickets sold for past travel dates. The balance in Air traffic liability, which includes a portion of the Company’s liability associated with its frequent flyer program, fluctuates throughout the year based on seasonal travel patterns, fare sale activity, and activity associated with the Company’s frequent flyer programs.
Unearned Revenue - Cash Received for 10 golf lessons
Receive cash before revenue is earned Creates a liability
Business owes customer a good or service Business has to repay cash received from
customer if good/service not delivered
JOURNAL
Date Accounts and explanation Debit Credit
Jan 23 Cash 600
Unearned revenue 600
3-433-43
Example: Unearned Training Revenue
Adjustingentry
$?Unearned revenue remainsJan. 31
$600Cash
received in advanceJan. 26
Services provided
2 Lessons
Unearned Revenue - Good/Service Delivered – (2 golf lessons taken)
When revenue is earned (i.e. good/service delivered) Liability for unearned revenue is reduced Revenue is increased
JOURNAL
Date Accounts and explanation Debit Credit
Jan 31 Unearned Revenue 120
Service Revenue 120
3-453-45
Adjusting Entries - Classifications
Prepayments:
o Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense.
o Depreciation - The process of allocating the cost of plant assets to expense over estimated useful lives
o Unearned revenues – we received cash and recorded a liability before we earned the revenue.
Accruals:
o Accrued expenses – we paid cash after we incurred the expense and recorded a liability.
o Accrued revenues – we received cash after we earned the revenue and recorded an asset.
Prepayments:
o Prepaid expenses – we paid cash (or had an obligation to pay cash) for the purchase of an asset before we incurred the expense.
o Depreciation - The process of allocating the cost of plant assets to expense over estimated useful lives
o Unearned revenues – we received cash and recorded a liability before we earned the revenue.
Accruals:
o Accrued expenses – we paid cash after we incurred the expense and recorded a liability.
o Accrued revenues – we received cash after we earned the revenue and recorded an asset.
3-463-46
Accrued Expenseso Record before paying cash
o When a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay, it still should record the expense.
o Examples: Accrued salaries, accrued interest.
o Adjusting entry:
Debit expense account (increase an expense)
Credit liability account (increase a liability)
o Record before paying cash
o When a company has incurred an expense but hasn’t yet paid cash or recorded an obligation to pay, it still should record the expense.
o Examples: Accrued salaries, accrued interest.
o Adjusting entry:
Debit expense account (increase an expense)
Credit liability account (increase a liability)
Accrued Salaries
JOURNAL
Date Accounts and explanation Debit Credit
Jan 31 Salaries expense 1,680
Salaries payable 1,680
1-29Monday
1-30Tuesday
2-2Friday
2-1Thursday
1-31Wednesday
$2,800 weekly salaries$1,680 $1,120
3-483-48
Example: Accrued Interest Costs
Adjustingentry
$100Interest
owedJan. 31
$100Cash paid for Interest
Feb 15
Interest $100
Jan. 1
Bank Loan $10,000
3-493-49
Interest Calculation – Pg 90
Amount of Annual Interest Fraction InterestNote payable x Rate x of Year = Expense
10,000 12% 1/12 100
3-503-50
Example: Accrued Interest CostsJOURNAL
Date Accounts and explanation Debit Credit
Jan 31 Interest Expense 100
Interest Payable 100
3-513-51
Accrued Revenueso When a company has earned revenue but hasn’t yet
received cash or recorded an amount receivable, it still should record the revenue. This is referred to as an accrued revenue.
o Examples: Interest receivable,
Adjusting entry:
Debit asset account (increase an asset)
Credit revenue account (increase a revenue)
o When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable, it still should record the revenue. This is referred to as an accrued revenue.
