c03+SM+inte+10e
Transcript of c03+SM+inte+10e
CHAPTER 3
REVIEW OF A COMPANY’S ACCOUNTING SYSTEM
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number ContentTime Range(minutes)
E3-1 Financial Statement Interrelationship. (Easy) Diagram. 5-10
E3-2 Journal Entries. (Easy) Sales, purchases, accounts payable. 5-10
E3-3 Journal Entries. (Moderate) Sales, purchases, accounts payable, accounts receivable. Post to t-accounts.
5-10
E3-4 Basic Income Statement. (Easy) Prepare simple income statement.
5-10
E3-5 Periodic Inventory System. (Easy) Prepare cost of goods sold schedule from selected accounts.
5-10
E3-6 Financial Statements. (Moderate) Prepare income statement, retained earnings statement, balance sheet, closing entries.
10-20
E3-7 Adjusting Entries. (Moderate) Bad debts, accruals, deferrals. 5-15
E3-8 Adjusting Entries. (Moderate) Recognizing necessary adjustments, journal entries.
10-15
E3-9 Adjusting Entries. (Easy) Record changes in trial balance accounts.
5-10
E3-10 Closing Entries. (Moderate) Prepare from ending account balances.
5-15
E3-11 Worksheet. (Moderate) Adjustments, income statement, retained earnings statement, balance sheet. Prepare financial statements from worksheet.
10-20
E3-12 Worksheet. (Moderate) Adjustments, income statement, retained earnings statement, balance sheet. Financial statement preparation. Closing entries.
15-20
E3-13 Reversing Entries. (Moderate) Recognizing and preparing appropriate reversals.
5-15
E3-14 Special Journals. (Easy) Indicate appropriate journal to record various transactions.
10-15
E3-15 (Appendix). Cash-Basis Accounting. (Moderate) Prepare accrual-based income statement and balance sheet from cash-basis accounting records.
15-20
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Number ContentTime Range(minutes)
P3-1 Trial Balance. (Moderate) Journal entries, posting to general ledger, preparing trial balance.
90-120
P3-2 Financial Statements. (Moderate) Preparation of income statement, retained earnings statement, balance sheet from trial balance. Closing entries.
30-45
P3-3 Financial Statements. (Moderate) Preparation of income statement, retained earnings statement, balance sheet from trial balance. Closing entries.
30-45
P3-4 Adjusting Entries. (Moderate) Recognize, calculate, journalize adjustments. Accruals, deferrals, year-end.
15-30
P3-5 Adjusting Entries. (Challenging) Calculate and journalize accruals, deferrals, and year-end adjustments.
20-40
P3-6 Adjusting Entries. (Moderate) Determine by comparing trial balance and adjusted trial balance. Prepare necessary reversing entries.
20-40
P3-7 Adjusting Entries. (Challenging) Year-end adjustments to update trial balance accounts.
20-40
P3-8 Income Statement. (Moderate) Calculations, fill in the blanks. Periodic inventory system.
10-15
P3-9 Errors. (Moderate) Effect on net income, total assets, total liabilities, total stockholders' equity.
15-20
P3-10 Errors in Financial Statements. (Challenging) Indicate effect on net income, assets, liabilities, and stockholders' equity of various errors.
15-20
P3-11 Worksheet. (Challenging) Prepare and complete worksheet. Financial statements, adjusting and closing entries.
60-90
P3-12 Worksheet. (Challenging) Complete worksheet. Prepare financial statements, adjusting and closing entries.
75-105
P3-13 Reversing Entries. (Challenging) Note payable, note receivable. Recording collection, payment with and without reversing entries.
15-30
P3-14 Reversing Entries. (Moderate) Prepare appropriate reversals and explain why entries should be reversed.
15-30
P3-15 Comprehensive. (Challenging) Journal entries, posting, trial balance, financial statements, adjusting and closing entries.
90-120
P3-16 (Appendix). Comprehensive: Statements From Incomplete Records. (Challenging) Prepare worksheet and financial statements from checkbook. Periodic inventory system.
45-90
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Number ContentTime Range(minutes)
P3-17 (AICPA adapted). (Appendix). Comprehensive. (Challenging) Accrual adjustments to cash-basis records, worksheet, statement of changes in capital. Periodic inventory system.
45-90
ANSWERS TO QUESTIONS
Q3-1 A primary objective of financial reporting is to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
Q3-2 An accounting system is the means by which a company records and stores the financial and managerial information from its transactions so that it can retrieve and report the information in an accounting statement.
Q3-3 A double-entry system standardizes the method that a company uses to record changes in its accounts resulting from various transactions or events. For each transaction or event that a company records, the dollar amount of the debits entered in all the related accounts must be equal to the total dollar amount of the credits. These debit or credit entries affect two or more accounts in the assets, liabilities, and stockholders' equity (including the temporary accounts). All normal accounts on the left side of the accounting equation (assets) are increased by debits and decreased by credits whereas accounts on the right side of the equation (liabilities and stockholders' equity) are increased by credits and decreased by debits.
Q3-4 A permanent account is an account whose balance at the end of the accounting period is carried forward into the next accounting period. Examples: Cash, Accounts Payable, Capital Stock. A temporary account is an account that is used temporarily to determine the change in retained earnings that occurred during the accounting period. The balance in a temporary account is closed out at the end of the period. Examples: Sales, Cost of Goods Sold, Salaries Expense.
Q3-5 The major financial statements of a company include:
a. The income statement, which summarizes the results of the company's income-producing activities for the accounting period.
b. The balance sheet, which summarizes the amounts of the assets, liabilities, and stockholders' equity of the company at the end of the accounting period.
c. The statement of cash flows, which summarizes the cash receipts and cash payments of the company for the accounting period.
Some companies also have a fourth financial statement for reporting their comprehensive income.
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Q3-6 a. An account is used by a company to store the recorded monetary information from its transactions and events. An account can be in several physical forms such as a location on a computer disk or a standardized business paper.
b. A contra account is an account created to emphasize a reduction from a related account.
c. A ledger is the group of accounts for a company.
d. A journal is used by a company to initially record the debit and credit entries to all accounts affected by its transactions.
e. Posting involves transferring the date and debit and credit amounts from the journal entries to the appropriate debit and credit sides of the applicable accounts in the general or subsidiary ledger.
Q3-7 The advantages to a company of initially recording each transaction in a journal include the following.
a. Use of a journal helps to prevent errors because all account titles and debit and credit entries are initially recorded in one place.
b. All the transactional information is recorded in one place, thereby providing a complete picture of the transaction.
c. Since the transactions are recorded as they occur, the journal also provides a chronological record of the company's financial transactions.
Q3-8 A perpetual inventory system is one in which the inventory account is updated each time a company makes a purchase or sale. When a company purchases inventory, it records the increase (debit) directly in its Inventory account. When it makes a sale, it records two journal entries. The first entry records the sales revenue at the retail price. The second entry records an increase (debit) in the Cost of Goods Sold account and a decrease (credit) in the Inventory account for the cost of the inventory.
Q3-9 a. Purchase of land on creditb. Sale of capital stock for cashc. Collection of accounts receivabled. Payment of accounts payablee. Retirement of capital stock for cash (note: many examples may show a
decrease in an asset and an increase in a contra-stockholders' equity account)
Q3-10 a. Purchase of merchandise on credit b. Return of defective merchandise for creditc. Purchase of merchandise for cashd. Return of defective merchandise for cash refund
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Q3-11 The steps that a company completes in the accounting cycle include:
a. Recording daily transactions or events in a journal. The daily transactions or events are recorded in the general journal.
b. Posting journal entries to the accounts in the general ledger. The dates and debit and credit amounts from the journal entries in the general journal are transferred to the appropriate debit and credit sides of the applicable accounts in the ledger.
c. Preparing and posting adjusting entries. At the end of the accounting period, certain accounts are updated through the use of an adjusting entry so that financial statements include the correct amounts for the current period. Those entries are transferred (by posting) to the appropriate accounts in the ledger just as the other journal entries are.
d. Preparing the financial statements. After all the adjusting entries have been posted to the general ledger, an adjusted trial balance is prepared. From the adjusted trial balance, the income statement, the retained earnings statement, and the balance sheet are prepared.
e. Preparing and posting closing entries. All the temporary accounts are closed (their balances are reduced to zero) and the retained earnings account is updated by closing entries which are posted to the general ledger.
Q3-12 For most companies, not all of their accounts are up to date at the end of the accounting period. Some of these accounts need to be adjusted so that all revenues and expenses are recorded and the balance sheet accounts have a correct ending balance. This is accomplished through the use of adjusting entries.
Q3-13 A prepaid expense is a good or service purchased by a company for use in its operations, but which has not been fully used up by the end of the accounting period.
Example: Assume the company paid for a two year insurance policy on July 1, in the amount of $400 and recorded this as Prepaid Insurance. At the end of the year, the following adjusting entry is necessary:
Insurance Expense [($400 2) x 1/2] 100Prepaid Insurance 100
A deferred revenue is a payment received by a company in advance for the future delivery of inventory or performance of services.
Example: Assume the company received 6 months rent, totaling $1,200 in advance on November 1 and recorded the receipt as Unearned Rent. On December 31, the following adjusting entry is necessary:
Unearned Rent ($1,200 x 2/6) 400Rent Revenue 400
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Q3-14 An accrued expense is an expense that a company has incurred during the accounting period but has neither paid nor recorded.
Example: Assume a company pays employees' salaries once a month on the 15th of the month. The monthly salaries payment is $5,000. On December 31, the following adjusting entry is necessary:
Salaries Expense ($5,000 x 1/2) 2,500Salaries Payable 2,500
An accrued revenue is a revenue that a company has earned during the accounting period but has neither received nor recorded.
