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Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions

Sales revenue. 850Cost of goods sold (290)

All other expenses (325)

Net income.. $ 235

Beginning cash.. $ 75

Collections ($850 $27).. 823

Payments for: inventory. (380)

everything else. (255)

Ending cash $ 263

(10 min.) S 3-2

Statement Reports(Amounts in millions)

Income statement Interest expense $ .8

Chapter 3 Accrual Accounting & Income 3- 1

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Balance sheet Notes payable ($4.1 + $1.7 $1.6). $4.2

Interest payable. 0.3

3-2 Financial Accounting 9/e Solutions

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(10 min.) S 3-3

At the end of each accounting period, the business reports its

performance through the preparation of financial statements. In order to

be useful to the various users of financial statements they must be up-

to-date. Accounts such as cash, Equipment, Accounts Payable,

Common Stock and Dividends are up-to date and require no adjustment

at the end of the accounting period. Accounts such as Accounts

Receivable, Supplies, Salary Expense and Salaries Payable may not be

up to date as of the last day of the accounting period. Why? Because

certain transactions that took place during the month may not have been

recorded.

The accrued salaries, which are owed to the employees but have not

been paid, are an expense related to the current period but also

represent a liability or debt that is owed by the business. The business

must make an adjusting entry to record the accrued salary owed as both

an increase in Salary Expense and an increase in Salaries Payable. If

the business does not make this adjustment, the expenses will be

understated, net income will be overstated, and liabilities will be

understated.


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(10 min.) S 3-4

The large auto manufacturer should record sales revenue when the

revenue is earned by delivering automobiles to Budget or Hertz. Thelarge auto manufacturer shouldnotrecord any revenue prior to delivery

of the vehicles, because the large auto manufacturer hasnt earned the

revenue yet. Therevenueprinciplegoverns this decision.

When the large auto manufacturer records the revenue from the sale, at

that time not before or after the large auto manufacturer should also

record cost of goods sold, the expense. Theexpense recognition

principletells when to record expenses.

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible long-lived

asset, less its estimated residual value, over its estimated useful life. All

long-lived or plant assets, except for land, decline in usefulness during

their life and this decline is an expense. Accountants must allocate the

cost of each plant asset, except for land, over the assets useful life.

Depreciation is the process of allocating the cost of a plant asset to

expense. Depreciation also decreases the book value of the asset to

reflect its usage.


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(10 min.) S 3-6

a. The Expense Recognition Principle

b.The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Expense Recognition Principle

(10 min.) S 3-7

a.

Oct. 31 Rent Expense ($3,000 1/6)...500

Prepaid Rent. 500

To record rent expense.

Prepaid Rent Rent Expense

Oct. 1 3,000Oct. 31 500 Oct. 31 500

Bal. 2,500 Bal. 500

b.

Oct. 31 Supplies Expense ($950 $400) 550

Supplies.. 550

To record supplies expense.


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Supplies Supplies Expense

Oct. 1 950 Oct. 31 550 Oct. 31 550

Bal. 400 Bal. 550

(10 min.) S 3-8

Req. 1

(a) Jan. 1 Computer Equipment... 50,000Cash. 50,000

Purchased computer equipment.

(b)Dec. 31 Depreciation Expense

Computer Equipment ($50,000 / 5). 10,000

Accumulated Depreciation

Computer Equipment.......

Record depreciation expense.

10,000

Req. 2

Computer Equipment

Accumulated

Depreciation

Computer

Equipment

Depreciation

Expense

Computer Equipment

Jan.50,000 Dec. 3110,000 Dec. 3110,000

Bal. 50,000 Bal. 10,000 Bal. 10,000


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Req. 3

Computer equipment. $50,000

Less: Accumulated depreciation (10,000)

Book value $40,000


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(10 min.) S 3-9

(Amounts in millions)

Income statement: 2012

Salary expense ($42.4 + $2.2).. $44.6

Balance sheet: 2012

Salary payable......... $ 2.2

(10 min.) S 3-10

Req. 1

Oct. 31 Interest Expense.. 250

Interest Payable.. 250

To accrue interest expense for October.

Nov. 30 Interest Expense.. 250

Interest Payable.. 250

To accrue interest expense for November.

Dec. 31 Interest Expense... 250

Interest Payable 250

To accrue interest expense for December.

Req. 2

Interest Payable

Oct. 31 250

Nov. 30 250

Dec. 31 250


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Bal. 750

Req. 3

Dec. 31 Interest Payable.......... 750Cash.. 750

To pay interest.

(10 min.) S 3-11

Req. 1

Oct. 31 Interest Receivable 250

Interest Revenue.. 250

To accrue interest revenue for October.

Nov. 30 Interest Receivable 250

Interest Revenue... 250

To accrue interest revenue for November.

Dec. 31 Interest Receivable 250

Interest Revenue...... 250

To accrue interest revenue for December.

Req. 2

Interest Receivable

Oct. 31 250

Nov. 30 250

Dec. 31 250


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Bal. 750

Req. 3

Dec. 31 Cash. 750

Interest Receivable. 750

To collect interest.


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(5-10 min.) S 3-12

Unearned revenues are liabilities becauseThe World Starhas received

cash from subscribers in advance of providing them with newspapers.

Receiving the cash in advance creates an obligation (a liability) forThe

World Star. AsThe World Stardelivers newspapers to subscribers,The

World Starearns the revenue, and the dollar amount of the unearned

revenue then goes into the revenue account.

a. Cash. 60,000Unearned Subscription Revenue....... 60,000

Received cash for revenue in advance.

b.Unearned Subscription Revenue.................. 40,000

Subscription Revenue 40,000

To record the earning of subscription

revenue that was collected in advance.

(5-10 min.) S 3-13

Prepaid Rent at December 31:

a. Unadjusted amount. $18,000

b. Adjusted amount ($18,000 $6,000).. 12,000

Rent Expense at December 31:


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c. Unadjusted amount $ - 0 -

d. Adjusted amount ($18,000 / 3). 6,000


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(10 min.) S 3-14

a. Accounts Receivable... 55,000

Service Revenue.. 55,000

Cash. 35,000

Accounts Receivable. 35,000

b. Cash. 9,000

Unearned Service Revenue.. 9,000

Unearned Service Revenue 7,000Service Revenue.. 7,000

(15-30 min.) S 3-15

Sparrow Sporting Goods Company

Income StatementFor the Year Ended March 31, 2012

Thousands

Net revenues. $175,500

Cost of goods sold. 136,000

All other expenses.. 29,000

Net income $ 10,500


Statement of Retained Earnings


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For the Year Ended March 31, 2012

Thousands

Retained earnings, March 31, 2011... $21,500

Add:Net income 10,500Retained earnings, March 31, 2012... $32,000


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(continued) S 3-15


Balance Sheet

March 31, 2012Thousands

ASSETS

Current:

Cash........................................................ $ 20,800

Accounts receivable.............................. 28,000

Inventories.............................................. 35,000

Other current assets.............................. 5,000

Total current assets.......................... 88,800

Property and equipment, net................. 6,300

Other assets............................................ 22,000

Total assets.................................................. $117,100

LIABILITIES

Total current liabilities........................... $ 55,100

Long-term liabilities............................... 7,500

Total liabilities.............................................. 62,600

STOCKHOLDERS EQUITY

Common stock....................................... 22,500

Retained earnings.................................. 32,000

Total stockholders equity........................... 54,500

Total liabilities and stockholders equity... $117,100


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(5-10 min.) S 3-16

CLOSING ENTRIES

Thousands

Mar. 31 Net Revenues . 175,500Retained Earnings....... 175,500

31 Retained Earnings. 165,000

Cost of Goods Sold. 136,000

All Other Expenses.. 29,000

Retained Earnings

Mar. 31, 2012 Expenses 165,000Mar. 31, 2011 Bal. 21,500

Mar. 31, 2012 Revenues 175,500

Mar. 31, 2012 Bal. 32,000

Retained Earnings ending balance agrees with the amount reported on

the statement of retained earnings and the balance sheet (in S 3-15).


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(5 min.) S 3-17

(Dollars in thousands)

Req. 1

Net working capital = Total current assets- Total current liabilities

$33,700 = $88,800 - $55,100

Req. 2

Current ratio = Total current assets = $88,800 = 1.61Total current liabilities $55,100

Req. 3

Debt ratio =

Total liabilities

=

$62,600

= 0.53Total assets $117,100

Req. 4

Net working capital of $33,700 means current assets exceed current

liabilitiesa positive sign. The current ratio and debt ratio values are

strong.


