CH 03 SM

CHAPTER 3
Adjusting the Accounts

ASSIGNMENT CLASSIFICATION TABLE
Study Objectives
Questions
Brief
Exercises
Exercises
Problems
Set A
Problems
Set B
1. Explain the time period

assumption.
2. Distinguish between the revenue

recognition principle and the
matching principle.
2, 3, 4
3. Explain the accrual basis of

accounting.
5, 6
4. Explain why and distinguish when

adjusting entries are needed.
7, 8
5. Identify and distinguish between

the major types of adjusting entries.
6. Identify and prepare adjusting

entries for prepayments.
10, 11, 17,

21, 22
2, 3, 4, 7,
8, 9, *13
3, 4, 5, 6, 7,
8, 9, 10, 11
2, 3, 5, 6,
7, 8, 9, 10,
11
2, 3, 5, 6,
7, 8, 9, 10,
11
7. Identify and prepare adjusting

entries for accruals.
12, 13, 14,

15, 16, 17,
21, 22
5, 7, 8, 9
4, 5, 6, 7, 8,
9, 10, 11
3, 4, 5, 6,
7, 8, 9, 10,
11, *13
3, 4, 5, 6,
7, 8, 9, 10,
11, *13
8. Identify and prepare the adjusting

entry for amortization.
18, 19, 20,

21, 22
6, 7, 8, 9
6, 7, 8, 9,
10, 11
7, 8, 9, 10,
11, *13
3, 7, 8, 9,
10, 11,
*13
9. Describe the nature and purpose of

an adjusted trial balance and
prepare.
23
10, 11
11, 12
9, 10, 11,
*13
9, 10, 11,
*13
*10. Identify and prepare adjusting

entries for the alternative treatment
of prepayments (Appendix 3A).
*24
*12, *13
*13
*12, *13
*12, *13
1, 2
3, 4, 7
3, 4, 7
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each
chapter.
3-1
ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
Simple
10-15
1A
Match adjusting entry type.
2A
Prepare original and adjusting journal entries for

prepayments.
Moderate
20-25
3A
Convert income from cash to accrual basis.
Complex
25-35
4A
Record transactions on accrual basis; convert revenue to

cash receipts.
Complex
25-35
5A
Prepare original and adjusting journal entries.
Moderate
25-35
6A
Prepare adjusting entries.
Moderate
25-35
7A
Prepare accrual-based income statement from cashbased information.
Complex
25-35
8A
Identify effects of adjusting journal entries.
Moderate
10-15
9A
Prepare adjusting entries, post, and prepare adjusted trial

balance.
Moderate
50-60
10A

balance and financial statements.
Moderate
50-60
11A
Prepare adjusting entries and financial statements.
Moderate
45-55
*12A

prepayments, using alternative treatment.
Moderate
20-25
*13A
Prepare adjusting entries, adjusted trial balance and

financial statements, using alternative treatment of
prepayments.
Moderate
55-65
Simple
10-15
1B
Match adjusting entry type.
2B

prepayments.
Moderate
20-25
3B
Convert income from cash to accrual basis.
Complex
25-35
4B
Record transactions on accrual basis; convert revenue to

cash receipts.
Complex
25-35
5B
Prepare original and adjusting journal entries.
Moderate
25-35
6B
Prepare adjusting entries.
Moderate
25-35
7B
Prepare accrual-based income statement from cashbased information.
Complex
25-35
8B
Identify effects of adjusting journal entries.
Moderate
10-15
3-2
Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
9B
Prepare adjusting entries, post and prepare adjusted trial

balance.
Moderate
50-60
10B

balance and financial statements.
Moderate
50-60
11B
Prepare adjusting entries and financial statements.
Moderate
45-55
*12B

prepayments, using alternative treatment.
Moderate
20-25
*13B
Prepare adjusting entries, adjusted trial balance and

financial statements, using alternative treatment of
prepayments.
Moderate
55-65
Cumulative CoverageChapters 2 to 3
Moderate
90-100
3-3
BLOOMS TAXONOMY TABLE

Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Material
Study Objectives
1. Explain the time period
assumption.
Knowledge
Comprehension
Q3-1
2. Distinguish between the

revenue recognition
principle and the
matching principle.
Q3-2
Q3-3
Q3-4
3. Explain the accrual basis

of accounting.
Q3-5
Q3-6
E3-1
4. Explain why and

distinguish when
adjusting entries are
needed.
Q3-7
Q3-8
BE3-1
Application
BE3-7
E3-2
P3-3A
P3-4A
P3-7A
P3-3B
P3-4B
P3-7B
5. Identify and distinguish

between the major types
of adjusting entries.
P3-1A
P3-1B
Q3-9
6. Identify and prepare

adjusting entries for
prepayments.
Q3-10
Q3-11
Q3-21
Q3-17
Q3-22
BE3-8
BE3-9
BE3-2
BE3-3
BE3-4
BE3-7
*BE3-13
E3-3
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
P3-2A
P3-3A
P3-5A
P3-6A
P3-7A
P3-8A
P3-9A
P3-10A
P3-11A
P3-2B
P3-3B
P3-5B
P3-6B
P3-7B
P3-8B
P3-9B
P3-10B
P3-11B
7. Identify and prepare

adjusting entries for
accruals.
Q3-12
Q3-13
Q3-14
Q3-21
Q3-17
Q3-22
BE3-8
BE3-9
Q3-15
Q3-16
BE3-5
BE3-7
E3-4
E3-5
E3-6
E3-7
E3-8
E3-9
E3-10
E3-11
P3-3A
P3-4A
P3-5A
P2-6A
P3-7A
P3-8A
P3-9A
P3-10A
P3-11A
*P3-13A
P3-3B
P3-4B
P3-5B
P3-6B
P3-7B
P3-8B
P3-9B
P3-10B
P3-11B
*P3-13B
3-4
Analysis
Synthesis
Evaluation
Study Objectives
8. Identify and prepare the
adjusting entry for
amortization.
9. Describe the nature and