Example: Assume a company received a 90-day note receivable dated December 1. The note has a face value of $10,000 and bears an annual interest rate of 12%. The adjusting entry on December 31 is:
Interest Receivable ($10,000 x 0.12 x 1/12) 100
Interest Revenue 100
Q3-15 Examples of adjusting entries used to record estimated items include:
a. Estimation of bad debts: Assume a company adopts a policy of providing allowance for bad debt losses that is equal to ½% of net sales. In the current year, the company has net sales of $1,500,000. The adjusting entry on December 31 is:
Bad Debt Expense($1,500,000 x 0.005) 7,500
Allowance for Doubtful Accounts 7,500
b. Estimation of depreciation expense: The cost of a depreciable asset is systematically allocated as an expense to each accounting period in which the asset is used. This allocation process is called depreciation. Assume that on July 1 of the current year, a company purchased certain office equipment for $20,000, which is estimated to have a useful life of 10 years and a residual value of $500. Depreciation expense is calculated using the following formula (assuming the straight-line method is used):
Cost – Estimated residual valueAnnual depreciation =
Estimated service life
On December 31 of the current year, the company records the following adjusting entry relating to its depreciation expense:
Depreciation Expense 975Accumulated Depreciation
[($20,000 - $500) 10 x 1/2] 975
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Q3-16 A trial balance lists all of the account balances of a company but does not include the effect of adjusting entries on the accounts. An adjusted trial balance lists all of the account balances of a company after the adjusting entries have been posted to the accounts and before closing entries have been made.
Items on an adjusted trial balance can be readily classified as belonging on either the income statement, retained earnings statement, or balance sheet. Therefore, a company's financial statements can be easily prepared by using the information on the adjusted trial balance.
Q3-17 A sales return occurs when a customer returns merchandise and receives a refund. A sales allowance occurs when a customer agrees to keep damaged merchandise and the company refunds a portion of the selling price. Both sales returns and sales allowances are subtracted from sales revenue to determine net sales.
Q3-18 When a company uses a periodic inventory system, the company records its purchases of inventory using a purchases account. It does not reduce its inventory when it makes a sale. Instead, it takes a physical inventory at the end of its accounting period. The company computes its cost of goods sold as follows:
Beginning inventory $XXAdd: Net purchases (including subtractions for
returns, allowances, and discounts taken) XXCost of goods available for sale $XXLess: Ending inventory (XX)Cost of goods sold $XX
Q3-19 Closing entries are made by a company at the end of its accounting period to reduce the balance in each temporary account to zero and to update the retained earnings account. After the company posts its closing entries, each temporary account begins the next accounting period with a zero balance, which makes it easier to summarize the company's net income and dividend information for the next accounting period. The retained earnings balance is also updated and becomes the next period's beginning balance.
Q3-20 Dec. 31 Sales RevenueInterest Revenue
Income SummaryTo close the temporary accounts withcredit balances.
Dec. 31 Income SummaryCost of Goods Sold
Depreciation Expense Salaries Expense Rent Expense Interest Expense Bad Debt Expense Utilities Expense Income Tax Expense To close the temporary accounts
with debit balances.
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Q3-20 (continued)
Dec. 31 Income SummaryRetained Earnings
To close the income summary balance(i.e., net income) to retained earnings.
Dec. 31 Retained Earnings Dividends Distributed
To close the dividends to retainedearnings.
Q3-21 A worksheet is a large sheet of multicolumn accounting paper prepared by a company at the end of an accounting period to minimize errors, simplify recording in the general journal of the adjusting and closing entries, and make it easier to prepare the financial statements. It has a column for listing all the ledger accounts, and debit and credit columns for the trial balance, adjustments, income statement, retained earnings statement, and balance sheet. The trial balance is listed with the current accounts and balances. Year-end adjustments are then initially entered on the worksheet. The trial balance amount of each account is combined with the adjustments to that account and carried over to the proper column of the financial statement in which the account is located. After each column is properly totaled and checked, financial statements, adjusting entries, and closing entries can be prepared from the information contained in the worksheet.
Q3-22 Reversing entries are the exact reverse (accounts and amounts) of adjusting entries. They are usually made at the same time as closing entries but are dated the first day of the next accounting period. The use of reversing entries is optional; reversing entries are used to simplify the recording of a later transaction related to the adjusting entry. The later transaction can be recorded routinely, without the need to consider the possible impact of the prior adjusting entry.
Assume the ABC Company pays employees' salaries every Friday (5-day work week), the weekly payroll amounts to $6,000, and December 31 falls on Tuesday. The adjusting, reversing, and payment entries are as follows:
Dec. 31 Salaries Expense 2,400 Salaries Payable 2,400
To accrue salaries expense($6,000 x 2/5).
Jan. 1 Salaries Payable 2,400 Salaries Expense 2,400
To reverse adjusting entryrelating to salaries payable.
Jan. 3 Salaries Expense 6,000 Cash 6,000
To record payment of weeklysalaries.
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Q3-23 A subsidiary ledger is a group of accounts, all of which relate to one specific company activity, such as the sale or purchase on credit. It is common to have an Accounts Receivable subsidiary ledger and an Accounts Payable subsidiary ledger. When a subsidiary ledger is used, a control account is kept in the general ledger. On any balance sheet date, the balance of a control account must always be equal to that of the subsidiary ledger. Subsidiary ledgers and control accounts are used by large companies selling on credit to many customers and purchasing on credit from many suppliers. If all the customer and supplier accounts were included in the general ledger, this ledger would substantially increase in size. To reduce the size of the general ledger, minimize errors, divide the accounting task, and keep up-to-date records of the company's dealings with credit customers and suppliers, it usually creates a subsidiary ledger.
Example: Assume a company sells goods on account to three customers, A, B, and C. During the year, the following transactions occurred and were recorded in a general journal.
January 15 Sale to A $1,200February 29 Sale to B 800April 25 Collection from A 500June 7 Sale to C 2,400July 28 Collection from B 400September 5 Collection from A 400October 21 Collection from B 200November 3 Sale to C 1,700December 5 Sale to A 1,500December 22 Collection from C 2,400
The Accounts Receivable control account in the general ledger and the Accounts Receivable subsidiary ledger accounts will appear as follows:
General Ledger Accounts Receivable Subsidiary Ledger
Accounts Receivable Control Account A01/15 1,200 04/25 500 01/14 1,200 04/25 50002/29 800 07/28 400 12/05 1,500 09/05 40006/07 2,400 09/05 400 12/31 Bal 1,80011/03 1,700 10/21 20012/05 1,500 12/22 2,40012/31 Bal 3,700
B02/29 800 07/28 400
10/21 20012/31 Bal 200
C06/07 2,400 12/22 2,40011/03 1,70012/31 Bal 1,700
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Q3-24 Special journals are journals used by a company to record transactions with a similar characteristic, such as credit sales and cash payments. Advantages of using special journals are that (1) they allow the accounting task to be divided, (2) they reduce the time needed to complete the various accounting activities, and (3) they provide for a chronological listing of similar transactions.
Q3-25 The major special journals and an example of the transactions that are recorded in each of them are as follows:
(1) Sales journal-sales of merchandise on credit(2) Purchases journal-purchases of merchandise on credit(3) Cash receipts journal-receipts of cash(4) Cash payments journal-payments of cash(5) General journal-adjusting, closing, and reversing entries and other
transactions not recorded in the special journals. Note: The general journal is not a special journal but is used with special journals as indicated.
Q3-26 The common software for the financial accounting functions include accounts receivable, accounts payable, inventory, payroll, and general ledger software.
Q3-27 Under cash-basis accounting, a company records revenues when it collects cash from sales and records expenses when it pays cash for its operations. To convert its cash-basis accounting records to an accrual-based income statement, the company must adjust its cash receipts to convert them to sales revenues and must adjust its cash payments to convert them to cost of goods sold and operating expenses.
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SOLUTIONS TO EXERCISES
E3-1
Beginning balance sheet: AS = LB + CC + RE
Income statement: Rev. - Exp. = NI
Retained earnings statement: End. RE = Beg. RE + NI - Div.
Ending balance sheet: AS = LB + CC + RE
Where AS = Assets LB = Liabilities CC = Contributed Capital RE = Retained Earnings NI = Net Income Div. = Dividends Exp. = Other Expenses Rev. = Revenues
E3-2
May 1 Cash 6,300Sales Revenue 6,300
Made cash sales.
1 Cost of Goods Sold 3,700Inventory 3,700
To record cost of sales.
5 Inventory 2,000Accounts Payable 2,000
Purchased inventory on credit.
9 Accounts Receivable 3,300Sales Revenue 3,300
Made credit sales.
9 Cost of Goods Sold 1,900Inventory 1,900
To record cost of sales.
13 Sales Salaries Expense 900Office Salaries Expense 600
Cash 1,500Paid salaries.
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E3-2 (continued)
May 14 Accounts Payable 2,000Cash 2,000
Paid for May 5 purchases.
18 Equipment 8,000Cash 2,000Accounts Payable 6,000
Purchased equipment making a $2,000down payment and agreed to pay balance in 60 days.
21 Inventory 600 Cash 600
Purchased inventory for cash.
27 Cash 2,600
Land 1,900 Gain on Sale of Land 700
Sold land at a gain.
E3-3
1. June 3 Cash 700Accumulated Depreciation:
Office Equipment 1,500 Gain on Sale of Office Equipment 200 Office Equipment 2,000
Sold office equipment at a gain.
7 Accounts Receivable 2,000 Sales Revenue 2,000
Made credit sales.
7 Cost of Goods Sold 1,200Inventory 1,200
To record cost of sales.
10 Inventory 1,000 Cash 1,000
Purchased inventory for cash.
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E3-3 (continued)1. (continued)
June 15 Office Equipment 4,000 Cash 1,500 Notes Payable 2,500
Purchased new office equipment,paying $1,500 and signing a 90-daynote for the difference.
16 Cash 2,000
Accounts Receivable 2,000Collected June 7 accountsreceivable.
17 Cash 4,200
Sales Revenue 4,200Made cash sales.
17 Cost of Goods Sold 2,300 Inventory 2,300
To record cost of sales.
20 Inventory 2,600 Accounts Payable 2,600
Purchased merchandise on credit.
24 Accounts Payable 200 Inventory 200
Returned defective merchandise forcredit.