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(10 min.) S 3-18

1.Earned revenue of $10,000 on account:

a. Net working capital = $43,700 [($88,800 + $10,000)- $55,100]

b.Current ratio =$98,800

= 1.79$55,100

c. Debt ratio =$62,600

= 0.49$127,100 ($117,100 +$10,000)

2.Paid accounts payable of $10,000:

a. Net working capital = $33,700[($88,800 - $10,000) - ($55,100- $10,000)]

b.Current ratio =$78,800

= 1.74$45,100

c. Debt ratio =$52,600 ($62,600 - $10,000)

= 0.49$107,100 ($117,100 -$10,000)


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Exercises

(5-10 min.) E 3-19A

Statement Reports (in millions)

1. Income statement Sales revenue $4,300

Operating expenses. 1,200

Balance sheet Accounts receivable $ 900

Accounts payable. 1,000

2. Cash basis would report only the cash collections of $4,500 from

customers and the payment of operating expenses ($1,200).

Their balance sheet should have included neither accounts

receivable nor accounts payable.

(5-10 min.) E 3-20A

a. Cash Basis b. Accrual Basis

Revenues... $540,000 $530,000Expenses... 420,000 440,000

Net income $120,000 $ 90,000


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The accrual basis measures net income better because its information

about revenues and expenses is more complete than the information

provided by the cash basis.


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(5-10 min.) E 3-21A

Millions

a. Revenue. $840

Therevenue principlesays to record revenue when it has been

earned, regardless of when cash is collected. Therefore, report

the amount of revenue earned, regardless of when the company

collects cash.

b. Total expense... $500

The expense recognition principlegoverns accounting for

expenses.

c. Theincome statementreports revenues and expenses.

Thestatement of cash flowsreports cash receipts and cash

payments.


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(15-20 min.) E 3-22A

Req. 1

Adjusting Entries

DATE ACCOUNT TITLES DEBIT CREDIT

a.Insurance Expense................................................ 900

Prepaid Insurance ($400+$1,200$700).......... 900

b.Interest Receivable................................................ 1,600

Interest Revenue............................................... 1,600

c.Unearned Service Revenue ($1,100 $500)........ 600Service Revenue............................................... 600

d.Depreciation Expense........................................... 4,800

Accumulated Depreciation.............................. 4,800

e.Salary Expense ($18,000 3/5)............................. 10,800

Salary Payable............................................... 10,800

f.Income Tax Expense ($21,000 .25).................... 5,250

Income Tax Payable...................................... 5,250

Req. 2

Net income understated by omission of:Interest revenue $ 1,600

Service revenue.... 600

Total understatement.. $ (2,200)

Net income overstated by omission of:

Insurance expense $ 900


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Depreciation expense.. 4,800

Salary expense.. 10,800

Income tax expense. 5,250

Total overstatement. 21,750

Overall effect net income overstated by $19,550

(10-15 min.) E 3-23A

Missing amounts initalics.

1 2 3 4

Beginning Supplies $ 500 $ 400 1,000 $1,000

Add: Payments for supplies

during the year 1,700 800 1,000 400

Total amount to account for 2,200 1,200 2,000 1,400

Less: Ending Supplies (500) (500) (700) (500)

Supplies Expense $1,700 $700 $1,300 $ 900

Journal entries:

Situation 1: Supplies......................................... 1,700

Cash............................................ 1,700

Situation 2: Supplies Expense............................. 700

Supplies..................................... 700


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(10-20 min.) E 3-24A

Req. 1

Adjusting Entries


a.Interest Expense.................................................... 9,600

Interest Payable............................................. 9,600

b.Interest Receivable............................................ 4,900

Interest Revenue........................................ 4,900

c.Unearned Rent Revenue ($12,000 / 2 6/12)....... 3,000

Rent Revenue................................................ 3,000

d.Salary Expense ($1,900 3).............................. 7,600

Salary Payable............................................... 7,600

e.Supplies Expense.................................................. 1,800

Supplies ($3,200 $1,400)............................ 1,800

f.Depreciation Expense ($80,000 / 5)...................... 16,000

Accumulated Depreciation........................... 16,000

Req. 2

Book value = $64,000 ($80,000 $16,000)


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(10-20 min.) E 3-25A

Accounts Receivable Supplies

Bal. 1,500 Bal. 500 (a) 200

(c) 900 Bal. 300

Bal. 2,400

Salary Payable Unearned Service Revenue

(b) 400 (d) 500 Bal. 600

Bal. 400 Bal. 100

Service Revenue Salary Expense

Bal. 4,200 Bal. 1,900

(c) 900 (b) 400

(d) 500 Bal. 2,300

Bal. 5,600

Supplies Expense

(a) 200

Bal. 200


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(20-30 min.) E 3-26A

Honeyglazed Hams, Inc.

Income Statement

Year Ended December 31, 2012Thousands

Revenues:

Sales revenue............................. $40,900

Expenses:

Cost of goods sold.................... $25,000

Selling, administrative, and

general expense.................. 10,300

Total expenses...................... 35,300

Income before tax........................... 5,600

Income tax expense.................... 2,100

Net income....................................... $ 3,500

Honeyglazed Hams, Inc..


Year Ended December 31, 2012

Thousands

Retained earnings, December 31, 2011. $4,700

Add:Net income . 3,500

8,200

Less: Dividends.. (1,500)

Retained earnings, December 31, 2012. $6,700


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(continued) E 3-26A

Honeyglazed Hams, Inc.

Balance Sheet

December 31, 2012Thousands

ASSETS LIABILITIES

Cash.$ 3,700 Accounts payable $ 7,900

Accounts receivable 1,700 Income tax payable.. 500

Inventories. 1,600 Other liabilities.. 2,400

Prepaid expenses. 1,600 Total liabilities... 10,800

Prop., plant, equip. $ 6,800 STOCKHOLDERS

Less: Accum. EQUITY

deprec.. (2,800) 4,000 Common stock.. 4,600

Other assets.. 9,500 Retained earnings 6,700

Total stockholders equity11,300

Total liabilities and

Total assets $22,100 stockholders equity... $22,100


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(10-20 min.) E 3-27A

One mechanism for solving this exercise is to prepare the relevant T-

accounts, insert the given information, and solve for the unknown

amounts, shown initalics.

Amounts in millions

Receivables

Beg. bal. 220

Sales revenue 20,550 Collections 20,400

End. bal. 370

Prepaid Insurance

Beg. bal. 150

Payment 440 Insurance expense 420

End. bal. 170

Accrued Liabilities Payable

Beg. bal. 600

Payments 4,300

Other operating

expenses 4,400

End. bal. 700


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(10-15 min.) E 3-28A

Req. 1

MillionsIncome statement

Service revenue (430 80). 350

Balance sheet

Unearned service revenue... 80

Req. 2

Income statement

Service revenue (65 + 430 80).. 415

Balance sheet


Service revenue is greater in (2) because Bennett began the year owing

more phone service to customers. With collections for the year and the

amount of the ending liability unchanged, Bennett must have earned

more revenue in situation 2 than in situation 1.

Not required but helpful:

Unearned Service Revenue

Beg. bal. 65

Earned revenue 415 Collected cash 430


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End. bal. 80


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(10-20 min.) E 3-29A

Req. 1

JournalDATE ACCOUNT TITLES DEBIT CREDIT

Closing Entries

Dec.31 Service Revenue........................................ 23,900

Other Revenue........................................... 400

Retained Earnings............................... 24,300

31 Retained Earnings..................................... 22,000Cost of Services Sold.......................... 11,000

Selling, General, and Administrative

Expense........................................... 6,400

Depreciation Expense......................... 4,100

Income Tax Expense............................ 500

31 Retained Earnings..................................... 300

Dividends.............................................. 300

Net income for 2012 was $2,300 ($24,300 $22,000).