o Examples: Interest receivable,
Adjusting entry:
Debit asset account (increase an asset)
Credit revenue account (increase a revenue)
Summary of the Adjusting Process
Two purposes of adjusting process Measure income (Revenues and
Expenses) Update balance sheet
Every adjusting entry affects at least one: Revenue or expense Asset or liability
Prepaids and Accruals -
PREPAIDS –CASH FIRST
FIRST LATER
Prepaid expenses
Prepaid expense Expense
Cash Prepaid expense
Unearned revenues
Cash Unearned revenue
Unearned revenue Revenue
ACCRUALS – CASH LATER
FIRST LATER
Accrued expenses
Expense Payable
Payable Cash
Accrued revenues
Receivable Cash
Revenue Receivable
Summary of Adjusting Entries
Recording the Adjustment
Category of Adjustment Debit Credit
Prepaid expense Expense Asset
Depreciation Expense Contra asset
Accrued expense Expense Liability
Accrued revenue Asset Revenue
Unearned revenue Liability Revenue
Unadjusted Trial Balance of Eagle Golf Academy
Account Title Debit CreditCash $6,200 Accounts Receivable 2,500Supplies 2,300Prepaid Rent 6,000Equipment 24,000Accounts Payable $2,300 Unearned Revenue 600Notes Payable 10,000Common Stock 25,000Retained Earnings 0Dividends 200Service Revenue 6,100Salaries Expense 2,800
Totals $44,000 $44,000
Eagle Golf AcademyTrial BalanceJanuary 31
2-55
3-563-56
LO4 Post Adjusting Entries
o Post adjusting entries to the T-accounts in the general ledger to update the account balances.
o Prepare an adjusted trial balance.
o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.
o Post adjusting entries to the T-accounts in the general ledger to update the account balances.
o Prepare an adjusted trial balance.
o An adjusted trial balance is a list of all accounts and their balances after we have updated account balances for adjusting entries.
3-573-57
Unadjusted Trial Balance and Adjusted Trial Balance of Eagle Golf Academy
Debit Credit Debit Credit Debit CreditCash $6,200 $6,200 Accounts receivable 2,500 (h) 200 2,700Supplies 2,300 (b) 1,200 1,100Prepaid rent 6,000 (a) 500 5,500Equipment 24,000 24,000Accum. depr., equip (c) 1,000 $1,000 Accounts payable 2,300 2,300Unearned revenue 600 (d) 120 480Salaries payable (e) 1,680 1680Utilities payable (f) 960 960Interest payable (g) 100 100Notes payable 10,000 10,000Common stock 25,000 25,000Retained earnings 0 0Dividends 200 200Service revenue 6,100 6,420Supplies expense (b) 1,200 1200Rent expense (a) 500 500Depreciation expense (c) 1,000 1000Salaries expense 2,800 (e) 1,680 4,480
Utilities expense (f) 960 960Interest expense (g) 100 100
Totals $44,000 $44,000 $47,940 $47,940
AccountsUnadjusted
Trial Balance Adjustments
EAGLE GOLF ACADEMYUnadjusted Trial Balance and Adjusted Trial Balance
January 31
(d and h) 320
AdjustedTrial Balance
3-583-58
Unadjusted Trial Balance and Adjusted Trial Balance of Eagle Golf Academy
Debit Credit Debit Credit Debit CreditCash $6,200 $6,200 Accounts receivable 2,500 (h) 200 2,700Supplies 2,300 (b) 1,200 1,100Prepaid rent 6,000 (a) 500 5,500Equipment 24,000 24,000Accum. depr., equip (c) 1,000 $1,000 Accounts payable 2,300 2,300Unearned revenue 600 (d) 120 480Salaries payable (e) 1,680 1680Utilities payable (f) 960 960Interest payable (g) 100 100Notes payable 10,000 10,000Common stock 25,000 25,000Retained earnings 0 0Dividends 200 200Service revenue 6,100 6,420Supplies expense (b) 1,200 1200Rent expense (a) 500 500Depreciation expense (c) 1,000 1000Salaries expense 2,800 (e) 1,680 4,480
Utilities expense (f) 960 960Interest expense (g) 100 100
Totals $44,000 $44,000 $47,940 $47,940
AccountsUnadjusted
Trial Balance Adjustments
EAGLE GOLF ACADEMYUnadjusted Trial Balance and Adjusted Trial Balance
January 31
(d and h) 320
AdjustedTrial Balance
Part C
The Reporting Process
3-603-60
LO5 Financial Statements