29 Accounts Payable 2,400 Cash 2,400
Paid for June 20 purchases lessreturn.
30 Utility Expense 210 Cash 210
Paid the monthly utility bill.
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E3-3 (continued)
2. General Ledger
Cash Accounts Receivable6/01 Bal 12,523 6/10 1,000 6/01 Bal 23,052 6/16 2,0006/03 700 6/15 1,500 6/07 2,0006/16 2,000 6/29 2,400 6/30 Bal 23,0526/17 4,200 6/30 2106/30 Bal 14,313
Inventory6/01 Bal 16,300 6/07 1,200
6/10
1,000 6/17 2,300
6/20
2,600 6/24 200
6/30 Bal 16,200
Office Equipment Accumulated Depreciation
6/01 Bal 35,860 6/03 2,000 6/03 1,500 6/01 Bal 10,5406/15 4,000 6/30 Bal 9,0406/30 Bal 37,860
Notes Payable Accounts Payable6/01 Bal 3,400 6/24 200 6/01 Bal 3,5006/15 2,500 6/29 2,400 6/20 2,6006/30 Bal 5,900 6/30 Bal 3,500
Sales Revenue Gain on Sale of Office Equipment6/01 Bal 47,872 6/01 Bal 4006/07 2,000 6/03 2006/17 4,200 6/30 Bal 6006/30 Bal 54,072
Cost of Goods Sold6/01 Bal 22,3546/07 1,2006/17 2,3006/30 Bal 25,854
Utility Expense6/01 Bal 1,1246/30 2106/30 Bal 1,334
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E3-4
RULE CORPORATIONIncome Statement
For Year Ended December 31, 2007
Sales revenue (net of $600 returns) $15,600Cost of goods sold (8,300)Gross profit on sales $ 7,300Operating expenses (3,800)Income from operations $ 3,500Other items
Interest expense $(800)Gain on sale of land 500 (300)
Income before income taxes $ 3,200Income tax expense (960)Net income $ 2,240
Earnings per share (800 shares) $ 2.80
E3-5
RAYNOLDE COMPANYCost of Goods Sold Schedule
For Year Ended December 31, 2007
Inventory, 1/1/2007 $10,800
Purchases 21,200Purchases returns and allowances (1,400)Purchases discounts (600)Cost of goods available for sale $30,000Less: Inventory, 12/31/2007 (11,900)Cost of goods sold $18,100
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E3-61. TURTLE COMPANY
Income StatementFor Year Ended December 31, 2007
Sales revenue $7,900
Cost of goods sold (4,300)Gross profit on sales $3,600Operating expenses Selling expenses $1,800
Administrative expenses 600 Total operating expenses (2,400)Income before income taxes $1,200Income tax expense (360)Net Income $ 840
Earnings per share (400 shares) $ 2.10
2. TURTLE COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $2,500Add: Net income for 2007 840
$3,340Less: Dividends for 2007 (200)Retained earnings, December 31, 2007 $3,140
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E3-6 (continued)
3. TURTLE COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $1,700Accounts receivable (net) 2,100Inventory
1,800 Total current assets $5,600Property and Equipment Equipment $5,400 Less: Accumulated depreciation (1,700)
Total property and equipment 3,700Total Assets
$9,300
LiabilitiesCurrent Liabilities
Accounts payable $2,300 Salaries payable
300Income taxes payable 360
Total current liabilities $2,960
Stockholders' EquityContributed Capital
Capital stock (400 shares) $3,200Retained Earnings 3,140 Total Stockholders' Equity 6,340Total Liabilities and Stockholders' Equity $9,300
4. 2007Dec. 31 Sales Revenues 7,900
Income Summary 7,900
31 Income Summary 7,060 Cost of Goods Sold 4,300 Selling Expenses 1,800 Administrative Expenses 600 Income Tax Expense 360
31 Income Summary 840 Retained Earnings 840
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31 Retained Earnings 200 Dividends Distributed 200
E3-7
2007Dec. 31 Bad Debts Expense 500
Allowance for Doubtful Accounts 500To provide for possible bad debtlosses ($25,000 x 2%).
31 Salaries Expense 1,400 Salaries Payable 1,400
To record accrued salaries expense.
31 Depreciation Expense 3,500 Accumulated Depreciation 3,500
To record depreciation expense forthe year [($30,000 - $2,000) 8].
31 Insurance Expense 800 Prepaid Insurance 800
To recognize expired insurance.
31 Interest Receivable 500 Interest Revenue 500
To record interest earned butnot collected.
31 Unearned Rent 1,000 Rent Revenue 1,000
To record rent revenue earned.
31 Interest Expense 600 Interest Payable 600
To record interest accumulatedbut not paid.
31 Income Tax Expense 450 Income Taxes Payable 450
To record income tax expense for theyear ($6,800 - 500 - 1,400 - 3,500 - 800 +500 + 1,000 - 600 = $1,500 x 30% = $450).
E3-8
Dec. 31 Depreciation Expense 1,725 Accumulated Depreciation 1,725
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To record depreciation expense forthe year [$(10,000 - 800) 4 x 9/12].
E3-8 (continued)
Dec. 31 Interest Expense 810 Interest Payable 810
To record interest accumulated but not paid ($9,000 x 12% x 9/12).
31 Office Supplies Expense 890 Office Supplies 890
To record office supplies used($250 + $830 - $190 = $890).
31 Insurance Expense 280 Prepaid Insurance 280
To recognize expired insurance($960 x 7/24).
31 Rent Earned 260 Unearned Rent 260
To record portion of rentcollected but unearned.
31 Selling Expenses 490 Advances to Sales Personnel 490
To record portion of advances tosales personnel that has been usedto pay travel expenses.
31 Interest Receivable 120 Interest Revenue 120
To record interest earned but notcollected ($6,000 x 12% x 2/12).
31 Salaries Expense 800 Salaries Payable 800
To record accrued salaries($2,000 x 2/5).
31 Income Tax Expense 1,056 Income Taxes Payable 1,056
To record income tax expense for theyear ($8,655 - 1,725 - 810 - 890 - 280 -260 - 490 + 120 - 800 = $3,520 x 30% =$1,056).
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E3-9
Dec. 31 Depreciation Expense 1,400 Accumulated Depreciation 1,400
To record depreciation expensefor the year ($6,600 - $5,200).
31 Bad Debt Expense 270 Allowance for Doubtful Accounts 270
To provide for possible bad debtlosses ($650 - $380).
31 Income Tax Expense 2,250 Income Taxes Payable 2,250
To record income tax expensefor the year ($2,250 - 0).
31 Interest Expense 320Interest Payable 320
To record interest accumulatedbut unpaid ($320 - 0).
31 Insurance Expense 260 Prepaid Insurance 260
To record expired insurance($350 - $90).
31 Salaries Expense 720 Salaries Payable 720
To record accrued salaries ($720 - 0).
31 Unearned Rent 600 Rent Revenue 600
To recognize rent earned ($900 - $300).
E3-10
Dec. 31 Sales Revenue 2,400Gain on Sale of Land 300
Income Summary 2,700
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E3-10 (continued)
Dec. 31 Income Summary 2,280 Sales Returns 200 Cost of Goods Sold 1,350 Salaries Expense 300 Utilities Expense 130 Miscellaneous Expenses 120 Income Tax Expense 180
31 Income Summary 420 Retained Earnings 420
31 Retained Earnings 250 Dividends Distributed 250
E3-11
1. (Worksheet on Following Page)
2. GRANT CONSULTING COMPANYIncome Statement
For Year Ended December 31, 2007
Consulting revenues $6,100Operating expenses Salaries expense $2,500 Rent expense 1,200 Depreciation expense 700 Miscellaneous expenses 800 Total operating expenses (5,200)Income from operations $ 900Other item Interest expense
(150)Income before income taxes $ 750Income tax expense (225)Net Income $ 525
Earnings per share (200 shares) $ 2.63
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GRANT CONSULTING COMPANYWorksheetFor Year Ended December 31, 2007
Trial Balance Adjustments Income StatementRetained Earnings
Statement Balance Sheet
Account Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashPrepaid rentOffice equipmentAccumulated depreciationNote payable (due 7/1/08)Capital stock (250 shares)Retained earnings (1/1/07)Dividends distributedConsulting revenuesSalaries expenseMiscellaneous expenses
Totals
Rent expenseDepreciation expenseInterest expenseInterest payable
Income tax expenseIncome taxes payable
Net income
Retained earnings (12/31/07)
3,800 2,400 7,000
200
2,500 800 16,700
1,400 2,000 4,000 3,200
6,100
16,700
(a)1,200(b) 700(c) 150 2,050(d) 225
2,275
(a)1,200
(b) 700
(c) 150 2,050
(d) 225
2,275
2,500 800
1,200 700 150 5,350 225 _____ 5,575 525 6,100
6,100
6,100
6,100 6,100
200
200 3,525 3,725
3,200
525 3,725 3,725
3,800 1,200 7,000
12,000 12,000
2,100 2,000 4,000
150
225
8,475 3,525 12,000
(a) $2,400 x 12/24 = $1,200 rent expense (c) $150 interest(b) $7,000 10 = $700 depreciation expense (d) $6,100 - $5,350 = $750 pretax income x 30% = $225 income tax expense
3-22
E3
-11
(co
ntin
ued
)1
.
3-2
2
C-2
3
EC
-13
(co
ntin
ued
)1
.
