Solution manual chapter 3 fap

Solution manual chapter 3 fap sir umer bashir sahb accounting adjusting entries

1. Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1.The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred (and matched with revenues they generated).
2.The accrual basis of accounting generally provides a better indication of company
performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.
3.Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4.A prepaid expense is reported as an asset on the balance sheet.
5.Depreciable plant assets (such as equipment, buildings, and machinery) lead to
adjustments for depreciation.
6.The Accumulated Depreciation contra account is used for depreciation. It provides
financial statement users with additional information about the relative age of the
assets. Without the contra account information, the reader would not be able to tell
whether the assets are new or in need of replacement.
7.An unearned revenue is reported as a liability on the balance sheet.
8.An accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.
9.If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.
10.For Krispy Kreme, the two accounts of Prepaid Expenses and Property and
Equipment require adjusting entries. The expense account(s) related to the prepaid
account and the depreciation expense account would be understated on the income
statement if Krispy Kreme fails to adjust these two asset accounts. If the adjusting
entries are not made, net income would be overstated. Note: Students might also
correctly identify accounts receivable, deferred income taxes and intangible assets
as needing adjustment.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 119

2. 11.In addition to prepayments, Tastykake must make adjusting entries to Property,
Plant and Equipment, Deferred Income Taxes, Accrued Payroll and Employee
Benefits, and possibly other assets and liabilities such as Receivables (for bad
debts).
12. The Accrued Wages Expense would be reported as part of “Accrued Expenses and
Other Liabilities” on Harley-Davidson’s balance sheet.
QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.URUnearned revenue
b.PEPrepaid expenses (Depreciation)
c.AEAccrued expenses
d.ARAccrued revenue
e.PEPrepaid expenses
Quick Study 3-2 (10 minutes)
a.Insurance Expense.......................................................1,800
Prepaid Insurance.................................................1,800
To record 6-month insurance coverage expired.
b.Supplies Expense.........................................................2,700
Supplies..................................................................2,700
To record supplies used during the year.
($1,000 + $3,000 – [?] = $1,300)
Quick Study 3-3 (10 minutes)
a. Depreciation Expense—Equipment............................5,000
Accumulated Depreciation—Equipment............. 5,000
To record depreciation expense for the year.
($30,000 - $5,000) / 5 years = $5,000
b.No depreciation adjustments are made for land as it is expected to last
indefinitely.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition120

3. Quick Study 3-4 (15 minutes)
a.Unearned Revenue........................................................15,000
Legal Revenue.......................................................15,000
To recognize legal revenue earned (20,000 x 3/4).
b.Unearned Subscription Revenue................................2,400
Subscription Revenue...........................................2,400
To recognize subscription revenue earned.
[100 x ($48 / 12 month) x 6 months]
Quick Study 3-5 (10 minutes)
Salaries Expense...........................................................400
Salaries Payable....................................................400
To record salaries incurred but not yet paid.
[One student earns, $100 x 4 days, M-R]
Quick Study 3-6 (15 minutes)
Accounts Debited and Credited Financial Statement
a.DebitUnearned Revenue Balance Sheet
CreditRevenue Earned Income Statement
b.DebitDepreciation Expense Income Statement
CreditAccumulated Depreciation Balance Sheet
c.DebitWages Expense Income Statement
CreditWages Payable Balance Sheet
d.DebitAccounts Receivable Balance Sheet
CreditRevenue Earned Income Statement
e.DebitInsurance Expense Income Statement
CreditPrepaid Insurance Balance Sheet
Quick Study 3-7 (10 minutes)
Adjusting entry DebitCredit
1.Accrue salaries expense f d
2.Adjust the Unearned Services Revenue account e g
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 121

4. to recognize earned revenue
3.Record the earning of services revenue for which
cash will be received the following period
a g
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition122

5. Quick Study 3-8 (10 minutes)
The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, implying an $800 debit to Interest Expense.
Quick Study 3-9 (10 minutes)
Cash Accounting:
Revenues (cash receipts).......................................................$33,000
Expenses (cash payments: $22,500 - $2,250 + $3,750)....... 24,000
Net income ..............................................................................$ 9,000
Accrual Accounting:
Revenues (earned) .................................................................$39,000
Expenses (incurred) ............................................................... 22,500
Net income...............................................................................$16,500
Quick Study 3-10 (15 minutes)
The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by...........$1,600
Accrued salaries error:
Understates expenses (and understates liabilities) by.... 1,000
Combination of errors:
Understates expenses by...................................................$2,600
Overstates assets by..........................................................$1,600
Understates liabilities by....................................................$1,000
Quick Study 3-11 (10 minutes)
Profit margin = $37,925 / $390,000 = 9.7%
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 123

6. Interpretation: For every one dollar that Yang Company records as revenue,
it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than
competitors’ average profit margin of 15%—it must improve performance.
Quick Study 3-12
A
(5 minutes)
The answer is d.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition124

7. EXERCISES
Exercise 3-1 (15 minutes)
1.B. 4.F
2.E. 5.D
3.C. 6.A.
Exercise 3-2 (30 minutes)
a.Unearned Fee Revenue.................................................10,000
Fee Revenue...............................................................10,000
To record earned portion of fee received in advance.
b.Wages Expense..............................................................9,000
Wages Payable...........................................................9,000
To record wages accrued but not yet paid.
c.Depreciation Expense—Equipment..............................19,127
Accumulated Depreciation—Equipment.................. 19,127
To record depreciation expense for the year.
d.Office Supplies Expense...............................................5,242
Office Supplies
**
.........................................................5,242
To record office supplies used ($480 + $5,349 - $587).
e.Insurance Expense........................................................2,800
Prepaid Insurance
*
.....................................................2,800
To record insurance coverage expired ($5,000 - $2,200).
f. Interest Receivable.......................................................750
Interest Revenue.......................................................750
To record interest earned but not yet received.
g.Interest Expense...........................................................3,500
Interest Payable........................................................3,500
To record interest incurred but not yet paid.
Notes:
Prepaid Insurance
*
Office Supplies
**
Beg. Bal. 5,000 Beg. Bal. 480
Purch. 5,349
? Used ? Used
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 125

8. End. Bal. 2,200 End. Bal. 587
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition126

9. Exercise 3-3 (25 minutes)
a.Depreciation Expense—Equipment..............................16,000
Accumulated Depreciation—Equipment.................. 16,000
To record depreciation expense for the year.
b.Insurance Expense........................................................5,960
Prepaid Insurance
*
.....................................................5,960
To record insurance coverage that expired
($7,000 - $1,040).
c.Office Supplies Expense...............................................2,626
Office Supplies
**
.........................................................2,626
To record office supplies used ($300 + $2,680 - $354).
d.Unearned Fee Revenue.................................................5,000
Fee Revenue...............................................................5,000
To record earned portion of fee received in advance
($10,000 x 1/2).
e.Insurance Expense........................................................4,600
Prepaid Insurance......................................................4,600
To record insurance coverage that expired.
f.Wages Expense..............................................................4,000
Wages Payable...........................................................4,000
To record wages accrued but not yet paid.
Notes:
Prepaid Insurance
*
Office Supplies
**
Bal. Bal. 7,000 Beg. Bal. 300
Purch. 2,680
? Used ? Used
End. Bal. 1,040 End. Bal. 354
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 127

10. Exercise 3-4 (15 minutes)
a. Adjusting entry:
2005
Dec. 31Wages Expense................................................500
Wages Payable..............................................500
To record accrued wages for one day.
(5 workers x $100)
b. Payday entry:
2006
Jan. 4Wages Expense................................................ 1,500
Wages Payable..................................................500
Cash...............................................................2,000
To record accrued and current wages.
Exercise 3-5 (15 minutes)
a.$1,650
b.$5,700
c.$10,080
d.$1,375
Proof:
(a) (b) (c) (d)
Supplies available – prior year-end.......$ 300 $1,600 $ 1,360$1,375
Supplies purchased in current year....... 2,100 5,400 10,080 6,000
Total supplies available...........................2,400 7,000 11,440 7,375
Supplies available – current year-end... (750 ) (5,700 ) (1,840 ) (800 )
Supplies expense for current year.........$1,650$1,300 $ 9,600$6,575
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition128