purpose of an adjusted
trial balance and prepare.
*10. Identify and prepare

adjusting entries for the
alternative treatment of
prepayments.
Broadening Your
Perspective
Knowledge
Q3-21
Comprehension
Q3-18
Q3-19
Q3-22
BE3-8
BE3-9
Application
P3-9A
Q3-20
P3-10A
BE3-6
P3-11A
BE3-7
*P3-13A
E3-6
P3-3B
E3-7
P3-7B
E3-8
P3-8B
E3-9
P3-9B
E3-10
P3-10B
E3-11
P3-11B
P3-7A
*P3-13B
P3-8A
Q3-23
BE3-10
BE3-11
E3-11
E3-12
P3-9A
P3-10A
P3-11A
*P3-13A
P3-9B
P3-10B
P3-11B
*P3-13B
*Q3-24
*BE3-12
*BE3-13
*E3-13
*P3-12A
*P3-13A
*P3-12B
*P3-13B
BYP3-1
BYP3-2
BYP3-3
BYP3-4
Cumulative Coverage
3-5
Analysis
Synthesis
Evaluation
BYP3-5
BYP3-6
BYP3-7
ANSWERS TO QUESTIONS
01.
(a) Under the time period assumption, an accountant is required to

determine the relevance of each business transaction to specific
accounting periods, and its effects on those periods.
(b) An accounting time period of one year in length is referred to as a
fiscal year. A fiscal year that extends from January 1 to December
31 is referred to as a calendar year. Accounting periods of less
than one year are called interim periods.
2.
The two generally accepted accounting principles that pertain to

adjusting the accounts are:
1. The revenue recognition principle, which states that revenue
should be recognized in the time period in which it is earned.
2. The matching principle, which states that efforts (expenses)
should be matched with accomplishments (revenues).
03. The law firm should recognize the revenue in April. The revenue
recognition principle states that revenue should be recognized in the
accounting period in which it is earned (i.e., when the work is done).
04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the
revenues in April. Under the matching principle, efforts (expenses)
should be matched with accomplishments (revenues).
05.
Information presented on an accrual basis is useful because it

reveals relationships that are likely to be important in predicting
future results. To illustrate, under accrual accounting, revenues are
recognized when earned so they can be related to the economic
environment in which they occur. Trends in revenues are thus more
meaningful.
06. The balance in total owners equity should not equal the balance in
the cash account. Owners equity reflects the net amount the owners
have invested in the company, which comprises total assetsnot just
cashnet of liabilities.
3-6
Questions Chapter 3 (Continued)

07. No, adjusting entries are required by the revenue recognition and
matching principles.
08. A trial balance may not contain up-to-date information for financial
statements because:
1. Some events are not journalized daily because it is unnecessary
and inefficient to do so.
2. The expiration of some costs occurs with the passage of time
rather than as a result of recurring daily transactions.
3. Some items may be unrecorded because the transaction data are
not known.
09. The three categories of adjusting entries are prepayments, accruals,
and estimates. Prepayments consist of transactions in which the cash
is exchanged in advance resulting in prepaid expenses and unearned
revenues. Accruals consist of transactions in which the cash will be
exchanged later, resulting in accrued revenues and accrued
expenses. Because we dont always know what will happen in the
future, estimates are required. One example of an estimate is the
allocation of the cost of a capital asset over its estimated useful life.
10. If the original purchase was recorded as an asset, then in the
adjusting entry expenses are debited (to increase them) and assets
are credited (to decrease them).
11. In the adjusting entry, liabilities are debited (to decrease them) and
revenues are credited (to increase them).
12. It may have credited unearned revenue or accounts receivable.
13. Asset and revenue. An asset (a receivable) is debited and revenue is
credited.
14. Utilities Expense is debited and Accounts Payable (a liability) is
credited.
3-7

15.
On the income statement, net income was understated $300. Prior to

adjustment, revenues are understated by $900 and expenses are
understated by $600. The impact on net income is $300 ($900 $600).
On the balance sheet, accounts receivable are understated by $900,
accounts payable are understated by $600, and owners equity
understated by $300 (see net income).
16.
The entry is:

Jan. 9 Salaries Payable .............................................
Salaries Expense ............................................
Cash...........................................................
17.
(a)
(b)
(c)
(d)
(e)
(f)
1,700
3,300
5,000
Accrued revenues.
Unearned revenues.
Accrued expenses.
Accrued expenses, prepaid expenses, or estimates (amortization).
Prepaid expenses or estimates (amortization).
Accrued revenues or unearned revenues.
18. No. Amortization is the process of allocating the cost of an asset to

expense over its useful life in a rational and systematic manner.
Amortization results in the presentation of the book value of the
asset, not its market value.
19. Amortization expense is an expense account whose normal balance
is a debit. This account shows the cost that has expired during the
current accounting period. Accumulated amortization is a contra
asset account whose normal balance is a credit. The balance in this
account is the total of all the amortization that has been recognized
from the date of acquisition to the balance sheet date.
*20. Equipment ......................................... $12,000
Less: Accumulated amortization ... 7,000
Net book value .................................. 5,000
3-8

21. (a)
(b)
(c)
(d)
(e)
(f)
Salaries Payable is credited.

Accumulated Amortization is credited.
Interest Expense is debited.
Supplies Expense is debited.
Service Revenue is credited.
Service Revenue is credited.
22. Disagree. An adjusting entry affects only one balance sheet account
and one income statement account.
23. Financial statements can be prepared from an adjusted trial balance
because the balances of all accounts have been adjusted to show the
effects of all financial events that have occurred during the
accounting period.
*24. For Supplies Expense: expenses are overstated and assets (prepaid
expense) are understated. The adjusting entry is:
Assets (Supplies).................................................................
Expenses (Supplies Expense)......................................
XX
XX
For Rent Revenue: revenues are overstated and liabilities (unearned

revenues) are understated. The adjusting entry is:
Revenues (Rent Revenue) ..................................................
Liabilities (Unearned Rent) ...........................................
3-9
XX
XX
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 3-1
1.
Prepaid Insuranceto recognize insurance expired (expenses) during

the period.
2.
Accumulated Amortizationto allocate the cost of the capital asset

to expense over the period it benefits.
3.
Unearned Revenueto account for Unearned Revenue received in

advance that was earned (revenues) during the period.
4.
Interest Payableto recognize interest expense accrued but unpaid

on notes payable.
5.
Rent Receivableto recognize rent earned (revenues) but not yet

collected.
BRIEF EXERCISE 3-2

Dec. 31
Advertising Supplies Expense...............................