E3-11 (continued)2. (continued)
GRANT CONSULTING COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $3,200Add:Net income for 2007 525
$3,725Less: Dividends for 2007 (200)Retained earnings, December 31, 2007 $3,525
GRANT CONSULTING COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets Cash $3,800
Prepaid rent 1,200Total current assets $5,000
Property and EquipmentOffice equipment $7,000Less: Accumulated depreciation (2,100)
Total property and equipment 4,900Total Assets
$9,900
LiabilitiesCurrent Liabilities
Note payable $2,000Interest payable 150Income taxes payable 225
Total Liabilities $2,375
Stockholders' EquityContributed Capital
Capital stock (200 shares) $4,000Retained Earnings 3,525
Total Stockholders' Equity 7,525Total Liabilities and Stockholders' Equity $9,900
3-23
MURPHY COMPANY Worksheet For Year Ended December 31, 2007
Trial Balance Adjustments Income StatementRetained Earnings
Statement Balance SheetAccount Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashAccounts receivableAllowance for doubtful accountsInventory Prepaid rentEquipmentAccumulated depreciationAccounts payableNote payable (due 7/1/08)Capital stock (1,000 shares)Retained earnings (1/1/07)Dividends distributedSales revenueCost of goods soldSalaries expenseUtilities expenseAdvertising expense
Totals
Depreciation expenseSalaries payableRent expenseBad debt expenseInterest expenseInterest payable
Income tax expenseIncome taxes payable
Net income
Retained earnings (12/31/07)
2,500 4,000 8,200 3,600 30,000
1,000
21,000 7,100 3,300 4,400 85,100
300
12,000 3,700 5,000 8,900 10,200
45,000
85,100
(b) 500
(a)3,000
(c)1,200(d) 450(e) 400 5,550(f) 1,460
7,010
(d) 450
(c)1,200
(a)3,000
(b) 500
(e) 400 5,550
(f)1,460
7,010
21,000 7,600 3,300 4,400
3,000
1,200 450 400 41,350 1,460 42,810 2,190 45,000
45,000
______ 45,000
45,000 45,000
1,000
1,000 11,390 12,390
10,200
2,190 12,390 12,390
2,500 4,000 8,200 2,400 30,000
47,100
750
15,000 3,700 5,000 8,900
500
400
1,460
11,390 47,100
(a) $30,000 10 = $3,000 depreciation expense (d) $45,000 x 1% = $450 bad debt expense(b) $500 salaries expense (e) $400 interest expense (c) $3,600 3 = $1,200 rent expense (f) $45,000 - $41,350 = $3,650 pretax income x 40% = $1,460 income tax expense
3-24
E3-1
21
.
3-2
4
EC
-14
C-2
5
E3-12 (continued)
2. MURPHY COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue $45,000
Cost of goods sold (21,000)Gross profit on sales $24,000Operating expenses
Salaries expense $ 7,600Utilities expense 3,300Advertising expense 4,400Depreciation expense 3,000Rent expense 1,200Bad debt expense 450
Total operating expenses (19,950)Income from operations $ 4,050Other item
Interest expense (400)
Income before income taxes $ 3,650Income tax expense (1,460)Net Income $ 2,190
Earnings per share (1,000 shares) $ 2.19
MURPHY COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $10,200Add:Net income for 2007 2,190
$12,390Less: Dividends for 2007 (1,000)Retained earnings, December 31, 2007 $11,390
3-25
E3-12 (continued)2. (continued)
MURPHY COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $ 2,500Accounts receivable $ 4,000Less: Allowance for doubtful accounts (750) 3,250Inventory
8,200Prepaid rent 2,400
Total current assets $16,350Property and Equipment
Equipment $30,000Less: Accumulated depreciation (15,000)
Total property and equipment 15,000Total Assets
$31,350
LiabilitiesCurrent Liabilities
Accounts payable $ 3,700Note payable 5,000Salaries payable
500Interest payable 400Income taxes payable 1,460
Total Liabilities $11,060
Stockholders' EquityContributed Capital
Capital stock (1,000 shares) $ 8,900Retained Earnings 11,390
Total Stockholders' Equity 20,290Total Liabilities and Stockholders' Equity $31,350
3. 2007Dec. 31 Sales Revenues 45,000
Income Summary 45,000
3-26
E3-12 (continued)3. (continued)
Dec. 31 Income Summary 42,810Cost of Goods Sold 21,000Salaries Expense 7,600Utilities Expense 3,300Advertising Expense 4,400Depreciation Expense 3,000Rent Expense 1,200Bad Debt Expense 450Interest Expense 400Income Tax Expense 1,460
31 Income Summary 2,190Retained Earnings 2,190
31 Retained Earnings 1,000Dividends Distributed 1,000
E3-13
2008Jan. 1 Interest Revenue 500
Interest Receivable 500
1 Interest Payable 620Interest Expense 620
E3-14
1. CP 6.
G
2. S 7.
CR
3. CP 8.
G
4. P 9.
G
5. CR 10.
CP
3-27
E3-15
1. ELLIS COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue $53,000a
Cost of goods sold (30,800)b
Gross profit $22,200Operating expenses
Depreciation expense $ 1,200c
Other operating expenses 10,000d
Total expenses (11,200)Net Income $11,000
a$51,300 collections from customers + $5,900 ending accounts receivable - $4,200 beginning accounts receivableb$30,600 payments to suppliers + $5,600 beginning inventory - $6,300 ending inventory + $7,000 ending accounts payable - $6,100 beginning accounts payablec$12,000 equipment 10 yearsd$12,700 operating cost payments - $3,600 ending prepaid rent ($7,200 2) + $900 salaries payable
3-28
E3-15 (continued)
2. ELLIS COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets Cash $ 4,700 Accounts receivable 5,900 Inventory 6,300 Prepaid rent 3,600a
Total current assets $20,500Property and Equipment Equipment $12,000 Less: Accumulated depreciation (6,000)b
Total property and equipment 6,000Total Assets
$26,500
LiabilitiesCurrent Liabilities Accounts payable $ 7,000 Salaries payable 900 Total Liabilities $
7,900
Owner's EquityM. Ellis, Capital $18,600Total Liabilities and Owner's Equity $26,500
a$7,200 2
b$2,400 + $1,200
c$13,600 beginning capital + $11,000 net income - $6,000 withdrawals
3-29
3-30
SOLUTIONS TO PROBLEMS
P3-1
1. 2007Nov. 2 Cash
3,400Sales Revenue 3,400
Made cash sales.
2 Cost of Goods Sold 2,040Inventory 2,040
To record cost of sales.
3 Inventory 900Cash 900
Purchased inventory for cash.
5 Cash 4,000
Gain on Sale of Land 350Land 3,650
Sold land at a gain.
8 Prepaid Insurance 528 Cash 528
Purchased 2-year comprehensiveinsurance policy.
12 Cash 1,320
Unearned Rent 1,320Leased portion of building and received6 months' rent at $220 per month.
13 Accounts Receivable 2,300 Sales Revenue 2,300
Made credit sales.
13 Cost of Goods Sold 1,400 Inventory 1,400
To record cost of sales.
16 Cash 230
Notes Receivable 200 Interest Revenue 30
3-31
Collected monthly payment on customer'snote receivable plus accrued interest.
3-32
P3-1 (continued)1. (continued)
Nov. 17 Inventory 1,600Accounts Payable 1,600
Purchased inventory on credit.
19 Sales Returns and Allowances 200 Accounts Receivable 200
Granted customer credit for defectiveinventory purchased on Nov. 13.
20 Land 8,000
Cash 2,000 Notes Payable 6,000
Purchased land by paying cashand issuing a 12%, 90-day note.
23 Cash 2,100
Accounts Receivable 2,100Collected Nov. 13 accounts receivableless Nov. 18 return.
26 Accounts Payable 1,600 Cash 1,600 Paid for inventory purchased
on Nov. 17.
27 Advertising Expense 420 Cash 420
Paid advertising expense.
30 Sales Salaries Expense 520Office Salaries Expense 390
Cash 910Paid sales salaries and office salaries.
3-33
P3-1 (continued)2.