11. Exercise 3-6 (25 minutes)
a.
Apr. 30Legal Fees Expense............................................2,500
Legal Fees Payable.....................................2,500
To record accrued legal fees.
May 12Legal Fees Payable.............................................2,500
Cash..............................................................2,500
To pay accrued legal fees.
b.
Apr. 30Interest Expense.................................................2,080
Interest Payable...........................................2,080
To record accrued interest expense
(9.6% x $780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable...................................................2,080
Interest Expense.................................................4,160
Cash..............................................................6,240
To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30Salaries Expense.................................................3,600
Salaries Payable..........................................3,600
To record accrued salaries
($9,000 x 2/5 week).
May 3 Salaries Payable..................................................3,600
Salaries Expense................................................. 5,400
Cash..............................................................9,000
To record payment of accrued and
current salaries ($9,000 x 3/5 week).
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 129

12. Exercise 3-7 (20 minutes)
Balance Sheet Insurance Asset using Insurance Expense using
Accrual
Basis
*
Cash
Basis
Accrual
Basis
**
Cash
Basis
Dec. 31, 2003$11,700 $0 2003.........$ 4,500 $16,200
Dec. 31, 2004 6,300 0 2004.........5,400 0
Dec. 31, 2005 900 0 2005......... 5,400 0
Dec. 31, 2006 0 0 2006......... 900 0
Total........$16,200 $16,200
EXPLANATIONS:
*
Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months LeftBalance
12/31/2003...26 $11,700
12/31/2004...14 6,300
12/31/2005...2 900
12/31/2006...0 0
**
Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered Expense
2003...... 10 $ 4,500
2004...... 12 5,400
2005...... 12 5,400
2006...... 2 900
$16,200
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition130

13. Exercise 3-8 (25 minutes)
Dec. 31Accounts Receivable..............................................1,800
Fees Earned.....................................................1,800
To record earned but unbilled fees
(30% x $6,000).
31 Unearned Fees.........................................................4,200
Fees Earned.....................................................4,200
To record earned fees collected in
advance (70% x $6,000).
31 Depreciation Expense—Computers.......................1,500
Accumulated Depreciation—Computers...... 1,500
To record depreciation on computers.
31 Depreciation Expense—Office Furniture................1,750
Accumulated Depreciation—Office Furniture.... 1,750
To record depreciation on office furniture.

31Salaries Expense....................................................2,450
Salaries Payable..............................................2,450
To record accrued salaries.
31 Insurance Expense..................................................1,300
Prepaid Insurance...........................................1,300
To record expired prepaid insurance.
31 Office Supplies Expense.........................................480
Office Supplies................................................480
To record use of office supplies.
31 Utilities Expense......................................................70
Utilities Payable...............................................70
To record incurred and unpaid utility costs.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 131

14. Exercise 3-9 (10 minutes)
a. $5,390/$44,830 = 12.0%
b. $87,644/$398,954 = 22.0%
c. $93,385/$257,082 = 36.3%
d. $55,234/$1,458,999= 3.8%
e. $70,158/$435,925 = 16.1%
Analysis and Interpretation: Company c has the highest profitability
according to the profit margin ratio. Company c earns 36.3 cents in net
income for each one dollar of net sales recorded.
Exercise 3-10
A
(30 minutes)
a.
Dec.1Supplies Expense............................................3,000
Cash..........................................................3,000
Purchased supplies.
b.
Dec.2Insurance Expense..........................................1,440
Cash..........................................................1,440
Paid insurance premiums.
c.
Dec.15Cash..................................................................12,000
Remodeling Fees Earned........................12,000
Received fees for work to be done.
d.
Dec.28Cash..................................................................3,600
Remodeling Fees Earned........................3,600
Received fees for work to be done.
e.
Dec.31Supplies...........................................................1,920
Supplies Expense....................................1,920
Adjust expenses for unused supplies.
f.
Dec.31Prepaid Insurance ($1,440 - $240).................1,200
Insurance Expense..................................1,200
Adjust expenses for unexpired coverage.
g.
Dec.31Remodeling Fees Earned ..............................9,300
Unearned Remodeling Fees................... 9,300
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition132

15. Exercise 3-11
A
(25 minutes)
a.Initial credit recorded in the Unearned Fees account:
July1Cash.......................................................................2,000
Unearned Fees..............................................2,000
Received fees for work to be done.
6Cash.......................................................................8,400
Unearned Fees..............................................8,400
Received fees for work to be done.
12Unearned Fees......................................................2,000
Fees Earned...................................................2,000
Completed work for customer.
18Cash.......................................................................7,500
Unearned Fees..............................................7,500
Received fees for work to be done.
27Unearned Fees......................................................8,400
Fees Earned...................................................8,400
Completed work for customer.
31No adjusting entries required.
b.Initial credit recorded in the Fees Earned account:
July1Cash.......................................................................2,000
Fees Earned...................................................2,000
Received fees for work to be done.
6Cash.......................................................................8,400
Fees Earned...................................................8,400
Received fees for work to be done.
12No entry required.
18Cash.......................................................................7,500
Fees Earned...................................................7,500
Received fees for work to be done.
27No entry required.
31 Fees Earned..........................................................7,500
Unearned Fees..............................................7,500
Adjusted to reflect unearned fees for unfinished job.
c. Under the first method (and using entries from a):
Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500
Fees Earned = $2,000 + $8,400 = $10,400
Under the second method (and using entries from b):
Unearned Fees = $7,500
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 133

16. Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial statements.]
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition134

17. PROBLEM SET A
Problem 3-1A (15 minutes)
1.G. 4.B. 7.H. 10.D.
2.E. 5.G. 8.E. 11.A.
3.I. 6.C. 9.F. 12.D.
Problem 3-2A (35 minutes)
Part 1
Adjustment (a)
Dec.31Office Supplies Expense.........................12,760
Office Supplies.................................12,760
To record cost of supplies used
($3,000 + $12,400 - $2,640).
Adjustment (b)
31Insurance Expense..................................12,312
Prepaid Insurance............................ 12,312
To record annual insurance coverage cost.
Policy Cost per Month
Months Active
in 2005 2005 Cost
A $660 ($15,840/24 mo.) 12 $ 7,920
B 363 ($13,068/36 mo.) 9 3,267
C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312
Adjustment (c)
31Salaries Expense (2 days x $2,100)........4,200
Salaries Payable............................... 4,200
To record accrued but unpaid wages.
Adjustment (d)
31Depreciation Expense—Building...........27,000
Accumulated Depreciation—Building 27,000
To record annual depreciation expense
[($855,000 -$45,000) / 30 years = $27,000]
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 135

18. Problem 3-2A (Continued)
Adjustment (e)
Dec.31Rent Receivable.......................................2,400
Rent Earned......................................2,400
To record earned but unpaid Dec. rent.
Adjustment (f)
31Unearned Rent.........................................4,350
Rent Earned......................................4,350
To record the amount of rent earned for
November and December (2 x $2,175).
Part 2
Cash Payment for (c)
Jan. 6Salaries Payable......................................4,200
Salaries Expense*....................................6,300
Cash...................................................10,500
To record payment of accrued and
current salaries. *(3 days x $2,100)
Cash Payment for (e)
15Cash..........................................................4,800
Rent Receivable................................2,400
Rent Earned......................................2,400
To record past due rent for two months.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition136

19. Problem 3-3A (90 minutes)
Parts 1 and 2
Cash Equipment
Unadj. Bal.26,000 Unadj. Bal.70,000
Accounts Receivable
Accumulated Depreciation—
Equipment
Unadj. Bal. 0 Unadj. Bal.16,000
(f) 7,500 (c) 12,000
Adj. Bal. 7,500 Adj. Bal. 28,000
Teaching Supplies Accounts Payable
Unadj. Bal.10,000 Bal. 36,000
(b) 7,400
Adj. Bal. 2,600 Salaries Payable
Unadj. Bal. 0
Prepaid Insurance (g) 400
Unadj. Bal.15,000 Adj. Bal. 400
(a) 3,000
Adj. Bal. 12,000 Unearned Training Fees
Unadj. Bal.11,000
Prepaid Rent (e) 4,400
Unadj. Bal.2,000 Adj. Bal. 6,600
(h) 2,000
Adj. Bal. 0 T. Watson, Capital
Bal. 63,600
Professional Library
Bal. 30,000 T. Watson, Withdrawals
Bal. 40,000
Accumulated Depreciation—
Professional Library
Unadj. Bal. 9,000
(d) 6,000
Adj. Bal. 15,000
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 137