Advertising Supplies.......................................
Advertising Supplies
12/31
8,700 12/31
Balance
1,500
7,200
7,200
Advertising Supplies Expense

7,200
12/31
3-10
7,200
BRIEF EXERCISE 3-3

July
Dec. 31
Prepaid Insurance ........................................

Cash.......................................................
10,000
Insurance Expense ($10,000 x 6/24 mos.)..

Prepaid Insurance ................................
2,500
10,000
2,500
Cash
7/1
Prepaid Insurance
7/1
Insurance Expense
10,000 12/31
12/31 Bal.
10,000
2,500
12/31
2,500
7,500
BRIEF EXERCISE 3-4

July 1
Dec. 31
Cash ........................................................................
Unearned Insurance Revenue .......................
10,000
Unearned Insurance Revenue...............................

Insurance Revenue ($10,000 x 6/24 mos.)....
2,500
10,000
2,500
Cash
7/1
10,000
Unearned Insurance Revenue

12/31
2,500 7/1
12/31 Bal.
Insurance Revenue
10,000
12/31
7,500
3-11
2,500
BRIEF EXERCISE 3-5

1.
Dec. 31
2.
3.
31
31
Interest Receivable.........................................
Interest Revenue.....................................
300
Accounts Receivable .....................................

Service Revenue .....................................
1,400

Salaries Payable .....................................
900
300
1,400
900
BRIEF EXERCISE 3-6

Dec. 31
Amortization ExpenseEquipment .....................

Accumulated Amortization
Equipment ....................................................
Amortization ExpenseEquipment
12/31
5,000
5,000
Accum. AmortizationEquipment
5,000
12/31
5,000
TAI WOO COMPANY

Balance Sheet (Partial)
December 31
Capital assets
Equipment ...............................................................
Less: Accumulated amortization..........................
3-12
$25,000
005,000
$20,000
BRIEF EXERCISE 3-7

Transaction
Cash
Purchased supplies on hand for cash

Recorded the use of supplies
Performed services on account
Received from customers payment of their
account
(e) Purchased office equipment for cash
(f) Recorded amortization of office equipment
-$100
0
0
0
-50
+1,000
+800
-500
0
0
0
-50
(a)
(b)
(c)
(d)
Net Income
$
BRIEF EXERCISE 3-8

(a)
Type of
Adjustment
(b)
Status of Accounts
Before Adjustment
Account
Relationship
1.
Prepaid
Expenses
Assets and Expenses
Assets (Supplies) Overstated

Expenses (Supplies Expense)
Understated
2.
Accrued
Revenues
Assets and Revenues
Assets (Accounts Receivable)

Understated
Revenues (Service Revenue)
Understated
3.
Accrued
Expenses
Expenses and
Liabilities
Expenses (Interest Expense)

Understated
Liabilities (Interest Payable)
Understated
4.
Unearned
Revenues
Liabilities and
Revenues
Liabilities (Unearned Rent) Overstated

Revenues (Rent Earned) Understated
5.
Amortization Expenses and Assets

(contra account)
Expenses (Amortization Expense)

Understated
Assets (Capital Assets) Overstated
3-13
BRIEF EXERCISE 3-9

(a)
Type of Adjustment
Account
(b)
Related Account
Accounts Receivable
Accrued Revenues
Service Revenue
Prepaid Insurance
Prepaid Expenses
Insurance Expense
Equipment
Estimates
Amortization
Expense/Accum.
Amortization
Supplies
Prepaid Expenses
Supplies Expense
Interest Payable
Accrued Expenses
Interest Expense
Unearned Service
Revenue
Unearned Revenues
Revenue Earned
Interest Receivable
Accrued Revenues
Interest Revenue
Rent Payable
Accrued Expenses
Rent Expense
BRIEF EXERCISE 3-10

KLAR COMPANY
Income Statement
For the Year Ended December 31, 2003
Revenues
Service revenue ......................................................
Expenses
Salaries expense.....................................................
Rent expense...........................................................
Insurance expense..................................................
Amortization expense.............................................
Supplies expense....................................................
Total expenses ................................................
Net income ......................................................................
3-14
$38,400
$13,000
4,000
2,000
001,000
500
020,500
$17,900
BRIEF EXERCISE 3-11

KLAR COMPANY
Statement of Owner's Equity
S. Klar, Capital, January 1....................................................................
Add: Net income .................................................................................
Less: Drawings ....................................................................................
S. Klar, Capital, December 31 ..............................................................
$15,600
017,900
33,500
006,000
$27,500
*BRIEF EXERCISE 3-12

(a)
Dec. 31
Advertising Supplies ..............................................

Advertising Supplies Expense .......................
Advertising Supplies
12/31
1,500
1,500
Advertising Supplies Expense
1,500
12/31
8,700 12/31
12/31 Bal.
7,200
1,500
(b) The adjusted balances are the same. It does not matter whether the
original entry is recorded to an asset or an expenses account as long
as the adjustment is done correctly.
3-15
*BRIEF EXERCISE 3-13

(a)
May
May 31
Cash .........................................................................
Unearned Rental Revenue ..............................
600
Unearned Rental Revenue......................................