Accounts Debit CreditCash $6,200 Accounts receivable 2,700Supplies 1,100Prepaid rent 5,500 BALANCEEquipment 24,000 SHEET
Accumulated Depreciation $1,000 AssetsAccounts payable 2,300 =Unearned revenue 480 LiabilitiesSalaries payable 1680 +Interest payable 100 Stockholders’ Equity
Utilities payable 960
Notes Payable 10,000STATEMENT OF Common stock 25,000
STOCKHOLDERS’ Retained earnings 0EQUITY Dividends 200
Common Stock Service revenue 6,420+ Supplies expense 1200 INCOME
Retained Earnings Rent expense 500 STATEMENT(= RE, Jan. 1 + NI – Div) Depreciation expense 1000 Revenues
= Salaries expense 4,480 −
Stockholders’ Equity Utilities expense 960 Expenses
Interest expense 100 =
Totals $47,940 $47,940 Net Income
EAGLE GOLF ACADEMYAdjusted Trial Balance
January 31
3-613-61
Income Statement
Revenues:Service revenue $6,420
Expenses:Salaries expense $4,480 Rent expense 500 Supplies expense 1,200 Depreciation expense 1,000 Interest expense 100 Utilities expense 960
Total expenses 8,240Net income ($1,820)
EAGLE GOLF ACADEMYIncome Statement
For the month ended January 31
3-623-62
Statement of Stockholders’ Equity
TotalCommon Retained Stockholders
’Stock Earnings Equity
Balance at January 1 -0- -0- -0-Issuance of common stock $25,000 $25,000 Add: Net income (Net Loss) (1820) (1820)Less: Dividends (200) (200)Balance at January 31 $25,000 ($2,020) $22,980
EAGLE GOLF ACADEMYStatement of Stockholders’ EquityFor the month ended January 31
Classifying Assets & Liabilities
Classified as current or long-term term based on liquidity (assets) or order of liquidation (liabilities) How quickly an item can be converted to cash
(assets) or liquidated using cash (liabilities)
Cash Most liquid
Accounts receivable Very liquid
Inventory Somewhat liquid
Plant assets Not liquid
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 6363
• Converted to cash, sold or consumed in the next yearCurrent assets
• Held for longer than one year• Includes plant assets
Long-term assets
• Must be paid within one yearCurrent liabilities
• Due date more than one year from balance sheet date
Long-term liabilities
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.
Classified Balance Sheet Categorizes and subtotals assets and
liabilities by current and long-term
Assets Liabilities
Current assets Current liabilities
Long-term investments Long-term liabilities
Property, plant and equipment
Other assets
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Classified Balance SheetSheetJanuary 31
EAGLE GOLF ACADEMYClassified Balance
Assets Liabilities Current assets: Current liabilities: Cash $6,200 Accounts payable $2,300
Accounts receivable 2,700 Unearned revenue 480 Supplies 1,100 Salaries payable 1680 Prepaid rent 5,500 Utilities payable 960
Total current assets 15,500 Interest payable 100 Total current liabilities $5,520
Long-term assets: Equipment 24,000 Long-term liabilities:
Less: Accum. depr., equip. (1,000) Notes payable 10,000
Total long-term assets 23,000 Total liabilities $15,520
Stockholders’ Equity Common stock 25,000
Retained earnings (2,020) Total stockholders’ equity $22,980
Total assets $38,500 Total liabilities and stockholders’ equity $38,500
Part D
The Closing Process
3-68
LO6 Closing Entries
Prepares the accounts for next period Temporary accounts are set to zero and closed
into Retained earnings
o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
o Does not affect the balances of permanent accounts other than retained earnings.
Prepares the accounts for next period Temporary accounts are set to zero and closed
into Retained earnings
o Increase the retained earnings account by the amount of revenues and decrease retained earnings by the amount of expenses and dividends.
o Does not affect the balances of permanent accounts other than retained earnings.