20. Problem 3-3A (Continued)
Tuition Fees Earned Rent Expense
Unadj. Bal.102,000 Unadj. Bal.22,000
(f) 7,500 (h) 2,000
Adj. Bal.109,500 Adj. Bal. 24,000
Training Fees Earned Teaching Supplies Expense
Unadj. Bal.38,000 Unadj. Bal. 0
(e) 4,400 (b) 7,400
Adj. Bal.42,400 Adj. Bal. 7,400
Depreciation Expense—
Professional Library Advertising Expense
Unadj. Bal. 0 Bal. 7,000
(d) 6,000
Adj. Bal. 6,000
Depreciation Expense—
Equipment Utilities Expense
Unadj. Bal. 0 Bal. 5,600
(c) 12,000
Adj. Bal. 12,000
Salaries Expense
Unadj. Bal.48,000
(g) 400
Adj. Bal. 48,400
Insurance Expense
Unadj. Bal. 0
(a) 3,000
Adj. Bal. 3,000
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition138

21. Problem 3-3A (Continued)
Part 2
Adjustment (a)
Dec. 31Insurance Expense.........................................3,000
Prepaid Insurance.....................................3,000
To record the insurance expired.
Adjustment (b)
31Teaching Supplies Expense..........................7,400
Teaching Supplies....................................7,400
To record supplies used ($10,000-$2,600).
Adjustment (c)
31Depreciation Expense—Equipment..............12,000
Accumulated Depreciation—Equipment...... 12,000
To record equipment depreciation.
Adjustment (d)
31Depreciation Expense—Profess. Library.....6,000
Accumul. Depreciation—Profess. Library... 6,000
To record professional library depreciation.
Adjustment (e)
31Unearned Training Fees.................................4,400
Training Fees Earned...............................4,400
To record training fees earned that were
collected in advance.
Adjustment (f)
31Accounts Receivable......................................7,500
Tuition Fees Earned.................................7,500
To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)
31Salaries Expense............................................400
Salaries Payable.......................................400
To record accrued salaries (2 days x $100 x 2).
Adjustment (h)
31Rent Expense..................................................2,000
Prepaid Rent..............................................2,000
To record expiration of prepaid rent.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 139

22. Problem 3-3A (Continued)
Part 3
Watson Technical Institute
Adjusted Trial Balance
December 31, 2005
Debit Credit
Cash.........................................................................$ 26,000
Accounts receivable..............................................7,500
Teaching supplies .................................................2,600
Prepaid insurance..................................................12,000
Prepaid rent............................................................0
Professional library................................................30,000
Accumulated depreciation—Professional library. . $ 15,000
Equipment...............................................................70,000
Accumulated depreciation—Equipment.............. 28,000
Accounts payable...................................................36,000
Salaries payable.....................................................400
Unearned training fees..........................................6,600
T. Watson, Capital..................................................63,600
T. Watson, Withdrawals.........................................40,000
Tuition fees earned................................................109,500
Training fees earned..............................................42,400
Depreciation expense—Professional library.......6,000
Depreciation expense—Equipment......................12,000
Salaries expense ...................................................48,400
Insurance expense.................................................3,000
Rent expense..........................................................24,000
Teaching supplies expense...................................7,400
Advertising expense..............................................7,000
Utilities expense..................................................... 5,600 _______
Totals.......................................................................$301,500$301,500

©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition140

23. Problem 3-3A (Continued)
Part 4
WATSON TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2005
Revenues
Tuition fees earned............................................$109,500
Training fees earned.......................................... 42,400
Total revenues....................................................$151,900
Expenses
Depreciation expense—Professional library...6,000
Depreciation expense—Equipment.................. 12,000
Salaries expense................................................48,400
Insurance expense.............................................3,000
Rent expense......................................................24,000
Teaching supplies expense...............................7,400
Advertising expense..........................................7,000
Utilities expense................................................. 5,600
Total expenses................................................... 113,400
Net income............................................................$ 38,500
WATSON TECHNICAL INSTITUTE
Statement of Owner’s Equity
For Year Ended December 31, 2005
T. Watson, Capital, December 31, 2004.............. $ 63,600
Plus: Net income.................................................. 38,500
102,100
Less: Owner withdrawals.................................... 40,000
T. Watson, Capital, December 31, 2005.............. $ 62,100
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 141

24. Problem 3-3A (Concluded)
WATSON TECHNICAL INSTITUTE
Balance Sheet
December 31, 2005
Assets
Cash.................................................................................$ 26,000
Accounts receivable......................................................7,500
Teaching supplies..........................................................2,600
Prepaid insurance.......................................................... 12,000
Professional library........................................................$30,000
Accumulated depreciation—Professional library....... (15,000) 15,000
Equipment.......................................................................70,000
Accumulated depreciation—Equipment......................(28,000) 42,000
Total assets.....................................................................$105,100
Liabilities
Accounts payable...........................................................$ 36,000
Salaries payable.............................................................400
Unearned training fees.................................................. 6,600
Total liabilities................................................................43,000
Equity
T. Watson, Capital.......................................................... 62,100
Total liabilities and equity.............................................$105,100
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition142

25. Problem 3-4A (45 minutes) — Part 1
Account
Unadjusted
Trial Balance Adjustments
Adjusted
Trial Balance
Cash...............................$ 27,000 $ 27,000
Accounts receivable..........12,000 (a
)
10,460 22,460
Office supplies..................18,000 (b
)
15,0003,000
Prepaid insurance.............7,320 (c)2,440 4,880
Office equipment...............92,000 92,000
Accumulated depreciation
—Office equipment.......... $ 12,000 (d
)
6,000 $ 18,000
Accounts payable............. 9,300 (e) 900 10,200
Interest payable................. (f)800 800
Salaries payable................ (g
)
6,600 6,600
Unearned consulting fees... 16,000(h)1,700 14,300
Long-term notes payable.... 44,000 44,000
J. Winner, Capital.............. 28,420 28,420
J. Winner, Withdrawals.......10,000 10,000
Consulting fees
earned...........................156,000
(a)
(h
)
10,460
1,700 168,160
Depreciation expense—
Office equipment.............
(d)6,000 6,000
Salaries expense...............71,000 (g)6,600 77,600
Interest expense................1,400 (f)800 2,200
Insurance expense............ (c
)
2,440 2,440
Rent expense...................13,200 13,200
Office supplies expense..... (b)15,000 15,000
Advertising expense.......... 13,800 _______(e
)
90
0
______ 14,700 _______
Totals..............................$265,720 $265,720 $43,900 $43,90
0
$290,480 $290,480
Adjustment description:
(a)Earned but uncollected revenues.
(b)Cost of consumed office supplies.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 143

26. (c)Cost of expired insurance coverage.
(d)Depreciation expense on office equipment.
(e)Incurred but unpaid advertising expense.
(f)Incurred but unpaid interest expense.
(g)Incurred but unpaid salaries expense.
(h)Earned revenues previously received in advance.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
th
Edition144

27. Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2005
Revenues
Consulting fees earned ................................$168,160
Expenses
Depreciation expense—Office equipment..$ 6,000
Salaries expense ..........................................77,600
Interest expense ...........................................2,200
Insurance expense .......................................2,440
Rent expense ................................................13,200
Office supplies expense ..............................15,000
Advertising expense .................................... 14,700
Total expenses.............................................. 131,140
Net income....................................................... $ 37,020
JJW COMPANY
Statement of Owner’s Equity
For Year Ended July 31, 2005
J. Winner, Capital, July 31, 2004.................... $28,420
Plus: Net income............................................. 37,020
65,440
Less: Owner withdrawals............................... 10,000
J. Winner, Capital, July 31, 2005.................... $55,440
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 145