Rental Revenue................................................
600
Cash .........................................................................
Rental Revenue................................................
600
600
600
(b)
May
May 31
No adjustment required
(c) The ending balances are the same under either alternative.
3-16
600
SOLUTIONS TO EXERCISES
EXERCISE 3-1
(a)
Accrual basis accounting records the events that change an entitys

financial statements in the periods in which the events occur, rather
than in the periods in which the entity receives or pays cash. That
is, revenue is recognized when it is earned. Expenses are recognized
when services or goods are used or consumed in the production of
revenue. Information presented on an accrual basis is useful
because it reveals relationships that are likely to be important in
predicting future results.
Conversely, under the cash basis of accounting, revenue is recorded
only when cash is received, and an expense is recognized only when
cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.
(b)
The government is not using either the cash or accrual basis of

accounting. It is using some other basis that is not a generally
accepted accounting policy. The government may believe it is
appropriate because the commitment to spend the funds has been
made.
(c)
Dear Member of Parliament,

It is my understanding that the Federal government is making
changes in the method of accounting it uses and is switching from
the cash basis of accounting to the accrual basis. I understand in
2001 accrual accounting is fully in use.
The government is to be commended for this change. The use of full
accrual accounting will provide a more accurate reflection of the true
costs of services that government provides and a more complete
reflection of its assets and liabilities. This will result in improved
information for decision makers and citizens.
Sincerely,
ACCOUNTING STUDENT
3-17
EXERCISE 3-2
(a)
Revenue
Expenses
Operating
Insurance
Net income
Cash
$22,000
Accrual
$26,000
13,500
2,500
$ 6,000
15,000
0000000
$ 11,000
(b) The accrual basis provides the most useful information for decision
making as it reflects transactions in the period in which they occur and
properly matches revenue and expenses.
EXERCISE 3-3
(a) 1. Prepaid Rent............................................................
Cash ...................................................................
To record payment of rent for January 1May 31, 2002.
20,000
2. Security Deposit......................................................
Cash ...................................................................
To record payment of security deposit.
5,000
3. Prepaid Rent............................................................
Cash ...................................................................
To record payment of rent for June 1November 30, 2002.
30,000
20,000
5,000
30,000
4. No entry required.
(b)
Rent Expense...............................................................
Prepaid Rent .......................................................
Rent Payable.......................................................
See (c) for calculations.
3-18
55,000
50,000
5,000
EXERCISE 3-3 (Continued)

(c) Rent expense:
$20,000 January 1 May 31 ($4,000 x 5 mos.)
30,000 June 1 November 30 ($5,000 x 6 mos.)
5,000 December 1 December 31 ($5,000 x 1 mos. accrual)
$55,000
(d) Balance sheet amounts with respect to rent:
Assets
Security deposit, $5,000
Liabilities
Rent payable, $5,000 (for the month of December)
3-19
EXERCISE 3-4
(a) July
(b) July
10 Supplies ...........................................................
Cash .........................................................
200
14 Cash .................................................................
Service Revenue .....................................
3,000
15 Salaries Expense.............................................
Cash .........................................................
1,200
20 Cash .................................................................
Unearned Service Revenue ....................
700
31
Supplies Expense...........................................
Supplies...................................................
500

Service Revenue .....................................
500

Salaries Payable .....................................
1,200
Unearned Service Revenue ...........................

Service Revenue .....................................
900
31
31
31
3-20
200
3,000
1,200
700
500
500
1,200
900
EXERCISE 3-5
Answer
Calculation
(a) Supplies balance = $800
Supplies expense
Add: Supplies (1/31/03)
Less: Supplies purchased
Supplies (12/31/02)
(b) Total premium = $4,800
Total premium = Monthly premium X

12; $400 X 12 = $4,800
Purchase date = Aug. 1, 2002
(c) Salaries payable = $1,500
Purchase date: On Jan. 31, there

are 6 months coverage remaining
($400 X 6). Thus, the purchase date
was 6 months earlier on Aug. 1,
2002.
Cash paid
Salaries payable (1/31/03)
Less: Salaries expense
Salaries payable (12/31/02)
(d) Unearned revenue = $1,150
$950)
700)
(850)
$800)
Service revenue
Unearned revenue (1/31/03)
$2,500
800
3,300
1,800
$1,500
$2,000
750
2,750
Cash received in Jan.
1,600
Unearned revenue (12/31/02) $1,150
3-21
EXERCISE 3-6
Item
(a)
Type of
Adjustment
(b)
Accounts
Before Adjustment
1.
Accrued
Revenues
Assets (Accounts Receivable) Understated

Revenues (Service Revenue) Understated
2.
Prepaid
Expenses
Assets (Store Supplies) Overstated

Expenses (Store Supplies Expenses) Understated
3.
Accrued
Expenses
Expenses (Utility Expense) Understated

Liabilities (Accounts Payable) Understated
4.
Unearned
Revenues
Liabilities (Unearned Service Revenue) Overstated

Revenues (Service Revenue) Understated
5.
Accrued
Expenses
Expenses (Salaries Expense) Understated

Liabilities (Salaries Payable) Understated
6.
Prepaid
Expenses
Assets (Prepaid Insurance) Overstated

Expenses (Insurance Expense) Understated
7.
Amortization
Assets (Capital Assets) Overstated

Expenses (Amortization Expense) Understated
3-22
EXERCISE 3-7
1.
2.
3.
4.
5.
Mar. 31
31
31
31
31
Amortization Expense ($400 3).....................

Equipment...............................................
1,200
Unearned Rent Revenue...................................

Rent Revenue ($9,300 1/3) .....................
3,100
Interest Expense ...............................................

Interest Payable.........................................
500
Supplies Expense .............................................

Supplies ($2,800 $850) ...........................
1,950
Insurance Expense ($300 3)..........................

Prepaid Insurance .....................................
900
Accounts Receivable ........................................

Service Revenue........................................
750
Utilities Expense ...............................................

Utilities Payable.........................................
520
Amortization Expense ......................................

Dental Equipment...................................
1,000

250
Insurance Expense ($12,000 12) ...................

1,000
Supplies Expense ($1,600 $500) ...................

Supplies .....................................................
1,100
1,200
3,100
500
1,950
900
EXERCISE 3-8
1.
2.
3.
Jan. 31
31
31
31
4.
5.
31
31
3-23
750
520
1,000
250
1,000
1,100
EXERCISE 3-9
1.
2.
3.
4.
5.
6.
7.
Oct. 31
31
31
31
31
31
31
Advertising Supplies Expense.........................

Advertising Supplies ($2,500 $1,400) ..
1,100
Insurance Expense ...........................................

100
Amortization Expense ......................................

Office Equipment....................................
50
Unearned Service Revenue..............................

Service Revenue........................................
600
Accounts Receivable ........................................