Req. 2

Retained Earnings

Expenses 22,000

Dec. 31, 2011 2,600

Dividends 300 Revenues 24,300


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Dec. 31, 2012 4,600


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(15-25 min.) E 3-30A

Journal


Adjusting Entries

Dec. 31 Unearned Service Revenue............................. 6,300

Service Revenue ($19,500 $13,200)........ 6,600

31 Salary Expense ($4,600 $4,300)................... 300

Salary Payable............................................. 300

31 Rent Expense ($1,600 $1,300)...................... 300

Prepaid Rent................................................ 300

31 Depreciation Expense ($700 $0).................. 700

Accumulated Depreciation......................... 700

31 Income Tax Expense ($1,500 $0).................. 1,500

Income Tax Payable.................................... 1,500

Closing Entries

31 Service Revenue............................................... 19,500

Retained Earnings...................................... 19,500

31 Retained Earnings............................................ 8,400

Salary Expense........................................... 4,600

Rent Expense.............................................. 1,600

Depreciation Expense................................ 700

Income Tax Expense................................... 1,500

31 Retained Earnings............................................ 1,400

Dividends..................................................... 1,400


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(20-30 min.) E 3-31A

Req. 1

Anderson Production CompanyBalance Sheet

December 31, 2012

ASSETS

Current Assets:

Cash................................................................................ $14,100

Prepaid rent ($800 $300)............................................ 500

Total current assets.................................................. 14,600

Plant Assets:

Equipment...... $42,000

Less accumulated depreciation

($3,400 + $700). (4,100) 37,900

Total assets......................................................................... $52,500

LIABILITIES

Current:

Accounts payable.......................................................... $ 5,100

Salary payable ($4,600 $4,300).............................. 300

Unearned service revenue ($9,100 $6,300).............. 2,800

Income tax payable.................................................... 1,500

Total current liabilities.............................................. 9,700

Note payable, long-term..................................................... 16,000

Total liabilities..................................................................... 25,700

STOCKHOLDERS EQUITY


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(30 min.) E 3-32A

a.Current ratio =$50

=1.11 Debt ratio=$40 + $5

= 0.60$40 + $5 $70 + $5

The purchase of equipment on accounthurtsboth ratios.

b.Current ratio=$50 $6

=1.10Debt ratio =$40 $6

= 0.53$40 $70 $6

The payment of long-term debthurtsthe current ratio andimproves

the debt ratio.

c.Current ratio=$50 + $5

=1.22Debt ratio =$40 + $5

= 0.60$40 + $5 $70 + $5

Collecting cash in advancehurtsboth ratios.

d.Current ratio=$50

=1.19 Debt ratio =$40 + $2

=0.60$40 + $2 $70

Accruing an expensehurtsboth ratios.

e.Current ratio= $50 + $6 =1.40 Debt ratio = $40 =.53$40 $70 + $6

A cash saleimprovesboth ratios.


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(5-10 min.) E 3-33B

Statement Reports (in millions)

1. Income statement Sales revenue.. $4,400

Operating expenses... 1,300

Balance sheet Accounts receivable.. $ 700

Accounts payable.. 1,200

2. Cash basis would report only the cash collections of $4,600 from

customers and the payment of operating expenses ($1,300).The

balance sheet would include neither accounts receivable nor

accounts payable.

(5-10 min.) E 3-34B

a. Cash Basis b. Accrual Basis

Revenues... $510,000 $500,000

Expenses... 410,000 450,000

Net income $100,000 $ 50,000

The accrual basis measures net income better because its information

about revenues and expenses is more complete than the information

provided by the cash basis.


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(15-20 min.) E 3-36B

Req. 1

Adjusting Entries


a.Insurance Expense................................................... 700

Prepaid Insurance ($300 + $900 $500)............ 700

b.Interest Receivable................................................ 1,300

Interest Revenue.................................................. 1,300

c.Unearned Service Revenue ($1,200 $300)........... 900

Service Revenue............................................... 900

d.Depreciation Expense............................................... 4,400

Accumulated Depreciation.................................. 4,400


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e.Salary Expense ($17,000 3/5)................................ 10,200

Salary Payable...................................................... 10,200

f.Income Tax Expense ($26,000 .25)....................... 6,500

Income Tax Payable............................................. 6,500

Req. 2

Net income understated by omission of:

Interest revenue.. $ 1,300

Service revenue............. 900

Total understatement $ (2,200)

Net income overstated by omission of:

Insurance expense $ 700

Depreciation expense.. 4,400

Salary expense.. 10,200

Income tax expense............ 6,500

Total overstatement............ 21,800

Overall effect net income overstated by. $19,600


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(10-15 min.) E 3-37B

Missing amounts initalics.

1 2 3 4Beginning Supplies $ 400 $ 600 $1,100 $ 900

Add: Payments for supplies

during the year 1,600 1,100 1,500 600

Total amount to account for 2,000 1,700 2,600 1,500

Less: Ending Supplies (200) (300) (1,000) (300)

Supplies Expense $1,800 $1,400 $1,600 $1,200

Journal entries:

Situation 1: Supplies. 1,600

Cash.. 1,600

Situation 2: Supplies Expense 1,400

Supplies....... 1,400


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(10-20 min.) E 3-38B

Req. 1

Adjusting Entries


a.Interest Expense....................................................... 9,000

Interest Payable.................................................... 9,000

b.Interest Receivable................................................... 4,300

Interest Revenue.................................................. 4,300

c.Unearned Rent Revenue ($13,900 / 2 6/12).......... 3,475Rent Revenue....................................................... 3,475

d.Salary Expense ($1,300 3)..................................... 3,900

Salary Payable...................................................... 3,900

e.Supplies Expense..................................................... 1,300

Supplies ($2,900 $1,600)................................... 1,300

f.Depreciation Expense ($140,000 / 5).......................28,000

Accumulated Depreciation.................................. 28,000

Req. 2

Book value = $112,000 ($140,000 $28,000)


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(10-20 min.) E 3-39B

Accounts Receivable Supplies

Bal. 1,400 Bal. 300 (a) 200

(c) 500 Bal. 100

Bal. 1,900

Salary Payable Unearned Service Revenue

(b) 700 (d) 200 1,000

Bal. 700 Bal. 800

Service Revenue Salary Expense

Bal. 4,600 Bal. 2,400

(c) 500 (b) 700

(d) 200 Bal. 3,100

Bal. 5,300

Supplies Expense

(a) 200

Bal. 200


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(20-30 min.) E 3-40B

Honeybee Hams, Inc.

Income Statement

Year Ended December 31, 2012Thousands

Revenues:

Sales revenue.......................... $42,200

Expenses:

Cost of goods sold.................. $25,500

Selling, administrative, and

general expense................... 10,000

Total expenses................... 35,500

Income before tax............................. 6,700

Income tax expense.......................... 2,500

Net income......................................... $ 4,200

Honeybee Hams, Inc.


Year Ended December 31, 2012

Thousands

Retained earnings, December 31, 2011.. $4,600Add:Net income . 4,200

8,800

Less: Dividends (1,400)

Retained earnings, December 31, 2012.. $7,400


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(continued) E 3-40B

Honeybee Hams, Inc.

Balance Sheet

December 31, 2012Thousands

ASSETS LIABILITIES

Cash.$ 3,400 Accounts payable.$ 7,700

Accounts receivable 1,900 Income tax payable.. 600

Inventories. 1,700 Other liabilities.. 2,400

Prepaid expenses 1,700 Total liabilities... 10,700

Prop., plant, equip. $ 6,700 STOCKHOLDERS

Less: Accum. EQUITY

deprec. (2,500) 4,200 Common stock.. 4,500

Other assets.. 9,700 Retained earnings 7,400

Total stockholders equity11,900

Total liabilities andTotal assets $22,600 stockholders equity... $22,600


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(10-20 min.) E 3-41B

One mechanism for solving this exercise is to prepare the relevant T-

accounts, insert the given information, and solve for the unknown

amounts, shown initalics.

Amounts in millions

Receivables

Beg. bal. 210

Sales revenue 21,010 Collections 20,900

End. bal. 320

Prepaid Insurance

Beg. bal. 160

Payment 470 Insurance expense 430

End. bal. 200

Accrued Liabilities Payable

Beg. bal. 640

Payments 4,200

Other operating

expenses 4,290

End. bal. 730


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(10 min.) E 3-42B

Req. 1

Millions

Income statement

Service revenue (380 95).. 285

Balance sheet


Req. 2

Income statement

Service revenue (75 + 380 95) 360

Balance sheet


Service revenue is greater in (2) because Terra began the year owing

more phone service to customers. With collections for the year and the

amount of the ending liability unchanged, Terra must have earned more

revenue in situation 2 than in situation 1.