28. Problem 3-4A (Concluded)
Part 2
JJW COMPANY
Balance Sheet
July 31, 2005
Assets
Cash............................................................................$ 27,000
Accounts receivable..................................................22,460
Office supplies...........................................................3,000
Prepaid insurance......................................................4,880
Office equipment........................................................$92,000
Accumulated depreciation—Office equipment.......(18,000) 74,000
Total assets................................................................$131,340
Liabilities
Accounts payable......................................................$ 10,200
Interest payable..........................................................800
Salaries payable.........................................................6,600
Unearned consulting fees.........................................14,300
Long-term notes payable.......................................... 44,000
Total liabilities............................................................75,900
Equity
J. Winner, Capital....................................................... 55,440
Total liabilities and equity.........................................$131,340
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition146

29. Problem 3-5A (50 minutes)
Part 1
CALLAHAY COMPANY
Income Statement
For Year Ended December 31, 2005
Revenues
Fees earned..............................................$420,000
Interest earned.......................................... 16,000
Total revenues..........................................$436,000
Expenses
Depreciation expense—Automobiles.....18,000
Depreciation expense—Equipment........10,000
Salaries expense......................................180,000
Wages expense........................................32,000
Interest expense.......................................24,000
Office supplies expense..........................26,000
Advertising expense................................50,000
Repairs expense—Automobiles............. 16,800
Total expenses......................................... 356,800
Net income..................................................$ 79,200
CALLAHAY COMPANY
Statement of Owner's Equity
For Year Ended December 31, 2005
J. Callahay, Capital, December 31, 2004.. $247,800
Plus: Net income....................................... 79,200
327,000
Less: Withdrawals by owner.................... 38,000
J. Callahay, Capital, December 31, 2005.. $289,000
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 147

30. Problem 3-5A (Concluded)
CALLAHAY COMPANY
Balance Sheet
December 31, 2005
Assets
Cash........................................................................ $ 22,000
Accounts receivable.............................................44,000
Interest receivable.................................................10,000
Notes receivable (due in 90 days)....................... 160,000
Office supplies......................................................8,000
Automobiles..........................................................$160,000
Accumulated depreciation—Automobiles..........(42,000)118,000
Equipment..............................................................130,000
Accumulated depreciation—Equipment.............(10,000)120,000
Land........................................................................ 70,000
Total assets...........................................................$552,000
Liabilities
Accounts payable.................................................$ 88,000
Interest payable.....................................................12,000
Salaries payable....................................................11,000
Unearned fees.......................................................22,000
Long-term notes payable..................................... 130,000
Total liabilities.......................................................263,000
Equity
J. Callahay, Capital............................................... 289,000
Total liabilities and equity....................................$552,000
Part 2
Profit margin = $79,200 / $436,000 = 18.2%
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition148

31. Problem 3-6A
A
(40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1Prepaid Advertising .......................................1,500
Cash..........................................................1,500
Paid for future advertising.
1Prepaid Insurance...........................................2,160
Cash..........................................................2,160
Paid insurance for one year.
30Cash.................................................................. 3,300
Unearned Service Fees...........................3,300
Received fees in advance.
Dec. 1Prepaid Consulting Fees ...............................2,700
Cash..........................................................2,700
Paid for future consulting.
15Cash..................................................................7,650
Unearned Service Fees...........................7,650
Received fees in advance.
31Advertising Expense.......................................600
Prepaid Advertising ................................600
To adjust prepaid advertising ($1,500-$900).
31Insurance Expense..........................................360
Prepaid Insurance....................................360
To adjust prepaid insurance
($2,160 x 2/12).
31Unearned Service Fees ..................................2,100
Service Fees Earned................................2,100
To adjust unearned service fees
($3,300-$1,200).
31Consulting Fees Expense ..............................900
Prepaid Consulting Fees......................... 900
To adjust prepaid consulting fees
($2,700 x 1/3).
31Unearned Service Fees ..................................3,000
Service Fees Earned................................3,000
To adjust unearned service fees.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 149

32. Problem 3-6A
A
(Continued)
Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov.1Advertising Expense.......................................1,500
Cash..........................................................1,500
Paid for future advertising.
1Insurance Expense..........................................2,160
Cash..........................................................2,160
Paid insurance for one year.
30Cash..................................................................3,300
Service Fees Earned................................3,300
Received fees in advance.
Dec.1Consulting Fees Expense...............................2,700
Cash..........................................................2,700
Paid for future consulting.
15Cash..................................................................7,650
Service Fees Earned................................7,650
Received fees in advance.
31Prepaid Advertising........................................900
Advertising Expense...............................900
To adjust for prepaid advertising.
31Prepaid Insurance...........................................1,800
Insurance Expense..................................1,800
To adjust for prepaid insurance.
31Service Fees Earned.......................................1,200
Unearned Service Fees...........................1,200
To adjust for unearned service fees.
31Prepaid Consulting Fees................................1,800
Consulting Fees Expense....................... 1,800
To adjust for prepaid consulting fees.
31Service Fees Earned.......................................4,650
Unearned Service Fees...........................4,650
To adjust for unearned service fees.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition150

33. Problem 3-6A
A
(Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months...................................$ 600
Prepaid advertising as of December 31...............................900
Insurance expense for two months.....................................360
Prepaid insurance as of December 31.................................1,800
Consulting fees expense (1/3 of total paid).........................900
Prepaid consulting fees........................................................1,800
Service fees earned for two months ($2,100 + $3,000)......5,100
Unearned service fees at 12/31 ($1,200 + $4,650)...............5,850
When prepaid expenses and unearned revenues are recorded in balance
sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 151

34. PROBLEM SET B
Problem 3-1B (15 minutes)
1.E. 4.C. 7.F. 10.I.
2.H. 5.D. 8.I. 11.A.
3.G. 6.B. 9.F. 12.B.
Problem 3-2B (30 minutes)
Part 1
Adjustment (a)
Oct. 31Office Supplies Expense........................................3,450
Office Supplies................................................3,450
To record cost of supplies used
($500 + $3,650 - $700).
Adjustment (b)
31Insurance Expense.................................................2,365
Prepaid Insurance...........................................2,365
To record annual insurance coverage cost.
Policy Cost per Month
Months Active
in 2005
2005
Expense
A $125 ($3,000/24 mo.) 12 $1,500
B 100 ($3,600/36 mo.) 7 700
C 55 ( $660 / 12 mo.) 3 165
Total $2,365
Adjustment (c)
31Salaries Expense....................................................800
Salaries Payable..............................................800
To record accrued but unpaid wages
(1 day x $800).
Adjustment (d)
31Depreciation Expense—Building.......................... 5,400
Accumulated Depreciation—Building........... 5,400
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition152

35. Problem 3-2B (Concluded)
Adjustment (e)
Oct. 31Rent Receivable......................................................600
Rent Earned.....................................................600
To record earned but unpaid Oct. rent.
Adjustment (f)
31Unearned Rent........................................................1,050
Rent Earned.....................................................1,050
To record rent earned for September
and October (2 x $525).
Part 2
Cash Payment for (c)
Nov.7Salaries Payable.....................................................800
Salaries Expense*...................................................3,200
Cash..................................................................4,000
To record payment of accrued and
current salaries. *(4 days x $800)
Cash Payment for (e)
15Cash.........................................................................1,200
Rent Receivable...............................................600
Rent Earned.....................................................600
To record past due rent for two months.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 153

36. Problem 3-3B (90 minutes)
Parts 1 and 2
Cash Accounts Payable
Bal. 50,000 Bal. 12,200
Accounts Receivable Salaries Payable
Unadj. Bal. 0 Unadj. Bal. 0
(f) 5,500 (g) 540
Adj. Bal. 5,500 Adj. Bal. 540
Teaching Supplies Unearned Training Fees
Unadj. Bal.60,000 Unadj. Bal.27,600
(b) 57,500(e) 9,200
Adj. Bal. 2,500 Adj. Bal.18,400
Prepaid Insurance M. Alcorn, Capital
Unadj. Bal.18,000 Bal. 68,500
(a) 6,400
Adj. Bal.11,600
M. Alcorn, Withdrawals
Prepaid Rent Bal. 20,000
Unadj. Bal.2,600
(h) 2,600
Adj. Bal. 0
Professional Library
Bal. 10,000
Accumulated Depreciation—
Professional Library
Unadj. Bal.1,500
(d) 2,000
Adj. Bal. 3,500
Equipment
Bal. 30,000
Accumulated Depreciation—
Equipment
Unadj. Bal.16,000
(c) 4,000
Adj. Bal.20,000
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition154