Service Revenue........................................
300

70
Salaries Expense ..............................................

Salaries Payable ........................................
1,500
3-24
1,100
100
50
600
300
70
1,500
EXERCISE 3-10
Aug. 31
31
31
31
31
31
Accounts Receivable .............................................

Service Revenue.............................................
600
Office Supplies Expense .......................................

Office Supplies ...............................................
1,600
Insurance Expense ................................................

Prepaid Insurance ..........................................
1,500
Amortization Expense ...........................................

Accumulated AmortizationOffice
Equipment ....................................................
1,200
Salaries Expense....................................................
Salaries Payable .............................................
1,100
Unearned Rent Revenue........................................

Rent Revenue..................................................
800
3-25
600
1,600
1,500
1,200
1,100
800
EXERCISE 3-11
(a)
July 31
31
31
31
31
Insurance Expense.........................................
Prepaid Insurance...................................
300
Supplies...........................................................
Supplies Expense ...................................
500
Amortization Expense....................................
Accumulated Amortization Equipment
150
Wages Expense ..............................................

Wages Payable........................................
300

Service Revenue .....................................
900
300
500
150
300
900
(b)
VIRMANI CO.
Income Statement
For the Month Ended July 31, 2003
Revenues
Service revenue ($5,500 + $900).....................
Expenses
Wages expense ($2,300 + $300) .....................
Supplies expense ($1,200 $500) ..................
Utilities expense ..............................................
Insurance expense ..........................................
Amortization expense .....................................
Total expenses .........................................
Net income ...............................................................
3-26
$6,400
$2,600
700
600
300
0,150
04,350
$2,050
EXERCISE 3-12
LIM COMPANY
Income Statement
For the Year Ended August 31, 2003
Revenues
Service revenue ...........................................................................
Rent revenue ................................................................................
Total revenues ......................................................................
Expenses
Salaries expense........................................................ $18,100
Rent expense..............................................................
15,000
Office supplies expense............................................
1,600
Insurance expense.....................................................
1,500
Amortization expense................................................
01,200
Total expenses .....................................................................
Net income ...........................................................................................
$34,600
011,800
46,400
037,400
$ 9,000
LIM COMPANY
For the Year Ended August 31, 2003
E. Lim, Capital, August 1, 2002............................................................
Add: Net income .................................................................................
E. Lim, Capital, August 31, 2003..........................................................
3-27
$15,600
009,000
$24,600
EXERCISE 3-12 (Continued)

LIM COMPANY
Balance Sheet
August 31, 2003
Assets
Cash......................................................................................................
Accounts receivable............................................................................
Office supplies .....................................................................................
Prepaid insurance................................................................................
Office equipment ..............................................................
$14,000
Less: Accumulated amortizationoffice equipment ...
004,800
Total assets ..........................................................................
$10,400
9,400
700
2,500
009,200
$32,200
Liabilities and Owner's Equity

Liabilities
Accounts payable ........................................................................
Salaries payable...........................................................................
Unearned rent revenue................................................................
Total liabilities ......................................................................
$05,800
1,100
700
7,600
Owner's equity
E. Lim, Capital ..............................................................................
Total liabilities and owner's equity .....................................
024,600
$32,200
3-28
*EXERCISE 3-13
(a) Jan. 02
10
15
Insurance Expense .........................................

Cash .........................................................
2,400
Supplies Expense ...........................................

Cash .........................................................
1,700
Cash .................................................................
Service Revenue .....................................
5,100
Insurance Expense
1/2
2,400
5,100 1/2
1/10
(b) Jan. 31
31
31
1,700
5,100
Supplies Expense
1/10
Cash
1/15
2,400
1,700
Service Revenue
2,400
1,700
1/15
5,100
Prepaid Insurance ($200 11 months) .........

Insurance Expense .................................
2,200
Supplies ...........................................................
Supplies Expense ...................................
800
Service Revenue .............................................

Unearned Service Revenue....................
3,600
3-29
2,200
800
3,600
*EXERCISE 3-13 (Continued)

(b) (Continued)
Cash
1/15
Service Revenue
5,100 1/2
1/10
1,000
Bal.
2,400
1,700
1/31
Insurance Expense
1/2
Bal.
2,400 1/31
1/31 2,200
1/10
200
Bal.
Supplies
1/31
5,100
Bal.
1,500
Supplies Expense
2,200
Prepaid Insurance
3,600 1/15
800
1,700 1/31
800
900
Unearned Service
Revenue
1/31 3,600
(c) Cash ...............................................................................................

Prepaid insurance.........................................................................
Supplies .........................................................................................
Unearned service revenue ...........................................................
Service revenue ............................................................................
Insurance expense........................................................................
Supplies expense..........................................................................
3-30
$1,000
2,200
800
3,600
1,500
200
900
SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
3
4
5
4
(a)
(b)
(c)
(d)
(e)
3
1
(f)
(g)
(h)
Record interest on note payable.

Record interest on note receivable.
Allocate cost of capital asset over its useful life.
Record revenue that has been earned but not billed or
collected.
Record revenue that has been earned that was previously
received in advance.
Record hiring of employees.
Record salaries owed.
Record supplies used.
3-31
PROBLEM 3-2A
1.
Jan. 1
Dec. 31
2.
Sept. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 15
Dec. 31
Office Supplies ..............................................

Cash ........................................................
4,500
Supplies Expense ($4,500 $900) ...............

Office Supplies.......................................
3,600
Prepaid Insurance .........................................

Cash ........................................................
3,600
Insurance Expense ($3,600 12 x 4) ...........

Prepaid Insurance..................................
1,200
Cash................................................................
Unearned Service Revenue...................
1,200
Unearned Service Revenue .........................

Service Revenue ....................................
1,200
Cash................................................................
Unearned Rent Revenue .......................
460
Unearned Rent Revenue ($460 2)..............