Cash Accounts Receivable11/01 Bal 7,800 11/0
3900 11/01 Bal 12,530 11/19 200
11/02 3,400 11/08
528 11/13 2,300 11/23 2,100
11/05 4,000 11/20
2,000 11/30 Bal 12,530
11/12 1,320 11/26
1,600
11/16 230 11/27
420
11/23 2,100 11/30
910
11/30 Bal 12,492
Allowance for Doubtful Accounts Notes Receivable11/0
1Bal 740 11/01 Bal 6,000 11/16 200
11/30
Bal 740 11/30 Bal 5,800
Inventory Prepaid Insurance11/01 Bal 25,121 11/0
22,040 11/01 Bal 840
11/03 900 11/13
1,400 11/08 528
11/17 1,600 11/30 Bal 1,36811/30 Bal 24,181
Office Supplies Land11/01 Bal 465 11/01 Bal 74,350 11/05 3,65011/30 Bal 465 11/20 8,000
11/30 Bal 78,700
Buildings Accumulated Depreciation-Buildings11/01 Bal 66,580 11/01 21,40011/30 Bal 66,580 11/30 Bal 21,400
Equipment Accumulated Depreciation-Equipment11/01 Bal 37,620 11/01 Bal 11,48011/30 Bal 37,620 11/30 Bal 11,480
3-34
Patents Accounts Payable11/01 Bal 25,000 11/26 1,600 11/01 Bal 38,75011/30 Bal 25,000 11/17 1,600
11/30 Bal 38,750
3-35
P3-1 (continued)2. (continued)
Notes Payable Unearned Rent11/0
1Bal 2,400 11/01 Bal 0
11/20
6,000 11/12 1,320
11/30
Bal 8,400 11/30 Bal 1,320
Common Stock, No Par Retained Earnings11/0
1Bal 165,00
011/01 Bal 24,958
11/30
Bal 165,000
11/30 Bal 24,958
Sales Revenue11/0
1Bal 38,400
11/02
3,400
11/13
2,300
11/30
Bal 44,100
Sales Returns and Allowances Gain on Sale of Land11/01 Bal 1,567 11/01 Bal 011/19 200 11/05 35011/30 Bal 1,767 11/30 Bal 350
Cost of Goods Sold11/01 Bal 32,00011/02 2,04011/13 1,40011/30 Bal 35,440
Sales Salaries Expense Office Salaries Expense11/01 Bal 6,200 11/01 Bal 4,30011/30 520 11/30 39011/30 Bal 6,720 11/30 Bal 4,690
Advertising Expense Utility Expense11/01 Bal 1,250 11/01 Bal 1,84511/27 420 11/30 Bal 1,84511/30 Bal 1,670
3-36
Interest Revenue Interest Expense11/0
1Bal 550 11/01 Bal 210
11/16
30 11/30 Bal 210
11/30
Bal 580
3-37
P3-1 (continued)
3. ANTIL COMPANYTrial Balance
November 30, 2007 Debit Credit
Cash $ 12,492Accounts receivable 12,530Allowance for doubtful accounts $ 740
Notes receivable 5,800Inventory 24,181Prepaid insurance 1,368Office supplies 465Land 78,700Buildings 66,580Accumulated depreciation: buildings 21,400Equipment 37,620Accumulated depreciation: equipment 11,480Patents 25,000Accounts payable 38,750Notes payable 8,400Unearned rent
1,320Common stock, no par 165,000Retained earnings 24,958Sales revenue
44,100Sales returns and allowances 1,767Gain on sale of land 350Cost of goods sold 35,440Sales salaries expense 6,720Office salaries expense 4,690Advertising expense 1,670Utility expense 1,845Interest revenue
580Interest expense 210
$317,078 $317,078
3-38
P3-2
1. STERN COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue (net of $2,100 returns) $30,900Cost of goods sold (15,040)Gross profit on sales $15,860Operating expenses
Selling expenses $ 4,800Administrative expenses 3,000
Total operating expenses (7,800)Income from operations $ 8,060Other items
Rent revenue $ 1,440Interest expense (750)
690Income before income taxes $ 8,750Income tax expense (2,625)Net Income $ 6,125
Earnings per share (1,500 shares) $ 4.08
2. STERN COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $ 6,770Add: Net income for 2007 6,125
$12,895Less: Dividends for 2007 (1,200)Retained earnings, December 31, 2007 $11,695
3-39
P3-2 (continued)
3. STERN COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $ 2,000Accounts receivable $ 2,700Less: Allowance for doubtful accounts (250) 2,450
Inventory 6,500
Prepaid insurance 800 Total current assets $11,750Property and Equipment
Land $ 5,200Buildings and equipment $31,000Less: Accumulated depreciation (15,000) 16,000
Total property and equipment $21,200Total Assets
$32,950
LiabilitiesCurrent Liabilities
Accounts payable $ 3,100Salaries payable
420Unearned rent 360Income taxes payable 2,625
Total current liabilities $ 6,505Long-Term Liabilities
Note payable (due 7/1/2011) $ 5,000Interest payable (due 7/1/2011) 750
Total long-term liabilities $ 5,750Total Liabilities
$12,255
Stockholders' EquityContributed Capital
Capital stock (1,500 shares) $ 9,000Retained Earnings 11,695
Total Stockholders' Equity 20,695Total Liabilities and Stockholders' Equity $32,950
3-40
P3-2 (continued)
4. 2007Dec. 31 Sales Revenues 33,000
Rent Revenue 1,440Income Summary 34,440
31 Income Summary 28,315 Sales Returns 2,100 Cost of Goods Sold 15,040 Selling Expenses 4,800 Administrative Expenses 3,000
Interest Expense 750Income Tax Expense 2,625
31 Income Summary 6,125 Retained Earnings 6,125
31 Retained Earnings 1,200Dividends Distributed 1,200
3-41
P3-3
1. NEALY COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue (net of $4,900 sales returns) $54,900
Cost of goods sold (27,400)Gross profit on sales $27,500Operating expenses
Administrative expenses $ 6,500Selling expenses 9,700
Total operating expenses (16,200)Income from operations $11,300Other items
Rent revenue $ 2,800Interest expense (650)
2,150Income before income taxes $13,450Income tax expense (4,035)Net Income $ 9,415
Earnings per share (4,000 shares) $ 2.35
2. NEALY COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $14,500Add: Net income for 2007 9,415
$23,915Less: Dividends for 2007 (2,400)Retained earnings, December 31, 2007 $21,515
3-42
P3-3 (continued)
3. NEALY COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $ 5,000Accounts receivable $ 5,700Less: Allowance for doubtful accounts (600) 5,100Inventory
10,800Unexpired insurance 1,600
Total current assets $22,500Property and Equipment
Land $ 6,800Buildings $42,000Less: Accumulated depreciation (19,000) 23,000Equipment $22,000Less: Accumulated depreciation (11,000) 11,000
Total property and equipment 40,800Total Assets
$63,300
LiabilitiesCurrent Liabilities
Accounts payable $ 6,400Current income taxes payable 4,035Interest payable (due July 1, 2008) 650Wages payable 1,000Unearned rent 700
Total current liabilities $12,785Long-Term Liabilities
Notes payable (due July 1, 2011) 10,000Total Liabilities
$22,785
Stockholders' EquityContributed Capital
Capital stock, $1 par $ 4,000Additional paid-in capital 15,000
Retained Earnings 21,515 Total Stockholders' Equity 40,515
Total Liabilities and Stockholders' Equity $63,300
3-43
P3-3 (continued)
4. 2007Dec. 31 Sales Revenue 59,800
Rent Revenue 2,800Income Summary 62,600
31 Income Summary 53,185Sales Returns 4,900Cost of Goods Sold 27,400Administrative Expenses 6,500Selling Expenses 9,700Interest Expense 650Income Tax Expense 4,035
31 Income Summary 9,415Retained Earnings 9,415
31 Retained Earnings 2,400Dividends Distributed 2,400
P3-4
2007Dec. 31 Salaries Expense 2,840
Salaries Payable 2,840To record accrued salaries.
31 Utility Expense 247Utilities Payable 247
To record accrued utility expense.
31 Depreciation Expense 8,010Accumulated Depreciation: Buildings 2,760Accumulated Depreciation: Equipment
5,250To record depreciation expenseDepreciation on buildings:$(78,000 - 9,000) 25Depreciation on equipment:$(44,000 - 2,000) 8.
31 Supplies Expense 525Store Supplies 128Office Supplies 397
To record supplies used.
3-44
P3-4 (continued)
Dec. 31 Interest Receivable 180Interest Revenue 180
To record interest earned($6,000 x 12% x 3/12).
31 Bad Debts Expense 650Allowance for Doubtful Accounts 650
To record estimated bad debtsexpense ($65,000 x 1%).
31 Insurance Expense 528Prepaid Insurance 528
To record expired insurance.
31 Advance to Sales Personnel 310Travel Expenses 310
To record unused travel advanceto sales personnel.
31 Income Tax Expense 1,788Income Taxes Payable 1,788
To record income tax liabilityon current earnings ($18,270 - 2,840 - 247 - 8,010 - 525 + 180 - 650 - 528 + 310 = $5,960 x 30% = $1,788).
P3-5
2007Dec. 31 Supplies Expense 435
Office Supplies 435To record office suppliesused ($129 + $480 - $174).
31 Prepaid Rent 300Rent Expense 300
To recognize unexpired rent($3,600 x 1/12).
3-45
P3-5 (continued)
Dec. 31 Discount on Notes Payable* 200Interest Expense 200
To recognize unexpired interest($1,200 x 2/12).
31 Depreciation Expense 11,800Accumulated Depreciation: Buildings 4,600Accumulated Depreciation: Store
Equipment 6,300Accumulated Depreciation: Office
Equipment 900Buildings: $(100,000 - 8,000) 20Store Equipment: $(65,000 - 2,000) 10Office Equipment: $(15,000 - 1,500) 10 x 8/12
31 Interest Expense 960Interest Payable 960
($12,000 x 12% x 8/12).
31 Insurance Expense 140Prepaid Insurance 140
To record expired insurance($720 3 x 7/12).
31 Interest Receivable 292Interest Revenue 292
To record earned but uncollectedinterest revenue ($7,000 x 10% x 5/12).
31 Rent Revenue 600Unearned Rent 600
To record unearned rent($960 x 5/8).
31 Travel Expenses 787Advances to Sales Personnel 787
To record travel expensesincurred by sales personnel.
31 Property Tax Expense 2,300Property Tax Payable 2,300
To record property tax expense forthe year.
3-46
P3-5 (continued)
Dec. 31 Utility Expense 302Utilities Payable 302
To record unpaid utility bill.
31 Salaries Expense 927Salaries Payable 927
To record accrued salaries.
31 Income Tax Expense 3,087Income Taxes Payable 3,087
To record income tax liability on currentearnings ($27,749 - 435 + 300 + 200 - 11,800 - 960 - 140 + 292 - 600 - 787 - 2,300 - 302 - 927 = $10,290 x 30% = $3,087).
*Note to Instructor: Students may erroneously debit an asset account such as Prepaid Interest. It should be made clear that the Discount on Notes Payable account is a contra-liability account to Notes Payable. This is discussed more fully in Chapter 13.
P3-6
1. 2007Dec. 31 Depreciation Expense 3,960
Accumulated Depreciation 3,960To record depreciation expense.
31 Interest Expense 810Interest Payable 810+
To record accrued interest.
31 Bad Debts Expense 410Allowance for Doubtful Accounts 410
To provide for possible bad debt losses.
31 Utilities Expense ($1,682 - $1,480) 202Utilities Payable 202R
To record accrued utilities expense.
31 Unearned Rent 600Rent Receivable 385
Rental Revenue 985R*
To recognize rent earned.
3-47
P3-6 (continued)
Dec. 31 Income Tax Expense 2,740 Income Taxes Payable 2,740
To provide for income tax liability.
31 Insurance Expense ($1,742 - $1,380) 362Prepaid Insurance 362
To record expired insurance.
31 Office Salaries Expense ($6,140 - $5,600) 540Office Salaries Payable 540R
To record accrued office salaries.
31 Rent Expense 800Prepaid Rent ($1,600 - $800) 800
To record expired rent.
31 Interest Receivable 320Interest Revenue ($940 - $620) 320R
To recognize interest earned.
31 Sales Salaries Expense ($7,850 - $7,300) 550Advances to Sales Personnel 550
To recognize sales salaries expense.