37. Problem 3-3B (Continued)
Parts 1 and 2
Tuition Fees Earned Advertising Expense
Unadj. Bal.105,000 Bal. 18,000
(f) 5,500
Adj. Bal.110,500
Training Fees Earned Utilities Expense
Unadj. Bal.62,000 Bal. 12,400
(e) 9,200
Adj. Bal.71,200
Depreciation Expense—
Professional Library
Unadj. Bal. 0
(d) 2,000
Adj. Bal. 2,000
Depreciation Expense—
Equipment
Unadj. Bal. 0
(c) 4,000
Adj. Bal. 4,000
Salaries Expense
Unadj. Bal.43,200
(g) 540
Adj. Bal. 43,740
Insurance Expense
Unadj. Bal. 0
(a) 6,400
Adj. Bal. 6,400
Rent Expense
Unadj. Bal.28,600
(h) 2,600
Adj. Bal. 31,200
Teaching Supplies Expense
Unadj. Bal. 0
(b) 57,500
Adj. Bal. 57,500
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 155

38. Problem 3-3B (Continued)
Part 2
Adjustment (a)
Dec. 31Insurance Expense................................................6,400
Prepaid Insurance..........................................6,400
To record the insurance expired.
Adjustment (b)
31Teaching Supplies Expense.................................57,500
Teaching Supplies.........................................57,500
To record the cost of supplies used
($60,000-$2,500).
Adjustment (c)
31Depreciation Expense—Equipment.....................4,000
Accumulated Depreciation—Equipment..... 4,000
To record equipment depreciation.
Adjustment (d)
31Depreciation Expense—Professional Library....2,000
Accumulated Depreciation—
Professional Library.............................2,000
To record professional library depreciation.
Adjustment (e)
31Unearned Training Fees........................................9,200
Training Fees Earned.....................................9,200
To record training fees earned that
were collected in advance.
Adjustment (f)
31Accounts Receivable............................................5,500
Tuition Fees Earned.......................................5,500
To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g)
31Salaries Expense...................................................540
Salaries Payable.............................................540
To accrue salaries expense (3 days x $180).
Adjustment (h)
31Rent Expense ........................................................2,600
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition156

39. Prepaid Rent..............................................................2,600
To record expiration of prepaid rent.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 157

40. Problem 3-3B (Continued)
Part 3
ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2005
Debit Credit
Cash............................................................................$ 50,000
Accounts receivable....................................................5,500
Teaching supplies.......................................................2,500
Prepaid insurance.......................................................11,600
Prepaid rent.................................................................0
Professional library.....................................................10,000
Accumulated depreciation—Professional library........ $ 3,500
Equipment...................................................................30,000
Accumulated depreciation—Equipment..................... 20,000
Accounts payable.......................................................12,200
Salaries payable..........................................................540
Unearned training fees................................................18,400
M. Alcorn, Capital........................................................68,500
M. Alcorn, Withdrawals...............................................20,000
Tuition fees earned......................................................110,500
Training fees earned....................................................71,200
Depreciation expense—Professional library...............2,000
Depreciation expense—Equipment.............................4,000
Salaries expense.........................................................43,740
Insurance expense......................................................6,400
Rent expense..............................................................31,200
Teaching supplies expense.........................................57,500
Advertising expense...................................................18,000
Utilities expense.......................................................... 12,400 _______
Totals..........................................................................$304,840 $304,840
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition158

41. Problem 3-3B (Continued)
Part 4
ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2005
Revenues
Tuition fees earned....................................................$110,500
Training fees earned.................................................. 71,200
Total revenues............................................................$181,700
Expenses
Depreciation expense—Professional library..........2,000
Depreciation expense—Equipment.........................4,000
Salaries expense........................................................43,740
Insurance expense....................................................6,400
Rent expense..............................................................31,200
Teaching supplies expense......................................57,500
Advertising expense..................................................18,000
Utilities expense......................................................... 12,400
Total expenses........................................................... 175,240
Net income....................................................................$ 6,460
ALCORN INSTITUTE
Statement of Owner’s Equity
For Year Ended December 31, 2005
M. Alcorn, Capital, December 31, 2004.............. $68,500
Plus: Net income.................................................. 6,460
74,960
Less: Owner withdrawals.................................... 20,000
M. Alcorn, Capital, December 31, 2005.............. $54,960
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 159

42. Problem 3-3B (Concluded)
ALCORN INSTITUTE
Balance Sheet
December 31, 2005
Assets
Cash..............................................................................$50,000
Accounts receivable....................................................5,500
Teaching supplies.......................................................2,500
Prepaid insurance........................................................ 11,600
Professional library.....................................................$10,000
Accumulated depreciation—Professional library........... (3,500) 6,500
Equipment....................................................................30,000
Accumulated depreciation—Equipment....................(20,000) 10,000
Total assets..................................................................$86,100
Liabilities
Accounts payable........................................................$12,200
Salaries payable...........................................................540
Unearned training fees................................................ 18,400
Total liabilities..............................................................31,140
Equity
M. Alcorn, Capital......................................................... 54,960
Total liabilities and equity...........................................$86,100
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition160

43. Problem 3-4B (45 minutes) — Part 1
Account
Unadjusted
Trial Balance Adjustments
Adjusted
Trial Balance
Cash...............................$ 48,000 $ 48,000
Accounts receivable.........70,000 (a)6,660 76,660
Office supplies.................30,000 (b)23,0007,000
Prepaid insurance............ 13,200 (c)4,600 8,600
Office equipment..............150,000 150,000
Accumulated depreciation—
Office equipment................
$ 30,000 (d)10,000 $ 40,000
Accounts payable............ 36,000 (e)6,000 42,000
Interest payable................ (f)1,600 1,600
Salaries payable............... (g)11,200 11,200
Unearned consulting fees. 30,000(h)12,200 17,800
Long-term notes payable. . 80,000 80,000
D. Chen, Capital............... 70,200 70,200
D. Chen, Withdrawals....... 10,000 10,000
Consulting fees earned....
264,000
(a)
(h)
6,660
12,200 282,860
Depreciation expense—
Office equipment...........
(d)10,000 10,000
Salaries expense..............115,600 (g)11,200 126,800
Interest expense...............6,400 (f)1,600 8,000
Insurance expense.......... (c)4,600 4,600
Rent expense..................24,000 24,000
Office supplies expense.... (b)23,000 23,000
Advertising expense......... 43,000 _______(e) 6 ,000 ______ 49,000 _______
Totals..............................$510,200 $510,200 $75,260 $75,260 $545,660 $545,660
Adjustment Descriptions:
(a)Earned but uncollected revenues.
(b)Cost of consumed office supplies.
(c)Cost of expired insurance coverage.
(d)Depreciation expense on office equipment.
(e)Incurred but unpaid advertising expense.
(f)Incurred but unpaid interest expense.
(g)Incurred but unpaid salaries expense.
(h)Earned revenues previously received in advance.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 161

44. Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2005
Revenues
Consulting fees earned .....................................$282,860
Expenses
Depreciation expense—Office equipment.......$ 10,000
Salaries expense ...............................................126,800
Interest expense ................................................8,000
Insurance expense ............................................4,600
Rent expense .....................................................24,000
Office supplies expense ...................................23,000
Advertising expense ......................................... 49,000
Total expenses................................................... 245,400
Net income............................................................ $ 37,460
DAXU CONSULTING COMPANY
Statement of Owner’s Equity
For Year Ended December 31, 2005
D. Chen, Capital, December 31, 2004................. $ 70,200
Plus: Net income.................................................. 37,460
107,660
Less: Owner withdrawals.................................... 10,000
D. Chen, Capital, December 31, 2005................. $ 97,660
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition162