Rent Revenue .........................................
230
3-32
4,500
3,600
3,600
1,200
1,200
1,200
460
230
PROBLEM 3-3A
Students may find this to be a fairly challenging problem, so here are a
few points that should help:
Under the CASH BASIS, revenues are recorded when they are
collected (received in cash), even if they were earned (the sale was
made) earlier;
Under the ACCRUAL BASIS of accounting, revenues are recorded
when they are earned (the sale is made)even if the cash is not
collected until later, or is received prior to the revenue being
earned.
Under the CASH BASIS, expenses are recorded when the cash is
paid out; and
Under the ACCRUAL BASIS of accounting, expenses are recorded
when the cost has expired or been used up, which is not
always in the same time period as when the cash is paid out.
For example,
Under the CASH BASIS, Supplies are recorded as expenses as
soon as they are purchased and paid for;
Under the ACCRUAL BASIS of accounting, Supplies are not
recorded as expenses until they have been used up. While the
supplies are still on hand, they are recorded as assets because
they have future benefits;
Under the CASH BASIS, amounts such as Unpaid Wages Owing at
the end of 2002 would not be considered expenses until they are
actually paid outin 2003; and
Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at
the end of 2002 would be considered expenses in 2002, because
the cost was incurred or used up during 2002even though the
cash will not be paid out until 2003.
3-33
PROBLEM 3-3A (Continued)

$35,190
Cash basis income
+3,400
Accounts Receivable arise from sales that have been

made, thus revenue must be recognized.
-2,500
Accounts Receivable collected in 2003 from sales that

were made (and revenue that was earned) in 2002.
+1,300
Supplies are not recorded as expenses until used up).
-1,160
Supplies from 2002 that were used up (and an expense

incurred) in 2003.
-1,200
Which is an expense because the cost was incurred

during 2003.
+2,400
For 2002 wages expense that were paid in 2003.
-1,440
Which is an expense because the cost was incurred

during 2003.
+1,600
For 2002 expenses that were paid in cash in 2003.
$37,590
Accrual basis income
3-34
PROBLEM 3-4A
(a)
1. Cash .........................................................................
Fees Receivable ...............................................
9,000
9,000
2. Unearned Fees Revenue ............................................ 22,000

Fees Revenue...................................................
22,000
3. Cash ............................................................................. 30,000
Unearned Fees Revenue .................................
30,000
Unearned Fees Revenue ($30,000 $17,000)........... 13,000
Fees Revenue...................................................
13,000
4. Fees Receivable.......................................................... 118,000
Fees Revenue ($153,000 $22,000 $13,000)
118,000
5. Cash ............................................................................. 106,000
Fees Receivable ($118,000 $12,000)............
106,000
(b) Cash received with respect to fees = $9,000 + $106,000 + $30,000 =
$145,000
T accounts (not required)
(4)
Unearned Fees Revenue

22,000
(2)
22,000 (3)
30,000
(3)
13,000
17,000
Fees Receivable
9,000
118,000
(1)
9,000
(5)
106,000
12,000
Fees Revenue
(2)
(3)
(4)
22,000
13,000
118,000
153,000
(1)
(3)
(5)
3-35
Cash
9,000
30,000
106,000
145,000
PROBLEM 3-5A
1. (a) July 1 Office Supplies............................................

Cash ........................................................
1,560
(b) Dec. 31 Supplies Expense ($1,560 + $640 $740).

Office Supplies.......................................
1,460
2. (a) Jan. 1 Cash .............................................................

Note Payable ..........................................
10,000
(b) Dec. 31 Interest Expense .........................................

Interest Payable ($10,000 X 6%) ...........
600
3. (b) Dec. 31 Telephone Expense ....................................

Accounts Payable ..................................
400
4. (a) Jan. 1
1,560
1,460
10,000
600
400
Truck ............................................................
Cash ........................................................
18,000
(b) Dec. 31 Amortization Expense ................................

Accumulated AmortizationTruck........
3,600
5. (a) Dec. 26 Wages Expense...........................................

Cash ........................................................
3,000
(b) Dec. 31 Wages Expense...........................................

Wages Payable ($3,000 5 x 3) ............
1,800
18,000
3,600
3,000
1,800
Note to Instructors: The January 3, 2003 journal entry follows for

information:
Jan. 3 Wages Expense...........................................
Wages Payable............................................
Cash ........................................................
3-36
1,200
1,800
3,000
PROBLEM 3-6A
1.
Dec. 31
Advertising Expense.........................................
Prepaid Advertising ..................................
A650 $6,000 / 12 = $500 per month
for 8 months =
B974 $7,200 / 24 = $300 per month
for 4 months =
0
2.
Dec. 31
5,200
5,200
$4,000
1,200
$5,200
Unearned Rent Revenue................................... 108,000

Rent Revenue ............................................
108,000
5 $4,000 2 = $ 40,000
4 $8,500 2 =
68,000
Total rent earned $108,000
Note that the $369,000 balance in Unearned Rent Revenue includes

the security deposits.
3.
Dec. 31

3,733
3,733
$80,000 8% 7/12 mos. = $3,733

4.
Dec. 31
Salaries Expense ..............................................

Salaries Payable ........................................
5 x $700 x 2/5 days = $1,400
3 x $500 x 2/5 days =
600
Total
$2,000
3-37
2,000
2,000
PROBLEM 3-7A
EXOTIC DESIGNS
Income Statement
Revenues
Design revenue ($61,500 + (6) $3,800)...........
Expenses
Wage expense ($18,400 + (5) $400) ...............
Supplies expense ($12,200 (2) $1,800) .......
Rent expense ($9,600 (3) $600) ...................
Automobile expense [(7) 12,000 X $0.30)].....
Advertising expense .......................................
Amortization expense ($18,400 (1) 10) ......
Telephone expense .........................................
Insurance expense ($1,800 (4) 2) ................
Total expenses.........................................
Net income...............................................................
$65,300
$18,800
10,400
9,000
3,600
3,600
1,840
980
900
49,120
$16,180
EXOTIC DESIGNS
Balance Sheet
December 31, 2003
Assets
Cash ..........................................................................
Prepaid insurance ($1,800 2 (4)) ..........................
Rent deposit .............................................................
Accounts receivable (6)...........................................
Supplies (2)...............................................................
Equipment ................................................................ $18,400
Less: Accumulated amortizationequipment .....
1,840
Total assets ......................................................
$ 2,520
900
600
3,800
1,800
16,560
$26,180
Liabilities and Owners Equity