31 Office Supplies Expense 450Office Supplies ($1,150 - $700) 450
To recognize office supplies used.
2. RReversing entries should be made on January 1, 2008.
R*Only the Rent Receivable ($385) portion of this entry should be reversed.+Interest Payable ($810) would not be reversed since it is not due until 5/14/2009.
3-48
P3-7
2007Dec. 31 Interest Receivable 500
Interest Revenue 500To recognize interest earned($10,000 x 10% x 6/12).
31 Prepaid Insurance 2,375Insurance Expense 2,375
To adjust overstated insuranceexpense ($3,000 x 19/24).
31 Depreciation Expense 2,080Accumulated Depreciation: Building 2,080
To record depreciation of buildingfor the year [($60,000 - $8,000) 25].
31 Depreciation Expense 900Accumulated Depreciation:
Delivery Equipment 900To record depreciation of delivery equipment for the year[($14,000 - $2,000) 10 x 9/12].
31 Unearned Rent 720Rent Revenue 720
To recognize rent earned($4,320 x 4/24).
31 Interest Expense 72Interest Payable 72
To record accrued interest($7,200 x 12% x 1/12).
31 Office Supplies 400Office Supplies Expense 400
To recognize unused office supplies.
3-49
P3-8
(1) Sales $220,000Less: Sales returns (1,000)
Net sales $219,000Less: Cost of goods sold (106,000)
Gross profit $113,000
(2) Cost of goods sold $106,000Add:Ending inventory 48,000
Cost of goods available for sale $154,000Less: Purchases $118,000
Purchases returns (2,000) (116,000)Beginning inventory $ 38,000
(3) Gross profit $113,000Less: Expenses
(65,000)Net income $ 48,000
(4) Beginning inventory of 2008 = Ending inventory of 2007 = $48,000
(5) Beginning inventory $ 48,000Purchases $140,000Purchases returns (3,000)
137,000Cost of goods available for sale $185,000
Less: Ending inventory (74,000)Cost of goods sold $111,000
(6) Cost of goods sold $111,000Add: Gross profit 77,000
Net sales $188,000 Add: Sales returns 3,000Sales $191,000
3-50
P3-9
ErrorNet
IncomeTotal
AssetsTotal
Liabilities
TotalStockholder
s'Equity
1. The purchase of equipment for cash is recorded as a debit to Equipment and a credit to Accounts Payable.
N O O N
2. Failed to record the purchase of inventory on credit.
N U U N
3. Cash received from a customer as payment of its accounts is recorded as if the receipt were for a current period sale.
O O N O
4. Failed to record a credit sale. U U N U
5. At the end of the year, the receipt of money from a 60-day, 12% bank loan is recorded as a debit to Cash and a credit to Sales Revenue.
O N U O
6. Failed to record the depreciation at the end of the current period.
O O N O
P3-10
1. Liabilities understated by $16,000 ($40,000 x 2/5), net income and stockholders' equity overstated by $16,000.
2. Liabilities understated by $600 ($20,000 x 0.12 x 3/12), net income and stockholders' equity overstated by $600.
3. Assets understated by $1,600 ($4,800 3), net income and stockholders' equity understated by $1,600.
4. Assets overstated by $3,000 ($3,500 - $500), net income and stockholders' equity overstated by $3,000.
5. Liabilities overstated by $13,000, net income and stockholders' equity understated by $13,000.
3-51
PC
-13
1. a
nd
2.
C-5
0
FIORILLO COMPANYWorksheetFor Year Ended December 31, 2007
Trial Balance Adjustments Income StatementRetained Earnings
Statement Balance SheetAccount Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashAccounts receivableAllowance for doubtful accountsInventory Prepaid insuranceLandBuildingsAccumulated depreciation: buildingsEquipmentAccumulated depreciation: equipmentAccounts payableNote payable (due 3/1/08)Unearned rentMortgage payable (due 1/1/2012)Capital stock (2,000 shares)Retained earnings (1/1/07)Dividends distributedSales revenueCost of goods soldSalaries expenseUtilities expenseOffice supplies expenseDelivery expenseOther expenses
TotalsDepreciation expenseBad debt expenseInterest expenseInterest payableInsurance expenseSalaries payableRent revenueOffice supplies
Income tax expenseIncome taxes payable
Net income
Retained earnings (12/31/07)
1,900 4,700
8,700 600 4,100 38,000
10,700
1,300
27,185 4,080 2,000 770 1,275 980 106,290
60
11,500
3,100 4,300 1,400 1,200 7,300 10,000 18,075
49,355
106,290
(f) 800
(e) 370
(a)1,700(b) 240(c) 580
(d) 175
(g) 230 4,095(h)3,309
7,404
(b) 240
(d) 175
(a)1,100
(a) 600
(g) 230
(c) 580
(e) 370(f) 800 4,095
(h)3,309
7,404
27,185 4,450 2,000 540 1,275 980
1,700 240 580
175
39,125 3,309 42,434 7,721 50,155
49,355
800 ______ 50,155
50,155 50,155
1,300
1,300 24,496 25,796
18,075
7,721 25,796 25,796
1,900 4,700
8,700 425 4,100 38,000
10,700
230
68,755
300
12,600
3,700 4,300 1,400 400 7,300 10,000
580
370
3,309
24,496 68,755
3-52
3-4
9
P3
-11
1. a
nd
2.
P3-11 (continued)1. and 2. (continued)
(a) Depreciation expense: $1,100 on buildings, $600 on equipment (b) $240 bad debts expense (c) Accrued interest: $50 on note payable, $530 on mortgage payable(d) $175 expired insurance (e) $370 accrued salaries(f) $800 rent collected in advance and now earned(g) $230 office supplies on hand at year-end(h) $50,155 - $39,125 = $11,030 pretax income x 30% = $3,309 income tax expense
3. FIORILLO COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue $49,355
Cost of goods sold (27,185)Gross profit on sales $22,170Operating expenses
Salaries expense $ 4,450Utilities expenses 2,000Office supplies expense 540Delivery expense 1,275Depreciation expense 1,700Bad debt expense 240Insurance expense 175Other expenses 980
Total operating expenses (11,360)Income from operations $10,810Other items
Rent revenue $ 800Interest expense (580)
220Income before income taxes $11,030Income tax expense (3,309)Net Income $ 7,721
Earnings per share (2,000 shares) $ 3.86
3-53
P3-11 (continued)3. (continued)
FIORILLO COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $18,075Add: Net income for 2007 7,721
$25,796Less: Dividends for 2007 (1,300)Retained earnings, December 31, 2007 $24,496
FIORILLO COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets Cash $ 1,900 Accounts receivable $ 4,700 Less: Allowance for doubtful accounts (300) 4,400 Inventory
8,700 Prepaid insurance 425 Office supplies 230 Total current assets $15,655Property and Equipment
Land $ 4,100Buildings $38,000
Less: Accumulated depreciation (12,600) 25,400Equipment $10,700
Less: Accumulated depreciation (3,700) 7,000Total property and equipment $36,500
Total Assets $52,155
(continued on next page)
3-54
P3-11 (continued)3. (continued)
LiabilitiesCurrent Liabilities Accounts payable $ 4,300 Note payable (due March 1, 2008) 1,400
Interest payable 580 Salaries payable 370
Unearned rent 400Income taxes payable 3,309
Total current liabilities $10,359Long-Term Liabilities
Mortgage payable (due January 1, 2012) 7,300Total Liabilities
$17,659
Stockholders' EquityContributed Capital
Capital stock (2,000 shares) $10,000Retained Earnings 24,496
Total Stockholders' Equity $34,496Total Liabilities and Stockholders' Equity $52,155
4(a). 2007Dec. 31 Depreciation Expense 1,700
Accumulated Depreciation: Buildings 1,100
Accumulated Depreciation: Equipment 600
To record depreciation expense.
31 Bad Debt Expense 240Allowance for Doubtful Accounts 240
To provide for doubtful accountsreceivable.
31 Interest Expense 580 Interest Payable 580
To record accrued interest payable.
31 Insurance Expense 175Prepaid Insurance 175
To record expired insurance.
3-55
P3-11 (continued)4(a). (continued)
Dec. 31 Salaries Expense 370Salaries Payable 370
To record accrued salaries.
31 Unearned Rent 800Rent Revenue 800
To recognize rent revenue.
31 Office Supplies 230Office Supplies Expense 230
To record unused office supplies.
31 Income Tax Expense 3,309Income Taxes Payable 3,309
To record income taxes.
4(b). 2007Dec. 31 Sales Revenue 49,355
Rent Revenue 800Income Summary 50,155
31 Income Summary 42,434 Cost of goods sold 27,185 Salaries Expense 4,450 Utilities Expense 2,000 Office Supplies Expense 540 Delivery Expense 1,275 Other Expenses 980 Depreciation Expense 1,700 Bad Debt Expense 240 Interest Expense 580 Insurance Expense 175 Income Tax Expense 3,309 31 Income Summary 7,721
Retained Earnings 7,721
31 Retained Earnings 1,300Dividends Distributed 1,300
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EC
-14
1.