Closing Entries (Zero out temporary accounts)
Close DividendsDebit Retained earnings Credit Dividends
Close ExpensesDebit Retained earnings Credit each expense account
Close RevenuesDebit each revenue account Credit Retained earnings
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall. 69
JOURNAL
Date Accounts and explanation Debit Credit
Sales revenue 6,420
Retained earnings 6,420
Retained earnings 8,240
Supplies Expense 1,200
Rent expense 500
Depreciation expense 1,000
Salaries expense 4,480
Utilities expense 960
Interest expense 100
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JOURNAL
Date Accounts and explanation Debit Credit
Retained earnings 200
Dividends 200
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3-723-72
Close to Retained Earnings
0 Beginning balance6,420 Total revenues
Total expenses 8,240 Total dividends 200
(2,020) Ending balance
Retained Earnings
3-733-73
LO7 Post Closing Entries and Prepare Post–Closing Trial Balance
Accounts Debit CreditCash $6,200 Accounts receivable 2,700 Supplies 1,100 Prepaid rent 5,500 Equipment 24,000 Accumulated Depreciation $1,000 Accounts payable 2,300 Unearned revenue 480 Salaries Payable 1,680 Interest Payable 100 Utilities Payable 960 Notes Payable 10,000 Common stock 25,000 Retained earnings (2,020)
Totals $39,500 $39,500
EAGLE GOLF ACADEMYPost-Closing Trial Balance
January 31
Accounting Cycle
New Accounting Period
End of Accounting Period Source Document - Transactions
Closing Entries Chart of Accounts - List of accounts and account numbers
Statement of Cashflows RECORD Journal Entry
Balance Sheet POST to Ledger - Accounts and balances
Statement of Retained Earnings Trial Balance (Unadjusted)
Statement of Operartions Adjusting Entries
Adjusted Trial Balance
Copyright ©2010 Pearson Education Inc. Publishing as Prentice Hall.75
Balance Sheet
Accounting Equation: Assets = Liabilities + Owners Equity
GAAP (Rules) formulated by FASB
Principles• Revenue Recognition
• Matching Principle
Income Statement
Statement of Retained Earnings
Statement of Cash Flows
3-76
Account Title Debits Credits
Cash 9,300$
Accounts Receivable 8,500
Supplies 1,500
Prepaid Rent 6,000
Equipment 75,000
Accumulated Depreciation 10,000$
Accounts Payable 6,700
Salaries Payable -
Interest Payable -
Utilities Payable -
Notes Payable 15,000
Common Stock 35,000
Retained Earnings 14,000
Service Revenue 45,000
Salaries Expense 23,500
Interest Expense -
Rent Expense -
Supplies Expense -
Utilities Expense 1,900
Depreciation Expense -
Totals 125,700$ 125,700$
Additional information:
Depreciation of equipment for year 5,000$
Accrued salaries at year-end 1,600$
Principal amount borrowed 9/1/2012 15,000$
Term of loan in years 4$
Annual Interest rate of loan 10%
Unused supplies at year-end 600$
Paid 1 year's rent on new studio on 4/1/2012 6,000$
Monthly rent amount 500$
Unpaid utilities at year-end 100$
CRIMSON TIDE MUSIC ACADEMYUnadjusted Trial Balance
December 31, 2012
3-77
3-78
Date Account Debit Credit
31-Dec
3-79
Date Account Debit Credit
31-Dec Depreciation Expense 5,000$
Accumulated Depreciation 5,000$
Adjust accumulated depreciation
Salaries Expense 1,600
Salaries Payable 1,600
Adjust salaries payable
Interest Expense 500
Interest Payable 500
Adjust interest payable
Supplies Expense 900
Supplies 900
Adjust supplies
Rent expense 4,500
Prepaid rent 4,500
Adjust prepaid rent
Utilities Expense 100
Utilities Payable 100
Adjust utilities expense
3-80
Account Title Debits Credits Debits Credits Debits Credits
Cash 9,300$
Accounts Receivable 8,500
Supplies 1,500
Prepaid Rent 6,000
Equipment 75,000
Accumulated Depreciation 10,000