45. Problem 3-4B (Concluded)
Part 2
DAXU CONSULTING COMPANY
Balance Sheet
December 31, 2005
Assets
Cash.............................................................................$ 48,000
Accounts receivable...................................................76,660
Office supplies............................................................7,000
Prepaid insurance.......................................................8,600
Office equipment.........................................................$150,000
Accumulated depreciation—Office equipment........ (40,000 ) 110,000
Total assets.................................................................$250,260
Liabilities
Accounts payable.......................................................$ 42,000
Interest payable...........................................................1,600
Salaries payable..........................................................11,200
Unearned consulting fees..........................................17,800
Long-term notes payable........................................... 80,000
Total liabilities.............................................................152,600
Equity
D. Chen, Capital.......................................................... 97,660
Total liabilities and equity..........................................$250,260
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 163

46. Problem 3-5B (50 minutes)
Part 1
LIGHTNING COURIER
Income Statement
For Year Ended December 31, 2005
Revenues
Delivery fees earned.....................................$580,000
Interest earned............................................... 24,000
Total revenues............................................... $604,000
Expenses
Depreciation expense—Trucks....................24,000
Depreciation expense—Equipment.............46,000
Salaries expense...........................................64,000
Wages expense.............................................290,000
Interest expense............................................25,000
Office supplies expense...............................33,000
Advertising expense.....................................26,400
Repairs expense—Trucks............................ 34,600
Total expenses.............................................. 543,000
Net income....................................................... $ 61,000
LIGHTNING COURIER
Statement of Owner's Equity
For Year Ended December 31, 2005
J. Hallam, Capital, December 31, 2004.......... $115,000
Plus : Net income........................................... 61,000
176,000
Less: Withdrawals by owner......................... 40,000
J. Hallam, Capital, December 31, 2005.......... $136,000
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition164

47. Problem 3-5B (Concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2005
Assets
Cash......................................................................$ 48,000
Accounts receivable...........................................110,000
Interest receivable...............................................6,000
Notes receivable (due in 90 days)........................ 200,000
Office supplies....................................................12,000
Trucks...................................................................$ 124,000
Accumulated depreciation—Trucks.................. (48,000 )76,000
Equipment............................................................260,000
Accumulated depreciation—Equipment...........(190,000)70,000
Land...................................................................... 90,000
Total assets.........................................................$612,000
Liabilities
Accounts payable...............................................$124,000
Interest payable...................................................22,000
Salaries payable..................................................30,000
Unearned delivery fees.......................................110,000
Long-term notes payable................................... 190,000
Total liabilities.....................................................476,000
Equity
J. Hallam, Capital................................................ 136,000
Total liabilities and equity..................................$612,000

Part 2
Profit margin = $61,000 / $604,000 = 10.1%
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 165

48. Problem 3-6B
A
(40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr.1Prepaid Consulting Fees.....................................3,450
Cash...............................................................3,450
Paid for future consulting services.
1Prepaid Insurance................................................2,700
Cash...............................................................2,700
Paid insurance for one year.
30Cash.......................................................................7,500
Unearned Service Fees................................7,500
Received fees in advance.
May1Prepaid Advertising.............................................3,450
Cash...............................................................3,450
Paid for future advertising.
23 Cash .....................................................................9,450
Unearned Service Fees...............................9,450
Received fees in advance.
31Consulting Fees Expense....................................1,500
Prepaid Consulting Fees..............................1,500
To adjust prepaid consulting fees.
31Insurance Expense...............................................450
Prepaid Insurance.........................................450
To adjust prepaid insurance.
31Unearned Service Fees .......................................3,900
Service Fees Earned.....................................3,900
To adjust unearned service fees.
31Advertising Expense............................................2,400
Prepaid Advertising......................................2,400
To adjust prepaid advertising.
31Unearned Service Fees........................................4,500
Service Fees Earned.....................................4,500
To adjust unearned service fees.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition166

49. Problem 3-6B
A
(Continued)
Part 2
Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr.1Consulting Fees Expense .................................3,450
Cash..............................................................3,450
Paid for future consulting services.
1Insurance Expense.............................................2,700
Cash..............................................................2,700
Paid insurance for one year.
30Cash.....................................................................7,500
Service Fees Earned...................................7,500
Received fees in advance.
May1Advertising Expense...........................................3,450
Cash..............................................................3,450
Paid for future advertising.
23Cash.....................................................................9,450
Service Fees Earned...................................9,450
Received fees in advance.
31Prepaid Consulting Fees....................................1,950
Consulting Fees Expense...........................1,950
To adjust for prepaid consulting fees.
31Prepaid Insurance ..............................................2,250
Insurance Expense......................................2,250
To adjust for prepaid insurance.
31Service Fees Earned...........................................3,600
Unearned Service Fees ..............................3,600
To adjust for unearned service fees.
31Prepaid Advertising............................................1,050
Advertising Expense...................................1,050
To adjust for prepaid advertising.
31Service Fees Earned...........................................4,950
Unearned Service Fees ..............................4,950
To adjust for unearned service fees.
©McGraw-Hill Companies, Inc., 2005
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50. Problem 3-6B
A
(Concluded)
Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31....................................$ 1,950
Consulting fees expense for two months..............................1,500
Insurance expense for two months........................................450
Prepaid insurance as of May 31..............................................2,250
Unearned service fees as of May 31 ($3,600 + $4,950).........8,550
Service fees earned for two months ($3,900 + $4,500).........8,400
Prepaid advertising as of May 31............................................1,050
Advertising expense for two months.....................................2,400
When prepaid expenses and unearned revenues are recorded in balance
sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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51. Serial Problem
Serial Problem, Success Systems (120 minutes) Part 1
Journal entries:
Dec.2Advertising Expense..................................655 1,025
Cash.....................................................101 1,025
Paid share of mall advertising costs.
3Repairs Expense—Computer....................684 500
Cash.....................................................101 500
Repaired the computer.
4Cash.............................................................101 3,950
Accounts Receivable..........................106 3,950
Collected accounts receivable.
10Wages Expense..........................................623 750
Cash.....................................................101 750
Paid employee for part-time work.
14Cash.............................................................101 1,500
Unearned Computer Services Revenue...236 1,500
Received advance on work to be performed.
15Computer Supplies....................................126 1,100
Accounts Payable...............................201 1,100
Purchased supplies on credit.
16No entry recorded in the journal.
20Cash.............................................................101 5,625
Computer Services Revenue.............403 5,625
Collected cash revenue from customer.
28Cash.............................................................101 3,000
Accounts Receivable..........................106 3,000
Collected accounts receivable.
29Mileage Expense........................................676 192
Cash.....................................................101 192
Reimbursed Breeze for mileage.
31K. Breeze, Withdrawals..............................302 1,500
Cash.....................................................101 1,500
Owner withdraws cash.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 169

52. Serial Problem (Continued)
Part 2
Adjusting entries:
Dec. 31Computer Supplies Expense .........................652 3,065
Computer Supplies .................................126 3,065
Adjustment for supplies used (supplies
balance less cost of supplies available).
31Insurance Expense .........................................637 555
Prepaid Insurance ...................................128 555
Adjustment for expired insurance (1/4
of original prepaid amount).
31Wages Expense ..............................................623 500
Wages Payable ........................................210 500
Adjustment for accrued wages.
31Depreciation Exp—Computer Equip.............613 1,250
Accumulated Depreciation—
Computer Equipment...........................168 1,250
Adjustment for computer equipment depreciation:
Cost.........................................................$20,000
Predicted life...........................................4 years
Annual depreciation (cost/life)..............$5,000
Expense for three months.....................$1,250
31Depreciation Expense—Office Equip............612 400
Accumulated Depreciation—
Office Equipment ..................................164 400
Adjustment for office equipment depreciation:
Cost..........................................................$8,000
Predicted life............................................5 years
Annual depreciation (cost/life)...............$1,600
Expense for three months.......................$400
31Rent Expense ..................................................640 2,475
Prepaid Rent ............................................131 2,475
Adjustment for expired rent (3/4 of
original prepaid amount).
©McGraw-Hill Companies, Inc., 2005
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53. Serial Problem (Continued)
Parts 1 and 2
Posting to the accounts:
Cash Acct. No. 101
Date Explanation PR Debit CreditBalance
Oct. 1 55,000 55,000
2 3,30051,700
5 2,22049,480
8 1,42048,060
15 4,800 52,860
17 805 52,055
20 1,94050,115
22 1,400 51,515
31 875 50,640
31 3,60047,040
Nov. 1 320 46,720
2 4,633 51,353
5 1,12550,228
18 2,208 52,436
22 250 52,186
28 384 51,802
30 1,75050,052
30 2,00048,052
Dec. 2 1,02547,027
3 500 46,527
4 3,950 50,477
10 750 49,727
14 1,500 51,227
20 5,625 56,852
28 3,000 59,852
29 192 59,660
31 1,50058,160
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 171