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Not required but helpful:

Unearned Service Revenue

Beg. bal. 75

Earned revenue 360 Collected cash 380

End. bal. 95


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(10-20 min.) E 3-43B

Req. 1


Closing Entries

Dec.31 Service Revenue........................................... 24,300

Other Revenue........................................... 200

Retained Earnings................................... 24,500

31 Retained Earnings........................................ 22,500Cost of Services Sold.............................. 11,400

Selling, General, and Administrative

Expense............................................ 6,000

Depreciation Expense............................. 4,500

Income Tax Expense................................ 600

31 Retained Earnings........................................ 400

Dividends.................................................. 400

Net income for 2012 was $2,000 ($24,500 $22,500).

Req. 2

Retained Earnings

Expenses 22,500

Dec. 31, 2011 2,200

Dividends 400 Revenues 24,500


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Dec. 31, 2012 3,800


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(20-30 min.) E 3-45B

Req. 1

Durkin Production Company

Balance SheetDecember 31, 2011

ASSETS

Current:

Cash.... $14,200

Prepaid rent ($1,500 $800)......... 700

Total current assets 14,900

Plant:

Equipment.. $44,000

Less accumulated depreciation

($3,500 + $600)........ (4,100) 39,900

Total assets. $54,800

LIABILITIES

Current:

Accounts payable.................................................................. $ 4,700

Salary payable ($5,600 $4,700).......................................... 900

Unearned service revenue ($8,400 $6,300)....................... 2,100

Income tax payable................................................................ 1,200

Total current liabilities..................................................... 8,900

Note payable, long-term.......................................................... 17,000

Total liabilities.......................................................................... 25,900

STOCKHOLDERS EQUITY

Common stock............................................................................. 8,700

Retained earnings ($11,400 + $9,900* $1,100)........................ 20,200


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Total stockholders equity.......................................................... 28,900

Total liabilities and stockholders equity................................... $54,800

*Net income = $9,900 ($19,600 $5,600 $2,300 $600 - $1,200)


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(continued) E 3-45B

Req. 2

Current

Year

Prior

YearNet working

capital

= Total current assets -

current liabilities =

$14,900 -

$8,900

=$6,000 $7,000

Current

rati

o

=

Total current assets

=

$14,900

= 1.67 1.70Total current liabilities $8,900

Both net working capital and the current ratio have decreased indicating

that the ability to pay current liabilities with current assets has

deteriorated.

Debt ratio =Total liabilities

=$25,900

= 0.47 0.40

Total assets $54,800

The overall ability to pay total liabilities deteriorated a little.


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(30 min.) E 3-46B

a.Current ratio =$60

=1.03 Debt ratio =$70 + $8

= 0.80$50 + $8 $90 + $8

The purchase of equipment on accounthurtsboth ratios.

b.Current ratio =$60 $5

=1.10 Debt ratio =$70 $5

= 0.76$50 $90 $5

The payment of long-term debthurtsthe current ratio andimproves

the debt ratio.

c.Current ratio =$60 + $4

=1.19 Debt ratio =$70 + $4

= 0.79$50 +$4 $90 + $4

Collecting cash in advancehurtsboth ratios.

d.Current ratio =$60

=1.11 Debt ratio =$70 + $4

= 0.82$50 + $4 $90

Accruing an expensehurtsboth ratios.

e.Current ratio = $60 + $8 =1.36 Debt ratio = $70 = 0.71$50 $90 + $8

A cash saleimprovesboth ratios.


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Serial Exercise

(3 hours) E 3-47

Reqs. 1, 2, 5, and 7

Cash Accounts Receivable

Jan. 2 11,000 Jan. 2 700 Jan. 18 1,500Jan. 28 1,500

9 1,000 3 3,900 Bal. 0

21 2,400 12 200 Adj. 2,000

28 1,500 26 400 Bal. 2,000

31 1,200

Bal. 9,500

Supplies Equipment

Jan. 5 400 Adj. 200 Jan. 3 3,900

Bal. 200 Bal. 3,900


Equipment Furniture

Adj. 65 Jan. 4 4,700

Bal. 65 Bal. 4,700


Furniture Accounts Payable

Adj. 78 Jan. 26 400Jan. 4 4,700


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Bal. 78 5 400

Bal. 4,700


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(continued) E 3-47

Reqs. 1, 2, 5, and 7

Salary Payable Unearned Service RevenueAdj. 500 Adj. 800Jan. 21 2,400

Bal. 500 Bal. 1,600

Common Stock Retained Earnings

Jan. 2 11,000 Clo. 1,743 Clo. 5,300

Bal. 11,000 Clo. 1,200

Bal. 2,357

Dividends Service Revenue

Jan. 31 1,200Clo. 1,200 Jan. 9 1,000

18 1,500

Bal. 2,500

Adj. 2,000

Adj. 800

Clo. 5,300Bal. 5,300

Rent Expense Utilities Expense

Jan. 2 700Clo. 700 Jan. 12 200Clo. 200

Salary Expense

Depreciation Expense

Equipment

Adj. 500 Clo. 500 Adj. 65 Clo. 65


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26 Accounts Payable...................................... 400

Cash........................................................ 400

28 Cash............................................................ 1,500

Accounts Receivable............................. 1,500

31 Dividends................................................... 1,200

Cash...................................................... 1,200


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(continued) E 3-47

Reqs. 3 and 4

Steve Ruiz, Certified Public Accountant, P.C.

Adjusted Trial Balance

January 31, 2012

TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE

ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Cash 9,500 9,500

Accounts receivable (a) 2,000 2,000

Supplies 400 (c) 200 200

Equipment 3,900 3,900

Accumulated depr. equip. (d1) 65 65

Furniture 4,700 4,700

Accumulated depr. furn. (d2) 78 78

Accounts payable 4,700 4,700

Salary payable (e) 500 500

Unearned service revenue 2,400 (b) 800 1,600

Common stock 11,000 11,000

Retained earnings

Dividends 1,200 1,200

Service revenue 2,500 (a)2,000 5,300

(b) 800

Rent expense 700 700

Utilities expense 200 200

Salary expense (e) 500 500


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Depreciation expense equip. (d1) 65 65

Depreciation expense furn. (d2) 78 78

Supplies expense (c) 200 200

20,600 20,600 3,64 3 3,64 3 23,24 3 23,24 3


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(continued) E 3-47

Req. 6

Steve Ruiz, Certified Public Accountant, P.C.Income Statement

Month Ended January 31, 2012

Revenues:

Service revenue $5,300

Expenses:

Rent expense $700

Salary expense 500

Supplies expense 200

Utilities expense 200

Depreciation expense furniture 65

Depreciation expense equipment 78

Total expenses 1,743

Net income $3,557

Steve Ruiz, Certified Public Accountant, P.C.


Month Ended January 31, 2012

Retained earnings, January 1, 2012 $ 0

Add:Net income 3,557

3,557


Retained earnings, January 31, 2012 $ 2,357


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(continued) E 3-47

Req. 6

Steve Ruiz, Certified Public Accountant, P.C.Balance Sheet

January 31, 2012

ASSETS LIABILITIES

Current assets: Current liabilities:

Cash $ 9,500 Accounts payable $ 4,700

Accounts receivable 2,000 Salary payable 500

Supplies 200 Unearned service

Total current assets 11,700 revenue 1,600

Plant assets: Total current liabilities 6,800

Equipment $3,900

Less: accum. STOCKHOLDERS EQUITY

depr. (65) 3,835Common stock 11,000

Retained earnings 2,357

Furniture $4,700

Less: accum.

Total stockholders equity 13,357

depr. (78) 4,622Total liabilities and ______

Total assets $20,157 stockholders' equity $20,157


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(continued) E 3-47

Req. 7


Closing Entries

Jan.31 Service Revenue 5,300

Retained Earnings.. 5,300

31 Retained Earnings 1,743

Rent Expense 700Utilities Expense.. 200

Salary Expense 500

Depreciation Expense Equipment... 65

Depreciation Expense Furniture.. 78

Supplies Expense....... 200

31 Retained Earnings 1,200

Dividends.. 1,200


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(continued) E 3-47

Req. 8

Net working

capital


current liabilities

$11,700 -

$6,800

= $4,900

Current ratio =Total current assets

=$11,700

= 1.72Total current liabilities $6,800

Debt ratio = Total liabilities = $6,800 = 0.34Total assets $20,157

The company has an excess of current assets over its current liabilities.