Liabilities
Wages payable (5) ..........................................
Accounts payable ((7) $12,000 X $0.30) .......
Total liabilities.........................................
Owners equity
Smith, Capital ($30,000 - $16,120 - $24,000).
Total liabilities and owners equity .......
3-38
400
3,600
4,000
22,180
$26,180
PROBLEM 3-8A
Balance Sheet
Adj.
Entry
1.
2.
3.
4.
5.
6.
Assets =
$500 O
$200 O
NA
NA
$100 U
$1,200 O
Liabilities +
NA
NA
$750 O
$500 U
NA
NA
Income Statement
Owners
Equity
$500 O
$200 O
$750 U
$500 O
$100 U
$1,200 O
3-39
Revenues NA
NA
$750 U
NA
$100 U
NA
Net
Expenses = Income
$500 U
$500 O
$200 U
$200 O
NA
$750 U
$500 U
$500 O
NA
$100 U
$1,200 U
$1,200 O
PROBLEM 3-9A
(a) 1. June 30
2.
30
30
3.
4.
5.
6.
7.
30
30
30
30
30
Insurance Expense ($7,200 1/12) ..........

Prepaid Insurance..............................
Amortization ExpenseOffice
Equipment...............................................
Office Equipment ............................
600
600
50
50
Amortization ExpenseBuses ................

Accum. AmortizationBuses ..........
2,300
Interest Expense........................................
Interest Payable .................................
300
Unearned Fees Revenue...........................

Fees Earned ($1,500 4)...................
6,000
Salaries Expense.......................................
Salaries Payable ($400 3)...............
1,200
Accounts Receivable ................................

Fees Earned .......................................
1,200
Advertising Expense.................................
Accounts Payable..............................
500
3-40
2,300
300
6,000
1,200
1,200
500

(b)
Cash
Date
Explanation
June 30
Balance
Ref.
Debit
Credit
Balance
3,000
Accounts Receivable
Date
Explanation
June 30
Ref.
Debit
J2
1,200
Ref.
Debit
Credit
Balance
1,200
Prepaid Insurance
Date
Explanation
June 30
30
Balance
9
J2
Credit
0,600
Balance
007,200
006,600
Office Equipment
Date
Explanation
June 30
Balance
Ref.
Debit
Credit
Balance
001,800
Accumulated AmortizationOffice Equipment

Date
Explanation
Ref.
June 30
Debit
J2
Credit
0,050
Balance
000,050
Buses
Date
Explanation
June 30
Balance
Ref.
9
3-41
Debit
Credit
Balance
140,000

(b) (Continued)
Accumulated AmortizationBuses
Date
Explanation
Ref.
June 30
Debit
J2
Credit
2,300
Balance
002,300
Notes Payable
Date
Explanation
June 30
Balance
Ref.
9
Debit
Credit
Ref.
Debit
Credit
J2
0,
500
Ref.
Debit
Credit
Balance
62,000
Accounts Payable
Date
Explanation
June 30
Balance
0,5500
Interest Payable
Date
Explanation
June 30
J2
0,300
Balance
000,300
Salaries Payable
Date
Explanation
Ref.
June 30
Debit
J2
Credit
1,200
Balance
001,200
Unearned Fees
Date
Explanation
June 30
30
Balance
Ref.
9
J2
3-42
Debit
6,000
Credit
Balance
15,000
9,000

(b) (Continued)
Eldon Kaplan, Capital
Date
Explanation
June 30
Balance
Ref.
Debit
Credit
Balance
70,000
Fees Earned
Date
Explanation
June 30
30
30
Balance
Ref.
Debit
9
J2
J2
Credit
6,000
1,200
Balance
15,900
21,900
23,100
Salaries Expense
Date
Explanation
June 30
30
Balance
Ref.
Debit
9
J2
1,200
Ref.
Debit
Credit
Balance
09,000
10,200
Advertising Expense
Date
Explanation
June 30
30
Balance
9
J2
500
Ref.
Debit
Credit
Balance
00,800
1,300
Gas and Oil Expense

Date
Explanation
June 30
Balance
3-43
Credit
Balance
1,100

(b) (Continued)
Insurance Expense
Date
Explanation
June 30
Ref.
Debit
J2
0,600
Credit
Balance
0,600
Amortization ExpenseOffice Equipment

Date
Explanation
June 30
Ref.
Debit
J2
0,050
Ref.
Debit
J2
2,300
Ref.
Debit
J2
0,300
Credit
Balance
0,050
Amortization ExpenseBuses
Date
Explanation
June 30
Credit
Balance
2,300
Interest Expense
Date
Explanation
June 30
3-44
Credit
Balance
0,300

(c)
ATLANTIC TOURS
Adjusted Trial Balance
June 30, 2003
Debit
Cash .........................................................................
Accounts Receivable ..............................................
Prepaid Insurance ...................................................
Office Equipment.....................................................
Accumulated AmortizationOffice
Equipment.............................................................
Buses .......................................................................
Accumulated AmortizationBuses ......................
Notes Payable..........................................................
Accounts Payable ...................................................
Interest Payable.......................................................
Salaries Payable ......................................................
Unearned Fees.........................................................
Eldon Kaplan, Capital .............................................
Fees Earned .............................................................
Salaries Expense.....................................................
Advertising Expense...............................................
Gas and Oil Expense...............................................
Insurance Expense..................................................
Amortization ExpenseOffice Equipment ...........
Amortization ExpenseBuses ..............................
Interest Expense......................................................
3-45
Credit
$ 3,000
1,200
6,600
1,800
$
50
140,000
2,300
62,000
500
300
1,200
9,000
70,000
23,100
10,200
1,300
1,100
600
50
2,300
300
$168,450
0000000
$168,450
PROBLEM 3-10A
(a) 1. Aug. 31
2.
3.
31
31
31
4.
5.
6.
7.
31
31
31
31
Insurance Expense ($450 3) ..................

1,350
Supplies Expense ($3,300 $1,000) ........