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LANGER COMPANYWorksheet
For Year Ended December 31, 2007
Trial Balance Adjustments Income StatementRetained Earnings
Statement Balance SheetAccount Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashAccounts receivableAllowance for doubtful accountsNote receivable (due 5/1/08)Inventory LandBuildings and equipmentAccumulated depreciationAccounts payableNote payable (due 4/1/2010)Capital stock (2,000 shares)Retained earnings (1/1/07)Dividends distributedSales revenueRent revenueCost of goods soldSalaries expenseDelivery expenseHeat and light expenseOther expenses
Salaries payableUtilities payableDepreciation expenseInterest expenseInterest payableRent receivableInterest receivableInterest revenueBad debt expense
Income tax expenseIncome taxes payable
Net income
Retained earnings (12/31/07)
1,000 2,700 1,200 9,200 4,500 20,600
600
9,050 2,750 720 820 540 53,680
30
8,790 4,050 4,000 5,000 6,120
25,140 550
53,680
(a) 250
(b) 80
(c) 810(d) 380
(e) 50(f) 80
(g) 70 1,720(h)3,105
4,825
(g) 70
(c) 810
(e) 50
(a) 250(b) 80
(d) 380
(f) 80 1,720
(h)3,105
4,825
9,050 3,000 720 900 540
810 380
70 15,470 3,105 18,575 7,245 25,820
25,140 600
80 _ _____ 25,820
25,820 25,820
600
600 12,765 13,365
6,120
7,245 13,365 _______ 13,365
1,000 2,700
1,200 9,200 4,500 20,600
50 80
______ 39,330
100
9,600 4,050 4,000 5,000
250 80
380
3,105
12,765 39,330
(a) $250 accrued salaries (d) $380 accrued interest payable (g) $70 bad debts expense(b) $80 heat and light expense (e) $50 rent receivable (h) $25,820 - $15,470 = $10,350 pretax income x 30% = $3,105 income tax(c) $810 depreciation expense (f) $80 accrued interest receivable expense
3-57
3-5
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P3
-12
1.
P3-12 (continued)
2. LANGER COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue $25,140
Cost of goods sold (9,050)Gross profit on sales $16,090Operating expenses
Salaries expense $ 3,000 Delivery expense 720 Heat and light expense 900 Depreciation expense 810 Bad debt expense 70
Other expenses 540 Total operating expenses (6,040)Income from operations $10,050Other items
Rent revenue $ 600 Interest revenue 80 Interest expense (380)
300Income before income taxes $10,350Income tax expense (3,105)Net Income $ 7,245
Earnings per share (2,000 shares) $ 3.62
LANGER COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $ 6,120Add: Net income for 2007 7,245
$13,365Less: Dividends for 2007 (600)Retained earnings, December 31, 2007 $12,765
3-58
P3-12 (continued)2. (continued)
LANGER COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets Cash $ 1,000 Accounts receivable $ 2,700 Less: Allowance for doubtful accounts (100) 2,600
Note receivable (due 5/1/08) 1,200 Rent receivable 50 Interest receivable 80 Inventory
9,200Total current assets $14,130
Property and Equipment Land $ 4,500 Buildings and equipment $20,600 Less: Accumulated depreciation (9,600) 11,000 Total property and equipment $15,500Total Assets
$29,630
LiabilitiesCurrent Liabilities
Accounts payable $ 4,050 Salaries payable
250 Utilities payable 80 Income taxes payable 3,105
Total current liabilities $ 7,485Long-Term Liabilities
Note payable (due 4/1/2010) $ 4,000Interest payable 380
Total long-term liabilities 4,380 Total Liabilities
$11,865
Stockholders' EquityContributed Capital
Capital stock (2,000 shares) $ 5,000Retained Earnings 12,765
Total Stockholders' Equity 17,765Total Liabilities and Stockholders' Equity $29,630
3-59
P3-12 (continued)
3(a). 2007Dec. 31 Salaries Expense 250
Salaries Payable 250To record accrued salaries.
31 Heat and Light Expense 80 Utilities Payable 80
To record accrued utilitybill for December.
31 Depreciation Expense 810 Accumulated Depreciation 810
To record depreciation expensefor the year.
31 Interest Expense 380 Interest Payable 380
To record accrued interest onnote payable.
31 Rent Receivable 50 Rent Revenue 50
To record rent earned but notyet received.
31 Interest Receivable 80 Interest Revenue 80
To recognize interest earnedon note receivable.
31 Bad Debt Expense 70 Allowance for Doubtful Accounts 70
To provide for doubtful accounts.
31 Income Tax Expense 3,105 Income Taxes Payable 3,105
To record income taxes owed.
3-60
P3-12 (continued)
3(b). 2007Dec. 31 Sales Revenue 25,140
Rent Revenue 600Interest Revenue 80
Income Summary 25,820
31 Income Summary 18,575 Cost of Goods Sold 9,050 Salaries Expense 3,000 Delivery Expense 720 Heat and Light Expense 900 Other Expenses 540 Depreciation Expense 810 Interest Expense 380 Bad Debt Expense 70 Income Tax Expense 3,105
31 Income Summary 7,245 Retained Earnings 7,245
31 Retained Earnings 600 Dividends Distributed 600
P3-13
1. 2008Jan. 1 Interest Payable 100
Interest Expense 100To reverse entry recorded onDec. 31, 2007.
1 Interest Revenue 42Interest Receivable 42
To reverse entry recorded onDec. 31, 2007.
Mar. 1 Cash 4,326
Notes Receivable 4,200Interest Revenue 126
To record collection of notereceivable and interest.
3-61
P3-13 (continued)1. (continued)
May 1 Notes Payable 6,000Interest Expense 300
Cash 6,300To record payment of note payable and interest.
2. 2008Mar. 1 Cash
4,326Notes Receivable 4,200Interest Receivable 42Interest Revenue 84
To record collection of notereceivable and interest.
May 1 Notes Payable 6,000Interest Payable 100Interest Expense 200
Cash 6,300To record payment of notepayable and interest.
P3-14
2008Jan. 1 Salaries Payable* 940
Salaries Expense 940When salaries are actually paid,the total amount would be directlydebited to salaries expense.
1 Interest Payable* 220Interest Expense 220
When interest is actually paid,the total amount would be debitedto interest expense.
1 Rent Revenue* 310Rent Receivable 310
When rent is actually received, thetotal amount would be recorded as rent revenue.
3-62
P3-14 (continued)
Jan. 1 Office Supplies Expense 100Office Supplies 100
Assuming the remaining office suppliesare used during 2008 no furtheradjusting entry is necessary.
1 Salaries Expense 300Advances to Sales Personnel 300
Assuming the sales persons earn theremaining salary advance during 2008no further adjusting entry is necessary.
*In each of these cases, making reversing entries enables the company to record subsequent transactions in a routine fashion without the necessity of referring to the previous adjusting entries.
P3-15
1. 2007Dec. 4 Cash
3,000Sales Revenue 3,000
Made cash sales.
4 Cost of Goods Sold 1,800Inventory 1,800
To record cost of sales.
7 Inventory 2,400Accounts Payable 2,400
Purchased inventory on credit.
11 Sales Returns 600Accounts Receivable 600
Customer returned inventoryfor credit.
11 Inventory 360Cost of Goods Sold 360
To record returned inventory.
14 Cash 900
Accounts Receivable 900Collected on accounts receivable.
3-63
P3-15 (continued)1. (continued)
Dec. 18 Cash 7,800
Land 5,000Gain on Sale on Land 2,800
Sold land at a gain.
20 Accounts Receivable 4,000Sales Revenue 4,000
Made credit sales.
20 Cost of Goods Sold 2,400Inventory 2,400
To record cost of sales.
21 Accounts Payable 360Inventory 360
Returned defective merchandise forcredit.
27 Inventory 1,250Cash 1,250
Purchased inventory for cash.
28 Accounts Payable 1,100Cash 1,100
Paid on accounts payable.
31 Land 6,000
Cash 1,000Notes Payable 5,000
Purchased land paying a $1,000down payment and signing a 12%,2-year note for the balance.