The current and debt ratios indicate an excellent financial position. The

business has $1.72 in current assets for every $1.00 of current liabilities.

The debt ratio of 34% is not too high, which suggests that, overall, the

business should be able to pay its debts.


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Quiz

Q3-48 b

Q3-49 bQ3-50 c

Q3-51 d

Q3-52 a

Q3-53 b

Q3-54 b

Q3-55 a

Q3-56 b ($3,000 9/12 = $2,250)

Q3-57 d ($5,000 + $22,000 $15,000 = revenue of $12,000)Q3-58 b

Q3-59 a

Q3-60 b

Q3-61 d

Q3-62 d Current ratio = $29,700 / $25,100 =1.183

Debt ratio =

$25,100 + $113,000

=.633$29,700 + $188,500

Q3-63 $7,965 ($8,000 $510 $125 + $800 $200)

Q3-64 d Salary Payable

Beg. bal. 20,000

Payment 136,000 Salary exp. 122,000

End. bal. 6,000


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Problems

(15-20 min.) P 3-65A

(All amounts in millions)

1. $40 x = $6 ; x = $34

2. Revenues.. $40

Expenses.. (34)

Net income... $ 6

3. Beginning receivables.. $ 10

Add:Revenues 40

Less: Collections... (25)

Ending receivables $25

Balance sheet

ASSETS

Current assets:

Receivables. $ 25

4. Beginning accounts payable. $ 7

Add:Expenses.. 34

Less: Payments.... (37)

Ending accounts payable $ 4

Balance sheet

LIABILITIES

Current liabilities:


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Accounts payable $ 4


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(20-30 min.) P 3-66A

Req. 1

Masters Consulting

Amount of Revenue (Expense) for JulyDate Cash Basis Accrual Basis

July 1 Expense $(2,000) $ 0

4 Expense (1,000) 0

5 Revenue 800 800

8 Expense (700) (700)

11 Revenue 0 3,400

19 0 0

24 Revenue 3,400 0

26 Expense (2,000) 0

29 Expense (1,500) (1,500)

31 Expense 0 $2,000 5 = (400)

31 Revenue 0 1,000

ReReq. 2 Income (loss) before tax $ (3,000) $2,600

Req. 3

The accrual-basis measure of net income is preferable because it accounts

for revenues and expenses when they occur, not when they are received or

paid in cash. For example, on July 11, the company earned $3,400 of

revenue and increased its wealth as a result. The accrual basis records this

revenue, but the cash basis ignores it. On July 24, the business collected

the receivable that was created by the revenue earned on account at July

11. The accrual basis records no revenue on July 24 because the


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companys increase in wealth occurred back on July 11. The cash basis

waits until cash is received, on July 24, to record the revenue. This is too

late.

(10-20 min.) P 3-67A

Journal


Dec.31 a. Insurance Expense. 4,650*

Prepaid Insurance.. 4,650

To record insurance expense.

31 b. Salary Expense ($5,800 2/5).. 2,320

Salary Payable 2,320

To accrue salary expense.

31 c. Interest Receivable. 600

Interest Revenue 600To accrue interest revenue.

31 d. Supplies Expense.. 6,300**

Supplies.. 6,300


31 e. Unearned Service Revenue

($12,100 60%)... 7,260

Service Revenue 7,260

To record revenue collected in advance.

31 f. Depreciation Expense Office

Furniture

3,000


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Depreciation Expense Equipment.. 6,300


Office Furniture.. 3,000


Equipment 6,300To record depreciation expense.

_____

*$1,050 + $4,800 $1,200 = $4,650

**$2,300 + $6,100 $2,100 = $6,300


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(45-60 min.) P 3-68A

Req. 1

Lady, Inc.


July 31, 2012

TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCEACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Cash 8,800 8,800

Accounts receivable 1,600 (a) 1,700 3,300

Prepaid rent 3,000 (b 1,000* 2,000

Supplies 2,100 (c) 1,630 470

Furniture 90,000 90,000

Accumulated depreciation 3,000 (d) 1,500** 4,500


Salary payable (e) 3,000*** 3,000

Common stock 14,000 14,000Retained earnings 75,060 75,060


Service revenue 17,000 (a) 1,700 18,700

Salary expense 2,400 (e) 3,000*** 5,400

Rent expense (b) 1,000* 1,000


Depreciation expense (d) 1,500** 1,500

Supplies expense (c) 1,630 _____ 1,630


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112,260 112,260 8,830 8,830 118,460 118,460_____

*$3,000 3 = $1,000

**$90,000 5 = $18,000 12 = $1,500

***$5,000 3/5 = $3,000


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(continued) P 3-68A

Req. 2 (continued)

Lady, Inc.Balance Sheet

July 31, 2012

ASSETS LIABILITIES



Accounts receivable 3,300 Salary payable 3,000

Prepaid rent 2,000 Total current liabilities 6,200

Supplies 470


Furniture $90,000

STOCKHOLDERS EQUITY

Less: Accum. Common stock 14,000

deprec. (4,500) 85,500Retained earnings 79,870



Total assets $100,070 stockholders equity $100,070


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(10-20 min.) P 3-69A

Req. 1

JournalDATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Apr. 30 Accounts Receivable ($6,830 $6,300).......... 530

Rental Revenue. 530

To accrue rental revenue.

30 Interest Receivable ($500 $0).. 500

Interest Revenue ($1,300 $800). 500To accrue interest revenue.

30 Supplies Expense ($400 $0) 400

Supplies ($1,200 $400) 400


30 Insurance Expense ($1,400 $0).. 1,400

Prepaid Insurance ($2,400 $1,000).. 1,400


30 Depreciation Expense ($1,900 $0). 1,900


($11,000 $9,100).. 1,900

To record depreciation expense.

30 Wage Expense ($2,300 $1,600)......... 700

Wages Payable ($700 $0)... 700

To accrue wage expense.

30 Unearned Rental Revenue ($1,700 $1,300).. 400

Rental Revenue*.. 400


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To record revenue that was collected in advance.

_____

* ($20,630 - $19,700 - $530)


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(continued) P 3-69A

Req. 2

Total assets = $80,230 ($8,200 + $6,830 + $500 + $4,900 +$800 + $1,000 + $69,000 $11,000)

Total liabilities = $8,800 ($6,800 + $700 + $1,300)

Net income = $15,230 ($20,630 + $1,300 $1,900 $400

$100 $2,300 $600 $1,400)

Total equity =

$71,430 ($80,230 $8,800)or ($19,000 +$41,000 + $15,230 - $3,800)


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(20-30 min.) P 3-70A

Req. 1

Simpson CorporationIncome Statement

Year Ended March 31, 2012

Revenues:


Expenses:

Salary expense $39,800

Rent expense 10,100

Insurance expense 4,000

Interest expense 2,700

Supplies expense 2,400

Depreciation expense 1,300 60,300

Income before tax 45,200

Income tax expense 7,000

Net income $ 38,200

Simpson Corporation


Year Ended March 31, 2012

Retained earnings, March 31, 2011 $ 2,000


40,200



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Retained earnings, March 31, 2012 $17,200

(continued) P 3-70A

Req. 1 (continued)

Simpson Corporation

Balance Sheet

March 31, 2012

ASSETS LIABILITIES

Cash $ 1,700Accounts payable $ 3,100

Accounts receivable 8,800Interest payable 700

Supplies 2,000Unearned service revenue 800

Prepaid rent 1,700Income tax payable 2,400

Note payable 18,400

Equipment $36,000 Total liabilities 25,400

Less: Accum.

deprec. (4,600)31,400 STOCKHOLDERS EQUITY

Common stock 3,000

Retained earnings 17,200





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Req. 2

Debt ratio:$25,400

= 0.56$45,600

Simpson is in compliance with its debt agreement, which requires the

company to maintain a debt ratio no higher than 0.60.


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(20 min.) P 3-71A

Req. 1


Closing Entries

Mar. 31 Service Revenue.. 94,100

Retained Earnings......... 94,100

31 Retained Earnings.. 35,200

Advertising Expense 11,000Depreciation Expense.. 1,000

Interest Expense... 300

Salary Expense.. 17,900

Supplies Expense. 5,000

31 Retained Earnings.. 32,500

Dividends........ 32,500

Req. 2

Retained Earnings


Mar. 31, 2012 Dividends 32,500Mar. 31, 2012 Revenues 94,100

Mar. 31, 2012 Bal. 45,900

Net income = $58,900 ($94,100 - $35,200)

Req. 3


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Retained Earnings increased during the year because net income of

$58,900 exceeded dividends of $32,500.