54. Serial Problem (Continued)
Parts 1 and 2
Accounts Receivable Acct. No. 106
Date Explanation PR Debit CreditBalance
Oct. 6 4,800 4,800
12 1,400 6,200
15 4,800 1,400
22 1,400 0
28 5,208 5,208
Nov. 8 5,668 10,876
18 2,208 8,668
24 3,950 12,618
Dec. 4 3,950 8,668
28 3,000 5,668
Computer Supplies Acct. No. 126
Date Explanation PR Debit CreditBalance
Oct. 3 1,420 1,420
Nov. 5 1,125 2,545
Dec. 15 1,100 3,645
31 3,065 580
Prepaid Insurance Acct. No. 128
Date Explanation PR Debit CreditBalance
Oct. 5 2,220 2,220
Dec. 31 555 1,665
Prepaid Rent Acct. No. 131
Date Explanation PR Debit CreditBalance
Oct. 2 3,300 3,300
Dec. 31 2,475 825
Office Equipment Acct. No. 163
Date Explanation PR Debit CreditBalance
Oct. 1 8,000 8,000
Accumulated Depreciation—Office Equipment Acct. No. 164
Date Explanation PR Debit CreditBalance
Dec. 31 400 400
©McGraw-Hill Companies, Inc., 2005
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55. Serial Problem (Continued)
Parts 1 and 2
Computer Equipment Acct. No. 167
Date Explanation PR Debit CreditBalance
Oct. 1 20,000 20,000
Accumulated Depreciation—Computer Equipment Acct. No. 168
Date Explanation PR Debit CreditBalance
Dec. 31 1,250 1,250
Accounts Payable Acct. No. 201
Date Explanation PR Debit CreditBalance
Oct. 3 1,420 1,420
8 1,420 0
Dec. 15 1,100 1,100
Wages Payable Acct. No. 210
Date Explanation PR Debit CreditBalance
Dec. 31 500 500
Unearned Computer Services Revenue Acct. No. 236
Date Explanation PR Debit CreditBalance
Dec. 14 1,500 1,500
K. Breeze, Capital Acct. No. 301
Date Explanation PR Debit CreditBalance
Oct. 1 83,00083,000
K. Breeze, Withdrawals Acct. No. 302
Date Explanation PR Debit CreditBalance
Oct. 31 3,600 3,600
Nov. 30 2,000 5,600
Dec. 31 1,500 7,100
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 173

56. Serial Problem (Continued)
Parts 1 and 2
Computer Services Revenue Acct. No. 403
Date Explanation PR Debit CreditBalance
Oct. 6 4,800 4,800
12 1,400 6,200
28 5,208 11,408
Nov. 2 4,63316,041
8 5,66821,709
24 3,95025,659
Dec. 20 5,62531,284
Depreciation Expense—Office Equipment Acct. No. 612
Date Explanation PR Debit CreditBalance
Dec. 31 400 400
Depreciation Expense—Computer Equipment Acct. No. 613
Date Explanation PR Debit CreditBalance
Dec. 31 1,250 1,250
Wages Expense Acct. No. 623
Date Explanation PR Debit CreditBalance
Oct. 31 875 875
Nov. 30 1,750 2,625
Dec. 10 750 3,375
31 500 3,875
Insurance Expense Acct. No. 637
Date Explanation PR Debit CreditBalance
Dec. 31 555 555
Rent Expense Acct. No. 640
Date Explanation PR Debit CreditBalance
Dec. 31 2,475 2,475
©McGraw-Hill Companies, Inc., 2005
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57. Serial Problem (Continued)
Parts 1 and 2
Computer Supplies Expense Acct. No. 652
Date Explanation PR Debit CreditBalance
Dec. 31 3,065 3,065
Advertising Expense Acct. No. 655
Date Explanation PR Debit CreditBalance
Oct. 20 1,940 1,940
Dec. 2 1,025 2,965
Mileage Expense Acct. No. 676
Date Explanation PR Debit CreditBalance
Nov. 1 320 320
28 384 704
Dec. 29 192 896
Miscellaneous Expenses Acct. No. 677
Date Explanation PR Debit CreditBalance
Nov. 22 250 250
Repairs Expense—Computer Acct. No. 684
Date Explanation PR Debit CreditBalance
Oct. 17 805 805
Dec. 3 500 1,305
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 175

58. Serial Problem (Continued)
Part 3
SUCCESS SYSTEMS
Adjusted Trial Balance
December 31, 2004
Debit Credit
Cash ............................................................................$ 58,160
Accounts receivable .................................................. 5,668
Computer supplies ....................................................580
Prepaid insurance .....................................................1,665
Prepaid rent ................................................................825
Office equipment .......................................................8,000
Accumulated depreciation—Office equipment....... $ 400
Computer equipment ................................................20,000
Accumulated depreciation—Computer equipment . 1,250
Accounts payable ......................................................1,100
Wages payable ...........................................................500
Unearned computer services revenue .................... 1,500
K. Breeze, Capital.......................................................83,000
K. Breeze, Withdrawals..............................................7,100
Computer services revenue .....................................31,284
Depreciation expense—Office equipment ..............400
Depreciation expense—Computer equipment........1,250
Wages expense ..........................................................3,875
Insurance expense ....................................................555
Rent expense .............................................................2,475
Computer supplies expense ....................................3,065
Advertising expense..................................................2,965
Mileage expense ........................................................896
Miscellaneous expenses ..........................................250
Repairs expense—Computer ................................... 1,305 _______
Totals...........................................................................$119,034 $119,034
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition176

59. Serial Problem (Continued)
Part 4
SUCCESS SYSTEMS
Income Statement
For Three Months Ended December 31, 2004
Revenue
Computer services revenue.......................................$31,284
Expenses
Depreciation expense—Office equipment................$ 400
Depreciation expense—Computer equipment.........1,250
Wages expense...........................................................3,875
Insurance expense......................................................555
Rent expense...............................................................2,475
Computer supplies expense......................................3,065
Advertising expense...................................................2,965
Mileage expense.........................................................896
Miscellaneous expenses............................................250
Repairs expense—Computer..................................... 1,305
Total expenses............................................................ 17,036
Net income.....................................................................$14,248
Part 5
SUCCESS SYSTEMS
Statement of Owner’s Equity
For Three Months Ended December 31, 2004
K. Breeze, Capital, October 1, 2004................. $ 0
Plus: Owner investment.......... 83,000
Net income.............................................. 14,248
97,248
Less: Owner withdrawals.................................. 7,100
K. Breeze, Capital, December 31, 2004............ $90,148
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 177