2. Note to Instructor: Only the accounts to which postings are made are shown below and on next page.
Cash Accounts Receivable12/01 Bal 3,090 12/2
71,250 12/01 Bal 9,900 12/14 600
12/04 3,000 12/28
1,100 12/20 4,000 12/14 900
12/14 900 12/31
1,000 12/31 Bal 12,400
3-64
12/18 7,80012/31 Bal 11,440
3-65
P3-15 (continued)2. (continued)
Inventory12/01 Bal 17,750 12/0
41,800
12/07 2,400 12/20
2,400
12/11 360 12/21
360
12/27 1,25012/31 Bal 17,200
Land Accounts Payable12/01 Bal 9,000 12/1
85,000 12/21 360 12/01 Bal 10,700
12/31 6,000 12/28 1,100 12/07 2,40012/31 Bal 10,000 12/31 Bal 11,640
Notes Payable Sales Revenue12/0
1Bal 0 12/01 Bal 76,000
12/31
5,000 12/04 3,000
12/31
Bal 5,000 12/20 4,000
12/31 Bal 83,000
Sales Returns Gain on Sale of Land12/01 Bal 6,300 12/01 Bal 012/11 600 12/18 2,80012/31 Bal 6,900 12/31 Bal 2,800
Cost of Goods Sold12/01 Bal 36,860 12/1
1360
12/04 1,80012/20 2,40012/31 Bal 40,700
3-66
P3-16 (con
ZU COMPANYWorksheet
For Year Ended December 31, 2007
Trial Balance Adjustments Income StatementRetained Earnings
Statement Balance SheetAccount Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashAccounts receivableAllowance for doubtful accountsInventory SuppliesLandBuildings and equipmentAccumulated depreciationAccounts payableNotes payableCapital stock, no par (2,000 shares)Retained earnings (1/1/07)Dividends distributedSales revenueSales returns Gain on sale of landCost of goods soldSalaries expenseAdvertising expenseOther expenses
Totals
Salaries payableDepreciation expenseSupplies expenseBad debt expense
Income tax expenseIncome taxes payable
Net income
Retained earnings (12/31/07)
11,440 12,400
17,200 1,400 10,000 42,000
2,000
6,900
40,700 12,500 8,100 4,500 169,140
100
4,200 11,640 5,000 20,000 42,400
83,000
2,800
169,140
(a)1,200
(b)2,100(c) 770(d) 830 4,900(e)2,460
7,360
(d) 830
(c) 770
(b)2,100
(a)1,200
4,900
(e)2,460
7,360
6,900
40,700 13,700 8,100 4,500
2,100 770 830 77,600 2,460 _____ 80,060 5,740 85,800
83,000
2,800
______ 85,800
_____ 85,800 85,800
2,000
2,000 46,140 48,140
42,400
5,740 48,140 48,140
11,400 12,400
17,200 630 10,000 42,000
93,670
930
6,300 11,640 5,000 20,000
1,200
2,460
46,140 93,670
(a) $1,200 accrued salaries (c) $1,400 - $630 = $770 supplies expense (e) $85,800 - $77,600 = $8,200 pretax income x 30% = $2,460
(b) $42,000 20 = $2,100 depreciation expense (d) $830 bad debt expense income tax expense
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P3-15 (continued)
4. ZU COMPANYIncome Statement
For Year Ended December 31, 2007
Sales revenue (net of $6,900 returns) $76,100Cost of goods sold (40,700)Gross profit on sales $35,400Operating expenses Salaries expense $13,700
Advertising expense 8,100 Depreciation expense 2,100 Supplies expense 770
Bad debt expense 830 Other expenses 4,500 Total operating expenses (30,000)Income from operations $ 5,400Other item
Gain on sale of land 2,800Income before income taxes $ 8,200Income tax expense (2,460)Net Income $ 5,740
Earnings per share (2,000 shares) $ 2.87
ZU COMPANYStatement of Retained Earnings
For Year Ended December 31, 2007
Retained earnings, January 1, 2007 $42,400Add:Net income for 2007 5,740
$48,140Less: Dividends for 2007 (2,000)Retained earnings, December 31, 2007 $46,140
3-68
P3-15 (continued)4. (continued)
ZU COMPANYBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $11,440Accounts receivable $12,400Less: Allowance for doubtful accounts (930) 11,470
Inventory 17,200
Supplies 630Total current assets $40,740
Property and Equipment Land $10,000
Buildings and equipment $42,000 Less: Accumulated depreciation (6,300) 35,700
Total property and equipment $45,700Total Assets
$86,440
LiabilitiesCurrent Liabilities Accounts payable $11,640
Salaries payable 1,200
Income taxes payable 2,460 Total current liabilities $15,300Long-Term Liabilities Notes payable 5,000 Total Liabilities
$20,300
Stockholders' EquityContributed Capital Capital stock (2,000 shares) $20,000Retained Earnings 46,140
Total Stockholders' Equity 66,140Total Liabilities and Stockholders' Equity $86,440
5(a). 2007Dec. 31 Salaries Expense 1,200
Salaries Payable 1,200
31 Depreciation Expense 2,100
3-69
Accumulated Depreciation 2,100
3-70
P3-15 (continued)5(a). (continued)
Dec. 31 Supplies Expense 770Supplies 770
31 Bad Debt Expense 830 Allowance for Doubtful Accounts 830
31 Income Tax Expense 2,460 Income Taxes Payable 2,460
5(b). 2007Dec. 31 Sales Revenue 83,000
Gain on Sale of Land 2,800 Income Summary 85,800
31 Income Summary 80,060 Sales Returns and Allowances 6,900 Cost of Goods Sold 40,700 Salaries Expense 13,700
Advertising Expense 8,100 Depreciation Expense 2,100 Supplies Expense 770 Bad Debt Expense 830 Other Expenses 4,500 Income Tax Expense 2,460
31 Income Summary 5,740 Retained Earnings 5,740
31 Retained Earnings 2,000Dividends Distributed 2,000
3-71
PC
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VALLEY SALESWorksheetFor Year Ended December 31, 2007
12/31/06 Balance Transactions Adjustments Income Statement Balance SheetAccount Titles Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
CashAccounts receivableInventoryEquipmentAccumulated depreciationAccounts payableSalaries payableT. Tunxis, capital
SalesNotes payablePurchasesSalaries expenseRent expenseT. Tunxis, withdrawalsInterest expenseOffice expenseAuto expense
Depreciation expenseInterest payable
Inventory (12/31/07)
Net income
2,300 10,400 12,500 8,000
______ 33,200
6,500 6,400 1,200 19,100 33,200
(a)173,200
(b) 4,000
(b) 6,400(b) 1,200
(b) 2,000(b)117,0001
(b) 3,0503
(b) 4,800(b) 23,500(b) 650(c) 3,1002
(b) 4,100 343,000
(b)169,800(a) 10,400
(a)152,800(a) 10,000
_______ 343,000
(c) 9,200
(d) 8,500 (e) 1,800
(g) 140
(d) 200
(f) 1,0004
___ __ 20,840
(f) 1,000(d) 8,700(e) 1,800
(c) 9,200
(g) 140 20,840
12,500
125,500 4,850 4,800 790 3,100 4,300
1,000
_______ 156,840 22,560 179,400
162,000
17,400 179,400 _______ 179,400
5,700 9,200
12,000
23,500
17,400 67,800 ______ 67,800
7,500 8,700 1,800 19,100
8,000
140
______ 45,240 22,560 67,800
1$123,100 - $6,100 in beginning accounts payable2$3,400 - $300 in beginning accounts payable3$4,250 - $1,200 in beginning salaries payable4($8,000 10) + [($4,000 10) x 1/2]
3-72
3-6
7
P3
-16
1.
P3-16 (continued)2. VALLEY SALES
Income StatementFor Year Ended December 31, 2007
Sales $162,000Cost of goods sold
Inventory, 1/1/2007 $ 12,500Purchases 125,500
Cost of goods available for sale $138,000 Less: Inventory, 12/31/2007 (17,400)
Cost of goods sold (120,600)
Gross profit on sales $ 41,400Operating expenses
Salaries expense $ 4,850Rent expense 4,800Office expense 3,100
Auto expense 4,300 Depreciation expense 1,000 Total operating expenses (18,050)Income from operations $ 23,350Other item Interest expense
(790)Net Income $ 22,560
3-73
P3-16 (continued)2. (continued)
VALLEY SALESBalance Sheet
December 31, 2007
AssetsCurrent Assets
Cash $ 5,700 Accounts receivable 9,200 Inventory
17,400 Total current assets $32,300Property and Equipment
Equipment $12,000Less: Accumulated depreciation (7,500)
Total property and equipment 4,500Total Assets
$36,800
LiabilitiesCurrent Liabilities
Accounts payable $ 8,700 Salaries payable
1,800Interest payable 140
Total current liabilities $10,640Long-Term Liabilities Notes payable 8,000 Total Liabilities
$18,640
Owner's EquityT. Tunxis, capital
$18,160a
Total Liabilities and Owner's Equity $36,800
a$19,100 beginning balance + $22,560 net income - $23,500 withdrawals
3-74
PC
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.
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WARD SPECIALTY FOODSWorksheet to ConvertTrial Balance to Accrual BasisDecember 31, 2007
Cash Basis Adjustments Accrual Basis Debit Credit Debit Credit Debit Credit
CashAccounts receivableAllowance for doubtful accountsInventoryEquipmentAccumulated depreciationPrepaid rentPrepaid insuranceAccounts payableAccrued expensesPayroll taxes withheldWard, withdrawalsWard, capital
SalesPurchasesIncome summary–inventorySalariesPayroll taxesRentMiscellaneous expenseInsuranceUtilitiesDepreciationDoubtful accounts expense
18,500 4,500
20,000 35,000
24,000
82,700
29,500 2,900 8,400 3,900 2,400 3,500
235,300
9,000
4,800
850
33,650
187,000
235,300
[1] 3,400
[3] 3,000
[4] 6,300[5] 600
[8] 900
[7] 4,000[3] 20,000[8] 135[8] 150
[8] 175[6] 5,800[2] 1,100 45,560
[2] 1,100
[6] 5,800
[7] 4,000[8] 1,360
[4] 5,625[5] 540
[1] 3,400
[3] 23,000
[4] 675
[5] 60
45,560
18,500 7,900
23,000 35,000
6,300 600
24,000
86,700
29,635 3,050 7,725 3,900 2,340 3,675 5,800 1,100 259,225
1,100
14,800
8,800 1,360 850
38,915
190,400
3,000
259,225
3-75
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1.
P3-17 (continued)1. (continued)
Explanations of Adjustments:
[1] To convert 2007 sales to accrual basis
Accounts receivable, 12/31/07 $ 7,900 Deduct: Accounts receivable, 12/31/06 (4,500) Increase in sales $
3,400
[2] To record provision for doubtful accounts
[3] To record increase in inventory from 12/31/06 to 12/31/07
Inventory, 12/31/07 $23,000 Inventory, 12/31/06 (20,000) Increase $ 3,000
[4] To adjust rent expense for prepaid rent at 12/31/06 and 12/31/07
Prepaid 12/31/07 ($8,400 x 9/12) $ 6,300 Prepaid 12/31/06 ($7,500 x 9/12) (5,625) Rent expense decrease $ 675
[5] To adjust insurance expense for prepaid insuranceat 12/31/06 and 12/31/07
Prepaid 12/31/07 ($2,400 x 3/12) $ 600Prepaid 12/31/06 ($2,160 x 3/12) (540)
Insurance expense decrease $ 60
[6] To record depreciation for 2007
[7] To convert 2007 purchases to accrual basis
Accounts payable 12/31/07 $ 8,800Deduct: Accounts payable 12/31/06 (4,800)Increase in purchases $ 4,000
[8] To convert expenses to accrual basis
Payroll taxes $ 400 - $250 $150
Salaries $ 510 - $375 $135
Utilities $ 450 - $275 $175
3-76
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$1,360 $900
3-77
P3-17 (continued)
2. WARD SPECIALTY FOODSStatement of Changes in
Mary Ward, CapitalFor the Year Ended December 31, 2007
Mary Ward, capital, 12/31/06 $38,915 [1]
Add:Net income for year 49,475 [2]
$88,390Deduct: Withdrawals for year (24,000)Mary Ward, capital, 12/31/07 $64,390
Explanations of Amounts:
[1] Mary Ward, capital, 12/31/06 after adjustmentto accrual basis (per worksheet)
[2] Computation of net income on accrual basis forthe year ended 12/31/07 (per worksheet)
Sales $190,400 Purchases $86,700 Income summary-inventory (3,000) Salaries 29,635 Payroll taxes 3,050 Rent 7,725 Miscellaneous expenses 3,900 Insurance 2,340 Utilities 3,675 Depreciation 5,800 Bad debts 1,100 (140,925) Net income $ 49,475
3-78