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Common stock 10,000

Retained earnings 45,900*


Total liabilities and stockholders equity $82,300

(continued) P 3-72A

Req. 1 (continued)

*Retained earnings, March 31, 2011. $19,500

Add: Net income ($94,100 $11,000 $1,000

$300 $17,900 $5,000). 58,900

78,400

Less: Dividends........... (32,500)

Retained earnings, March 31, 2012 $45,900

Req. 2

2012 2011

Net working

capital


current liabilities

$32,800 -

$20,700

= $12,100 $11,800

Current ratio =


=

$32,800

= 1.58 1.20Total current liabilities $20,700

The increase in both working capital and the current ratio indicate that

the ability to pay current liabilities with current assets improved during

2012.


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2012 2011


=$26,400

= 0.32 0.25Total assets $82,300

The overall debt position deteriorated a little during 2012. The

improvement in the current ratio is greater than the deterioration in the

debt ratio. However, Mountain Lodges overall debt position is strong

because a debt ratio of .32 is not troublesome.


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(45-60 min.) P 3-73A

Req. 1


Current ratio = Total current assets = $15.8 = 1.84Total current liabilities $8.6

$13.9


=$8.6 + $5.3

= 0.43Total assets $32.1

Req. 2

Current Ratio Debt Ratio

a.$15.8 ($8.6 1/2)

= 2.67$13.9 ($8.6 1/2)

= 0.35

($8.6 1/2) $32.1 ($8.6 1/2)

b.$15.8 + $2.0

= 2.07$13.9 + $2.0

= 0.47$8.6 $32.1 + $2.0

c.$15.8 + $2.4

= 2.12 $13.9

= 0.40$8.6 $32.1 + $2.4

d.$15.8 $.7

= 1.75 $13.9

= 0.44$8.6 $32.1 $.7

e. $15.8

= 1.74$13.9 + $0.5

= 0.45$8.6 + $0.5 $32.1


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f.$15.8 $1.5

= 1.66 $13.9 + $2.5

= 0.47$8.6 $32.1 + $4.0 $1.5

g.$15.8

= 1.84 $13.9

= 0.44

$8.6 $32.1 $0.4


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(continued) P 3-73A

Req. 3

a.Revenues usuallyincreasethe current ratio.b.Revenues usuallydecreasethe debt ratio.

c.Expenses usuallydecreasethe current ratio.

Note: Depreciation is an exception to this rule.

d.Expenses usuallyincreasethe debt ratio.

e.If a companys current ratio is greater than 1.0, as it is for Harrington,

paying off a current liability will alwaysincreasethe current ratio.

f.Borrowing money on long-term debt will alwaysincreasethe current

ratio andincreasethe debt ratio.


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(15-20 min.) P 3-74B


1. $37 x = $7; x = $30

2. Revenues.. $37

Expenses.. 30

Net income... $ 7

3. Beginning receivables......... $ 11

Add:Revenues 37

Less: Collections.. (20)

Ending receivables $ 28

Balance sheet

ASSETS

Current assets:Receivables $ 28

4. Beginning accounts payable.. $ 6

Add:Expenses 30

Less: Payments..... (35)

Ending accounts payable. $ 1

Balance sheet

LIABILITIES


Accounts payable $ 1


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(20-30 min.) P 3-75B

Req. 1

Healthy Hearts ConsultingAmount of Revenue (Expense) for December

Date Cash Basis Accrual Basis

Dec. 1 Expense $ (3,500) Expense 0

4 Expense $(900) Expense 0

5Revenue $500 Revenue $500

8 Expense $(200) Expense $(200)

11 Revenue 0 Revenue $3,100

19 Expense 0 Expense 0

24 Revenue $3,100 Revenue 0

26 Expense $(1,800) Expense 0

29 Expense $(800) Expense $(800)

31 Expense 0 Expense $(700)

31 Revenue 0 Revenue $400

Req. 2 Income (loss)

before tax $(3,600) Income before tax $2,300

Req. 3

The accrual-basis measure of net income is preferable because it accounts

for revenues and expenses when they occur, not when they are received or

paid in cash. For example, on Dec. 11, the company earned $3,100 of

revenue and increased its wealth as a result. The accrual basis records this

revenue, but the cash basis ignores it. On Dec. 24, the business collected

the receivable that was created by the revenue earned on account at Dec.


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11. The accrual basis records no revenue on Dec. 24 because the

companys increase in wealth occurred back on Dec. 11. The cash basis

waits until cash is received, on Dec. 24, to record the revenue. This is too

late.

(10-20 min.) P 3-76B

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Dec. 31 a. Insurance Expense............................ 3,500*

Prepaid Insurance......................... 3,500

To record insurance expense

31 b. Salary Expense ($6,200 1/5)............ 1,240

Salary Payable........................... 1,240

To accrue salary expense.

31 c. Interest Receivable............................. 500Interest Revenue........................... 500

To accrue interest revenue.

31 d. Supplies Expense............................... 6,800**

Supplies......................................... 6,800


31 e. Unearned Service Revenue($11,900 70%)................................... 8,330

Service Revenue........................... 8,330

To record revenue that was collected

in advance.


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31 f. Depreciation Expense Office .........

Furniture...................................

Depreciation Expense Equipment..

3,500

5,800


Office Furniture........................ 3,500Accumulated Depreciation

Equipment................................. 5,800


_____

*$800 + $3,600 $900 = $3,500

**$2,700 + $6,400 $2,300 = $6,800


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(45-60 min.) P 3-77B

Req. 1

Princess, Inc.


August 31, 2012

TRIAL BALANCE ADJUSTMENTS

ADJUSTED

TRIAL BALANCE

ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Cash 8,300 8,300

Accounts receivable 1,900 (a) 2,100 4,000

Prepaid rent 2,100 (b) 700* 1,400

Supplies 2,400 (c) 2,090 310

Furniture 63,000 63,000

Accumulated depreciation 3,700 (d) 1,750** 5,450


Salary payable (e) 3,060*** 3,060

Common stock 13,000 13,000Retained earnings 53,430 53,430


Service revenue 11,000 (a) 2,100 13,100

Salary expense 2,600 (e) 3,060*** 5,660

Rent expense (b) 700* 700


Depreciation expense (d) 1,750** 1,750


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Supplies expense (c) 2,090 _____ 2,090

85,130 85,130 9,700 9,700 92,040 92,040

* $2,100 3 = $700

**$63,000 3 = $21,000 12 = $1,750

***$5,100 3/5 = $3,060


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(continued) P 3-77B

Req. 2 (continued)

Princess, Inc.Income Statement

Month Ended August 31, 2012

Revenues:


Expenses:



Depreciation expense 1,750

Rent expense 700

Utilities expense 530

Total expenses 10,730

Net income $2,370

Princess, Inc.


Month Ended August 31, 2012

Retained earnings, August 1, 2012 $53,430


55,800


Retained earnings, August 31, 2012 $51,500

Financial Accounting 9/e Solutions Manual3-110

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(continued) P 3-77B

Req. 2 (continued)

Princess, Inc.Balance Sheet

August 31, 2012

ASSETS LIABILITIES


Cash $8,300 Accounts payable $ 4,000

Accounts receivable 4,000 Salary payable 3,060

Prepaid rent 1,400Total current liabilities 7,060

Supplies 310


Furniture $63,000 STOCKHOLDERS EQUITY

Less: Accum. Common stock 13,000

deprec. (5,450) 57,550Retained earnings 51,500


______Total liabilities and ______


Chapter 3 Accrual Accounting and Income 3-111

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(10-20 min.) P 3-78B

Req. 1

Journal

DATE ACCOUNT TITLES AND EXPLANATION DEBITCREDIT

Apr.30 Accounts Receivable ($6,800 $6,300). 500

Rental Revenue. 500

To accrue rental revenue.