60. Serial Problem (Continued)
Part 6
SUCCESS SYSTEMS
Balance Sheet
December 31, 2004
Assets
Cash ................................................................................$58,160
Accounts receivable .....................................................5,668
Computer supplies ........................................................580
Prepaid insurance .........................................................1,665
Prepaid rent ...................................................................825
Office equipment ...........................................................$ 8,000
Accumulated depreciation—Office equipment........... (400) 7,600
Computer equipment.....................................................20,000
Accumulated depreciation—Computer equipment .... (1,250) 18,750
Total assets.....................................................................$93,248
Liabilities
Accounts payable...........................................................$ 1,100
Wages payable...............................................................500
Unearned computer services revenue......................... 1,500
Total liabilities................................................................3,100
Equity
K. Breeze, Capital........................................................... 90,148
Total liabilities and equity.............................................$93,248
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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61. Reporting in Action — BTN 3-1
1.The revenue recognition principle requires that revenue be recorded
when earned, not before and not after. Most companies earn revenue
when they provide services and products to customers.
2.Krispy Kreme provides information related to revenue recognition in
footnote 2 discussing the “Nature of Business and Significant
Accounting Policies.” A policy on revenue recognition is stated for
each segment of the company.
·Company Store operations revenue is derived from the sale of
doughnuts and related items to on-premises and off-premises
customers. Revenue is recognized at the time of sale for on-premises
sales and at the time of delivery for off premises sales.
·Franchise Operations revenue is derived from: (1) development and
franchise fees from the opening of new stores; and (2) royalties
charged to franchisees based on sales. Development and franchise
fees are charged for certain new stores and are deferred until the
store is opened. The royalties recognized in each period are based on
the sales in that period.
·KKM&D revenue is derived from the sale of doughnut-making
equipment, mix and other supplies needed to operate a doughnut
store to Company-owned and franchised stores. Revenue is
recognized at the time the title and risk of loss pass to the customer,
generally upon delivery of the goods.
3.For fiscal year-end February 2, 2003, the profit margin is:
$33,478,000 / $491,549,000 = 0.068 = 6.8%
For fiscal year-end February 3, 2002, the profit margin is:
$26,378,000 / $394,354,000 = 0.067 = 6.7%
4.Solution depends on the financial statements accessed.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 179

62. Comparative Analysis — BTN 3-2
1.Krispy Kreme
Current year, profit margin = $33,478 / $491,549 = 6.8%
Prior year, profit margin = $26,378 / $394,354 = 6.7%
Tastykake
Current year, profit margin = $2,000 / $162,263 = 1.2%
Prior year, profit margin = $8,048 / $166,245 = 4.8%
2.Krispy Kreme is more successful on the basis of profit margin. In the
most current year, Krispy Kreme earned an average of 6.8 cents on the
dollar while Tastykake earned 1.2 cents on the dollar. For the prior
years, Krispy Kreme earned 6.7 cents on the dollar compared to 4.8
cents for Tastykake.
Ethics Challenge — BTN 3-3
1.GAAP requires that annual deprecation be accumulated in a contra-
asset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
in Krispy Kreme’s balance sheet in Appendix A) the cost of property,
plant, and equipment along with its related accumulated depreciation
are reported in the footnotes. Thus, Bergez is correct with her journal
entry recommendation.
2.One strength of Welch’s method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welch’s approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3.While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergez’s approach. As a professional,
Bergez is required to uphold the standards of her profession and thus
the decision is an ethical one for her.
©McGraw-Hill Companies, Inc., 2005
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63. Communicating in Practice — BTN 3-4
This communication activity has no set solution. A class discussion of the
ratios can be conducted with emphasis on (1) return and profitability by
industries and (2) a contrast of debt financing between industries.
Taking It to the Net — BTN 3-5
1. Cannondale’s primarily sells mountain bikes.
2. Review 10-K.
3. Recent fiscal years have ended on June 29, 2002, June 30, 2001 and July
1, 2000. While Cannondale labels these endings as “12 months ended”
they appear to be reporting as of the end of the 52nd week.
4.Net sales for the fiscal year ended June 29, 2002, is $156,655,000.
5.Net loss for the fiscal year ended June 29, 2002, is $15,440,000.
6.Profit margin is: $(15,440) / $156,655 = -0.099 = -9.8% (or non-interpretable)
7.Cannondale’s fiscal year-end appears to (but does not necessarily)
correspond to its natural business year. The difficulty in reaching a
definitive answer to this question is the lack of information in
Cannondale’s statements. The quarterly sales data does reveal that the
3 months ending in June has reported the highest sales of the four
quarters for the last two years reported. Management does discuss
“seasonality” as a factor affecting business. The bottom line is
Cannondale’s fiscal year-end appears to correspond to its natural
business year, but we cannot be certain.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 181

64. Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Nevertheless, the
presentation of each expert team should reflect the following summary points:
Before Adjusting
Balance Sheet Income Statement
Type Account Account Adjusting Entry
Prepaid expense Asset overstated Expense understatedDr. Expense
Cr. Asset*
Unearned revenues Liability overstatedRevenue understatedDr. Liability
Cr. Revenue
Accrued Expenses Liability understatedExpense understatedDr. Expense
Cr. Liability
Accrued Revenues Asset understatedRevenue understatedDr. Asset
Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively
involved in the learning process. Encourage students to take the opportunity to
ask questions in the small group environment the learning team provides.
Encourage the better students to serve as experts on unearned revenues. The
instructor’s observation of and reactions to expert teams’ development of
presentation material as well as the delivery to learning teams will have a
significant impact on the effectiveness of this activity.
©McGraw-Hill Companies, Inc., 2005
Fundamental Accounting Principles, 17
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Edition182

65. Business Week Activity — BTN 3-7
1.Herz personally favors a move toward what is known as “principles-
based accounting.” This type of accounting would require a vast
simplification of accounting standards where professionals would be
asked to comply with broad goals and objectives. Such accounting
would be a move away from a lengthy list of rules and exceptions.
2.Herz believes that breaking the rules is at the core of most of the
scandals. When a person or company just outright violates standards
and commits fraud, it is hard to say the standard is wrong. It’s like when
someone robs a bank: You can’t really say that the law against bank
robbing was part of the problem.
3.A principles-based system is one where the accounting standard simply
lays out objectives of good reporting in an area. It may include some
rules, based on the objectives, but it does not try to answer every
question or provide a rule for every situation. So a typical standard
would be more like 10-to-12 pages in length rather than 200 pages.
4.Principles-based accounting requires the exercise of good judgment by
both companies and auditors. Those who don’t like the principles-
based approach say, “I don’t trust people to do that.” They think people
need rules to follow or they will try to find a way to make an objective fit
almost any situation.
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 183

66. Entrepreneurial Decision — BTN 3-8
1.Many businesses find it cheaper to use outside collection agencies rather
than hire in-house staff to handle past-due account collections.
Additionally, owners of collection agencies are usually experts in the art of
collection and may be able to collect on accounts that the businesses
themselves never would be able to. Although a 50% commission seems
steep, it must be weighed against the possibility that zero collections may
be realized if the account is not turned over.
2.Mellie’s net income = Income x Profit margin = $40,000,000 x 0.08 =
$3,200,000.
3.Current commission expense = $40,000,000 x 0.02 = $800,000.
4.If the commission fee charged can be negotiated down from 50% to 40%,
this will be a 20% reduction in commission expense. This is computed as:
(50% - 40%) / 50% = 20%. Specifically, the commission expense would
change from $800,000 to 80% of $800,000 or $640,000 (also computed as
$40,000,000 x 0.02 x (40%/50%)).
The $160,000 reduction from $800,000 to $640,000 represents a 20% decline
from $800,000.
5.Net income would be $160,000 higher since commission expense would be
reduced by $160,000. Net income would change to $3,360,000 [$3,200,000 +
$160,000].
Profit margin would then equal: $3,360,000/$40,000,000 = 8.4%.
Hitting the Road — BTN 3-9
There is no formal solution to this field activity. The instructor may wish to
tally students’ findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.
©McGraw-Hill Companies, Inc., 2005
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Edition184

67. Global Decision — BTN 3-10
1.Grupo Bimbo states under its “Significant Accounting Policies” in its
annual report that revenue is recognized when the product is shipped.
2.The five types of assets that are depreciated by Grupo Bimbo are:
a.Buildings
b.Manufacturing equipment
c.Vehicles
d.Office equipment
e.Computer equipment
Land, construction-in-progress, and machinery-in-transit are not
depreciated.
3.Grupo Bimbo profit margin (in thousands of pesos):
2002 profit margin = 1,002,664 / 41,373,269 = 2.4%
2001 profit margin = 1,682,025 / 34,968,097 = 4.8%
©McGraw-Hill Companies, Inc., 2005
Solutions Manual, Chapter 3 185