Accounts Payable 6,700
Salaries Payable -
Interest Payable -
Utilities Payable -
Notes Payable 15,000
Common Stock 35,000
Retained Earnings 14,000
Service Revenue 45,000
Salaries Expense 23,500
Interest Expense -
Rent Expense -
Supplies Expense -
Utilities Expense 1,900
Depreciation Expense -
Totals 125,700$ 125,700$ -$ -$ -$ -$
December 31, 2012
Unadjusted Trial Balance Adjustments Adjusted Trial Balance
CRIMSON TIDE MUSIC ACADEMYUnadjusted Trial Balance AND Adjusted Trial Balance
3-81
Account Title Debits Credits Debits Credits Debits CreditsCash 9,300$ 9,300$ Accounts Receivable 8,500 8,500 Supplies 1,500 900 600 Prepaid Rent 6,000 4,500 1,500 Equipment 75,000 75,000 Accumulated Depreciation 10,000 5,000 15,000 Accounts Payable 6,700 6,700 Salaries Payable - 1,600 1,600 Interest Payable - 500 500 Utilities Payable - 100 100 Notes Payable 15,000 15,000 Common Stock 35,000 35,000 Retained Earnings 14,000 14,000 Service Revenue 45,000 45,000 Salaries Expense 23,500 1,600 25,100 Interest Expense - 500 500 Rent Expense - 4,500 4,500 Supplies Expense - 900 900 Utilities Expense 1,900 100 2,000 Depreciation Expense - 5,000 5,000 Totals 125,700$ 125,700$ 12,600$ 12,600$ 132,900$ 132,900$
Adjusted Trial Balance
CRIMSON TIDE MUSIC ACADEMYUnadjusted Trial Balance AND Adjusted Trial Balance
December 31, 2012
Unadjusted Trial Balance Adjustments
3-82
CRIMSON TIDE MUSIC ACADEMYIncome Statement
For the Period Ending December 31, 2012
Revenue:
Expenses:
Net Income
CRIMSON TIDE MUSIC ACADEMYStatement of Stockholders' Equity
For the Period Ending December 31, 2012
Common Stock
Retained Earnings Total
Beginning Balance, December 31, _2011____ 35,000$ 14,000$ 49,000$ Add: Common Stock - Add: Net IncomeLess: DividendsEnding Balance, December 31, _2012____
3-83
CRIMSON TIDE MUSIC ACADEMYBalance SheetDecember 31, 2012
Assets:CashAccounts ReceivableSuppliesPrepaid RentOffi ce Equipment
Less: Accumulated DepreciationTotal Assets
Liabilities:Accounts PayableSalaries PayableInterest PayableUtilities PayableNotes Payable
Total Liabilities
Stockholders EquityCommon StockRetained Earnings
Total Stockholders' EquityTotal Liabilities and Stockholders' Equity
3-84
CRIMSON TIDE MUSIC ACADEMYIncome Statement
For the Period Ending December 31, 2012
Revenue:Service Revenue 45,000$
Expenses:Salaries Expense 25,100 Interest Expense 500 Rent Expense 4,500 Supplies Expense 900 Utilities Expense 2,000 Depreciation Expense 5,000 38,000
Net Income 7,000.00$
CRIMSON TIDE MUSIC ACADEMYStatement of Stockholders' Equity
For the Period Ending December 31, 2012
Common Stock
Retained Earnings Total
Beginning Balance, December 31, _2011____ 35,000$ 14,000$ 49,000$ Add: Common Stock - Add: Net Income 7,000 7,000 Less: Dividends - - Ending Balance, December 31, _2012____ 35,000$ 21,000$ 56,000$
3-85
CRIMSON TIDE MUSIC ACADEMYBalance Sheet
December 31, 2012
Assets:Cash 9,300$ Accounts Receivable 8,500 Supplies 600 Prepaid Rent 1,500 Offi ce Equipment 75,000
Less: Accumulated Depreciation 15,000 60,000 Total Assets 79,900$
Liabilities:Accounts Payable 6,700$ Salaries Payable 1,600 Interest Payable 500 Utilities Payable 100 Notes Payable 15,000
Total Liabilities 23,900$
Stockholders EquityCommon Stock 35,000$ Retained Earnings 21,000
Total Stockholders' Equity 56,000$ Total Liabilities and Stockholders' Equity 79,900$
3-86
Date Account Debit Credit
31-Dec
3-87
Date Account Debit Credit
31-Dec Service Revenue 45,000$
Retained Earnings 45,000$
Retained Earnings 38,000
Salaries Expense 25,100
Interest Expense 500
Rent Expense 4,500
Supplies Expense 900
Utilities Expense 2,000
Depreciation Expense 5,000