30 Interest Receivable ($400 $0). 400

Interest Income ($400 $0)......... 400

30 Supplies Expense ($700 $0).......... 700

Supplies ($1,300 $600)....... 700


30 Insurance Expense ($1,500 $0).. 1,500

Prepaid Insurance ($2,400 $900).. 1,500


30 Depreciation Expense ($1,400 $0).... 1,400


($10,200 $8,800) 1,400


30 Wage Expense ($2,500 $1,300). 1,200

Wages Payable ($1,200 $0)... 1,200To accrue salary expense.

30 Unearned Rental Revenue ($2,000 $1,800). 200

Rental Revenue*.. 200

To record revenue that was collected in

advance.


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_____

* ($15,700 - $15,000 - $500)


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(20-30 min.) P 3-79B

Req. 1

Nicholl CorporationIncome Statement

Year Ended May 31, 2012

Revenues:


Expenses:


Rent expense 10,300

Insurance expense 3,600

Interest expense 2,600


Depreciation expense 1,200 60,400

Income before tax 37,400

Income tax expense 7,100

Net income $30,300

Nicholl Corporation


Year Ended May 31, 2012Retained earnings, May 31, 2011 $ 4,000


34,300



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Retained earnings, May 31, 2012 $14,300


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(continued) P 3-79B

Req. 1 (continued)

Nicholl Corporation.Balance Sheet

May 31, 2012

ASSETS LIABILITIES


Accounts receivable 8,600 Unearned service

Supplies 2,200 revenue 900

Prepaid rent 1,800 Interest payable 500

Income tax payable 2,100

Equipment $37,300 Note payable 18,800

Less: Accum. Total liabilities 26,000

deprec. (4,100) 33,200

STOCKHOLDERS EQUITY

Common stock 7,000

Retained earnings 14 ,300




Req. 2

Debt ratio: $26,000 = 0.55


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$47,300

Nicholl Corporations debt ratio of 0.55 is in compliance with the lenders

debt restriction.

(20 min.) P 3-80B

Req. 1

Journal


Closing Entries

Mar.31 Service Revenue 91,500

Retained Earnings 91,500


Salary Expense.. 17,700

Supplies Expense. 4,800

Advertising Expense 11,400

Depreciation Expense. 2,000

Interest Expense... 400


Dividends 32,500

Req. 2

Retained Earnings



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Mar. 31, 2012 Dividends 32,500Mar. 31, 2012 Revenues 91,500

Mar. 31, 2012 Bal. 42,700

Net income = $55,200($91,500 - $36,300)

Req. 3

Retained Earnings increased during the year because net income of

$55,200 exceeded dividends of $32,500.


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(30-40 min.) P 3-81B

Req. 1

Cool River Service, Inc.

Balance Sheet

March 31, 2012

ASSETS

Current assets:

Cash....................................................................... $ 7,400

Accounts receivable............................................. 17,000

Prepaid expenses.................................................. 3,000 Supplies................................................................. 5,500

Total current assets.......................................... 32,900

Plant assets:

Equipment..............................................................$42,800

Less: accumulated depreciation..........................(6,900) 35,900

Other assets................................................................ 14,000

Total assets................................................................. $82,800

LIABILITIES


Accounts payable.................................................. $14,400

Current portion of note payable........................... 700

Salary payable....................................................... 2,600

Unearned service revenue.................................... 3,600

Total current liabilities...................................... 21,300

Note payable, long-term............................................. 5,600

Total liabilities............................................................. 26,900


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STOCKHOLDERS EQUITY

Common stock............................................................ 13,200

Retained earnings .................................................. 42,7 00*

Total stockholders equity...................................... 55,900

Total liabilities and stockholders equity.................. $82,800


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(continued) P 3-81B

Req. 1 (continued)

_____

*Computation:

Retained earnings, March 31, 2011.. $ 20,000

Add: Net income ($91,500 $11,400 $2,000

$400 $17,700 $4,800).......... 55,200

75,200

Less: Dividends.. (32,500)

Retained earnings, March 31, 2012.. $42,700

Req. 2

2012 2011

Net working

capital


current liabilities

$32,900 -

$21,300

= $11,600$11,000

Current ratio =Total current assets

=$32,900

= 1.54 1.30

Total current liabilities $21,300

The increase in both working capital and the current ratio indicate that

the ability to pay current liabilities with current assets improved during

2012.


=$26,900

=0.32 0.35Total assets $82,800

Cool River Services overall debt position improved a bit from 2011 to

2012.


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(45-60 min.) P 3-82B

Req. 1


Current ratio = Total current assets = $15.4 =1.64Total current liabilities $9.4

$14.9


=$9.4 + $5.5

=0.48Total assets $31.2

Req. 2

Current Ratio Debt Ratio

a.$15.4 ($9.4 1/2)

= 2.28$14.9 ($9.4 1/2)

= 0.38($9.4 1/2) $31.2 ($9.4 1/2)

b.$15.4 + $3.0

= 1.96$14.9 + $3.0

= 0.52$9.4 $31.2 + $3.0

c.$15.4 + $2.4

= 1.89 $14.9

= 0.44$9.4 $31.2 + $2.4

d.$15.4 $.6

= 1.57 $14.9

= 0.49$9.4 $31.2 $.6

e. $15.4 = 1.59 $14.9 + $0.3 = 0.49$9.4 + $0.3 $31.2

f.$15.4 $2.0

= 1.43 $14.9 + $2.9

= 0.52$9.4 $31.2 + $4.9 $2.0


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g.$15.4

= 1.64 $14.9

= 0.49$9.4 $31.2 $0.9


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7Accrued expenses payable = $1,900 + $500 = $2,400

Conclusion: Valley Forges net working capital and current ratio

improved during 2012. The companys current ratio is

very strong.

(60 min.) E 3-84

a.Net income:

Service revenue:

($161,000 + $1,650 + $32,200).

Expenses:Salary ($37,000 + $3,500).

Depreciation building

Supplies...

Insurance.

Advertising..

Utilities.

Net income..

$194,850

$ 40,500

2,600

3,100

1,500

7,300

2,00057,000

$137,850

b.Total assets:

Cash

Accounts receivable ($7,500 + $32,200)Supplies ($4,600 $3,100)

Prepaid insurance ($3,500 $1,500).

Building

Less: Accum. Depr.

$ 7,300

39,7001,500

2,000

$110,000


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($15,600 + $2,600)..

Land

Total assets.

(18,200) 91,800

53,000

$195,300


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(continued) E 3-84

c.Total liabilities:

Accounts payable..........................................Salary payable...............................................

Unearned service revenue

($5,500 $1,650).......................................

Total liabilities...............................................

Total stockholders equity:

Common stock..............................................Retained earnings, beginning......................

Add: Net income...........................................

Less: Dividends............................................

Total stockholders equity............................

$ 6,100 3,500

3,850

$ 13,450

d.

$ 14,000 $ 46,000

137,850

197,850

(16,000

)

167,850

$181,850

e.Total assets =Total liabilities +Total stockholders equity

$195,300 = $13,450 + $181,850


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(20 min.) P 3-85

Express Detail Inc.

Balance Sheet

December 31, 2012

ASSETS LIABILITIES

Cash (a) $ 15,300 Accounts payable (g) $ 3,000

Accounts receivable (c)1,400 Advertising payable(h) 500

Supplies (d) 1,000 Salary payable (i) 500


Equipment (e) $35,000

Less: Accum.

deprec.(f)(12,000)

17,700

23,000

Unearned gift certificate

revenue (b)

Total liabilities1,2005,200

STOCKHOLDERS EQUITY

Total assets

$40,700

Common stock (j)

Retained earnings (k)

Total stockholders

equity


stockholders equity

18,000

17,500

35,500

$40,700


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(continued) P 3-85

Supporting computations

(a) Cash

Bal. 12/31/2011 1,300

Cash collections fromcustomers

Issuance of common stock

31,000

8,000

12,500500

5,000

Salaries paidDividends paid

Purchase of equipment

5,500 Payments of accounts

payable

1,500 Advertising paid1,500

Bal. 1/31/2012 15,300

(b) Unearned Gift Certificate Revenue

800 Bal. 12/31/2011

Gift certificate revenue earned 600 1,000 Sale of gift certificates

1,200 Bal. 1/31/2012 (given)

(c) Accounts Receivable

Bal. 12/31/2011 2,000

Revenue on account 29,400 30,000 Collections from customers*

Bal. 1/31/2012 1,400

* Excludes the $1,000 for gift certificates which was received in advance, not on

account

(d) Supplies

Bal. 12/31/2011 1,500

Purchase of supplies 3,500 4,000 Supplies expense

Bal. 1/31/2012 1,000

(e) Equipment -- $35,000 ($30,000 + $5,000)


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(f) Accumulated depreciation -- $12,000 ($6,000 + $6,000)


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(continued) P 3- 85

(g) Accounts payable

5,000 Bal. 12/31/2011

Payments on account 5,500 3,500 Purchase of supplies

3,000 Bal. 1/31/2012

(h) $2,000 Advertising expense - $1,500 advertising paid

(i) Salary Payable

1,000 Bal. 12/31/2011

Salaries paid 12,500 12,000 Salary expense

500 Bal. 1/31/2012

(j) Common Stock--$18,000 ($10,000 + $8,000)

(k) Retained Earnings

12,000 Bal. 12/31/2011

Dividends 500 6,000 Net income

17,500 Bal. 1/31/2012


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Decision Cases

(25 min.) Decision Case 1

Req. 1 Unadjusted trial balance:Debit Credit

Cash.. $ 8,000

Accounts receivable. 4,200

Supplies... 800

Prepaid rent 1,200

Land.. 43,000Accounts payable.. $12,000

Salary payable 0

Unearned service revenue.. 700

Note payable, due in 3 years.. 23,400

Common stock.. 5,000

Retained earnings. 9,300Service revenue. 9,100

Salary expense... 3,400

Rent expense.. 0

Advertising expense. 900

Supplies expense.. 0

Totals $61,500 $59,500

Out of balance $2,000


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(continued) Decision Case 1

Req. 2 Adjusted trial balance:

Debit Credit

Cash... $8,000

Accounts receivable.. 4,200

Supplies ($800 - $400)... 400

Prepaid rent ($1,200 x 11/12) 1,100

Land ($41,000 + $2,000). 43,000

Accounts payable... 12,000

Salary payable. 1,000

Unearned service revenue ($700 - $500).. 200

Note payable, due in 3 years... 25,400

Common stock 5,000

Retained earnings.. 9,300

Service revenue ($9,100 + $500). 9,600

Salary expense ($3,400 + $1,000) 4,400

Rent expense ($1,200 x 1/12).. 100

Advertising expense.. 900

Supplies expense... 400

Total $62,500 $62,500

Req. 3

Current ratio =$8,000 + $4,200 + $400 + $1,100

$12,000 + $1,000 + $200


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=$13,700

= 1.04$13,200

We might have trouble sleeping at night with a current ratio of 1.04. Tobe safe, the current ratio should be around 1.50 or higher.


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(30-40 min.) Decision Case 3

Req. 1 (your highest price)

Advertising revenue ($22,000 + $4,000) $26,000Expenses:

Salary $4,000

Utilities 900

Other (unrecorded) 1,100

Salary of your manager 5,000 11,000

Your expected monthly net income $15,000

Multiplier to compute price X 16

Your highest price $240,000

Req. 2 (Williams asking price)

SW Advertising, Inc.

Statement of Retained Earnings and Common Stock

June 30, 2012

Beginning retained earnings $ 93,000

Add:Net income

Revenue ($22,000 + $4,000) $26,000

Less: Expenses ($4,000 +

$900 + $1,100) (6,000) 20,000

113,000


Ending retained earnings $104,000

Common stock 50,000


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Stockholders equity, June 30, 2012 $154,000

Multiplier to compute price X 2__

Williams asking price $308,000


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(continued) Decision Case 3

Req. 3

You may start by offering Williams approximately $225,000 for thebusiness. His asking price is $308,000 so you are starting out quite far

apart. If Williams appears especially eager to sell out, you may be able

to buy the firm for closer to your highest price of $240,000. However, if

he is not so eager to sell and if you want the business badly enough, you

may have to pay somewhere between $240,000 and $308,000. It might

pay to hire an expert to value the businesss assets. You may find that

Williams price is inflated based on the value of its assets. You can

always raise your offer, but you cannot decrease it, so start the

negotiating process with an offer around $225,000.


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Ethical Issues

Ethical Issue 1

1.The journal entry to record the revenue is:

Dec. Accounts Receivable... XXX

Sales Revenue.. XXX

The debit to Accounts Receivable will increase total current assets

and, as a result, increase (improve) the current ratio.

The credit to Sales Revenue will increase total owner equity and, as aresult, decrease (improve) the debt ratio.

2.a. c. The issue is whether it is ethical to record the revenue in the

current year. The contract has been signed, but the implication is that

the company will not have done everything it needs to do in order to

earn the revenue in the current year. The stakeholders are the

company, the bank, the stockholders, and the companys other

creditors. From an economic standpoint, the entry would obviously

improve the companys short term financial position. However, the

advantage would probably be short-lived. When the bank finds out

about this entry, they will likely protest, and demand immediate

payment, so the longer-term economic impact will likely be negative.

From a legal standpoint, to record this transaction in December

violates GAAP by violating therevenue principle. In this case Cross

Timbers has not made the sale (has not delivered the merchandise) tothe customer and, therefore, has not earned the revenue prior to

December 31 of the current year. From an ethical standpoint,

recording this revenue violates the banks rights for proper disclosure

of the companys income and assets. Revenue should be recorded

no earlier than when it is earned. Cross Timbers expects to earn the

revenue in January of next year. Cross Timbers clearly cannot record


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this revenue until it is earned. To do so is not in their best economic,

legal (GAAP) or ethical best interests.

(continued) Ethical Issue 1

3.The authors would suggest either of two actions. Cross Timbers can

either:

a.Report the current ratio of 1.47 and the debt ratio of .51 because

these are the true values. Then tell the bank of the signed contract

for additional work and the hope for a better set of ratio values next

year. In some cases, banks will agree to sign awaiverof the terms

of loan covenants, meaning that, although the company is in

violation, the bank will not move to enforce the covenant. They

may give Cross Timbers a grace period to cure the violation in

the covenant.

b.Pay off some current liabilities before year end. This will improve

both the current ratio and the debt ratio. This may enable Cross

Timbers to bring its ratio values into compliance with the banks

requirements.


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Ethical Issue 2

1.These transactions overstate the reported income of the company by

$21,000 ($10,000 + $10,000 + $1,000).

2.It appears that Almond wants to improve the companys reported

income in order to borrow on favorable terms. Her action isunethical

and probably illegal as wellbecause she is deliberately overstating

the companys reported income.

Almond appears to be letting the potential short term economic

advantage of these deliberate misstatements take precedence. She

needs to remember that these misstatements violate GAAP, and that,

depending on what use is made of the financial statements, could

subject the company to civil or criminal legal proceedings. If this

happens, the short term economic gains ($21,000) would not even

come close to the long-term economic costs associated with the legal

actions, not to mention the negative publicity. The business will

need a bank loan, and perhaps the money would be used to pay bills,

expand the business, and so on. However, based on Almonds lack of

integrity, the money may be destined for her own use. Regardless of

its use, the money is obtained under false pretenses and cannot be

headed for a good outcome.

The bank is harmed by Almonds and Lails actions. Lending

money to Almond under false pretenses may lead the bank to charge


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an unrealistically low interest rate that robs the banks owners of

interest revenue. In the extreme, the public is robbed if taxpayers

wind up financing the bailout of a failed institution.

3.Personal advice will vary from student to student. The purpose of

asking this question is to challenge students to take the high road of

ethical conduct by having nothing to do with Almonds scheme. The

authors would advise Lail, the accountant, to take these actions, in

order:

a.Refuse to take any part in Almonds scheme, explaining that the

result is overstatement of reported income. This is both illegal and

unethical, and will ultimately have a negative economic impact on

the company, as well. Accountants are bound to standards of

ethical conduct that these actions violate. The can go to prison

when caught falsifying financial statements.

b.To remain ethical, the accountant must be willing to lose his/her

job. It is better to protect ones reputation even if that causes a

short-term hardship.


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Focus on Financials: Amazon.com, Inc.

(15-20 min.)

Req. 1

Accrued expenses are expenses that have been incurred but that have

not yet been paid as of the balance sheet date. The accrual and

matching concepts require that all expenses be recognized (recorded)

during the period in which they are incurred in order to earn revenue,

regardless of when they are paid.

Req. 2 and Req. 4 (balances in millions at December 31, 2008)

Accrued expenses and other

Beg. Bal. $1,759

(a) 1,759 (b) 2,321End. Bal

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