Supplies..............................................
2,300
1,350
2,300
Amortization ExpenseCottages
($6,250 1/4) ........................................
Accum. Amort.Cottages ................
1,562
Amortization ExpenseFurniture
($5,200 1/4) ........................................
Accum. Amort.Furniture................
1,300
1,562
1,300
Unearned Rent Revenue ...........................

Rent Revenue.....................................
5,000
Salaries Payable ................................
400

Rent Revenue.....................................
800
5,000
400
533
Interest Payable [($80,000 8%) 1/12]
3-46
800
533

(b)
Cash
Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
19,600
Accounts Receivable
Date
Explanation
Aug. 31
Ref.
Debit
J1
800
Ref.
Debit
Credit
Balance
00,800
Prepaid Insurance
Date
Explanation
Aug. 31
31
Balance
9
J1
Credit
0,1,350
Balance
005,400
004,050
Supplies
Date
Explanation
Aug. 31
31
Balance
Ref.
Debit
9
J1
Credit
2,300
Balance
003,300
001,000
Land
Date
Aug.
Explanation
31
Ref.
Debit
Credit
Balance
Balance
025,000
Cottages
Date
Explanation
Aug. 31
Balance
Ref.
9
3-47
Debit
Credit
Balance
125,000

(b) (Continued)
Accumulated AmortizationCottages
Date
Explanation
Ref.
Aug. 31
Debit
J1
Credit
1,562
Balance
001,562
Furniture
Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
026,000
Accumulated AmortizationFurniture
Date
Explanation
Ref.
Aug. 31
Debit
J1
Credit
Balance
1,300
000,1,300
Credit
Balance
Accounts Payable
Date
Explanation
Aug. 31
Balance
Ref.
Debit
006,500
Unearned Rent Revenue

Date
Explanation
Aug. 31
31
Balance
Ref.
Debit
9
J1
5,000
Ref.
Debit
Credit
Balance
006,800
001,800
Salaries Payable
Date
Explanation
Aug. 31
J1
Credit
400
Balance
000,400
Interest Payable
Date
Explanation
Ref.
Aug. 31
J1
3-48
Debit
Credit
0,533
Balance
000,533

(b) (Continued)
Mortgage Payable
Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
080,000
Keath Yhap, Capital

Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
100,000
Keath Yhap, Drawings

Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
05,000
Rent Revenue
Date
Explanation
Aug. 31
31
31
Balance
Ref.
Debit
9
J1
J1
Credit
5,000
0,800
Balance
80,000
85,000
85,800
Salaries Expense
Date
Explanation
Aug. 31
31
Balance
Ref.
Debit
9
J1
400
Ref.
Debit
Credit
Balance
51,000
51,400
Utilities Expense
Date
Explanation
Aug. 31
Balance
3-49
Credit
Balance
09,400

(b) (Continued)
Repair Expense
Date
Explanation
Aug. 31
Balance
Ref.
Debit
Credit
Balance
03,600
Insurance Expense
Date
Explanation
Aug. 31
Ref.
Debit
J1
1,350
Ref.
Debit
J1
2,300
Ref.
Debit
J1
1,562
Ref.
Debit
J1
0,11,300
Ref.
Debit
J1
0,533
Credit
Balance
00,11,350
Supplies Expense
Date
Explanation
Aug. 31
Credit
Balance
2,300
Amortization ExpenseCottages
Date
Explanation
Aug. 31
Credit
Balance
1,562
Date
Explanation
Aug. 31
Credit
Balance
0,1,300
Interest Expense
Date
Explanation
Aug. 31
3-50
Credit
Balance
0,533

(c)
HIGHLAND COVE RESORT
August 31, 2003
Debit
Cash ..........................................................................
Accounts Receivable...............................................
Prepaid Insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ...................................................................
Accumulated AmortizationCottages ..................
Furniture ...................................................................
Accumulated AmortizationFurniture ..................
Accounts Payable....................................................
Unearned Rent Revenue .........................................
Interest Payable .......................................................
Mortgage Payable ....................................................
Keath Yhap, Capital .................................................
Keath Yhap, Drawings.............................................
Rent Revenue...........................................................
Salaries Expense .....................................................
Utilities Expense ......................................................
Repair Expense........................................................
Insurance Expense ..................................................
Supplies Expense ....................................................
Amortization ExpenseCottages ..........................
Amortization ExpenseFurniture..........................
Interest Expense ......................................................
3-51
Credit
$ 19,600
800
4,050
1,000
25,000
125,000
$ 1,562
26,000
1,300
6,500
1,800
400
533
80,000
100,000
5,000
85,800
51,400
9,400
3,600
1,350
2,300
1,562
1,300
000 0533
$277,895
0000 000
$277,895

(d)

Income Statement
For the Three Months Ended August 31, 2003
Revenues
Rent revenue .....................................................
Expenses
Salaries expense ...............................................
Utilities expense................................................
Repair expense..................................................
Supplies expense..............................................
Amortization expensecottages.....................
Insurance expense............................................
Interest expense................................................
Amortization expensefurniture.....................
Total expenses...........................................
Net income ...............................................................
$85,800
$51,400
9,400
3,600
2,300
1,562
1,350
533
1,300
71,445
$14,355

For the Three Months Ended August 31, 2003
Keath Yhap, Capital, June 1........................................................ $
0
Add: Investment by owner ........................................................ 100,000
Net income ........................................................................ 0 14,355
114,355
Less: Drawings ........................................................................... 0 05,000
Keath Yhap, Capital, August 31.................................................. $109,355
3-52

(d) (Continued)
Balance Sheet
August 31, 2003
Assets
Cash ..........................................................................
Accounts receivable................................................
Prepaid insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ................................................................... $125,000
Less: Accumulated amortizationcottages ........
1,562
26,000
Furniture ...................................................................
1,300
Less: Accumulated amortizationfurniture ........
Total assets ..............................................
$ 19,600
800
4,050
1,000
25,000
123,438
24,700
$198,588

Liabilities
Accounts payable ............................................
Salaries payable ...............................................
Interest payable................................................
Unearned rent revenue ....................................
Mortgage payable.............................................
Total liabilities ..........................................
Owner's equity
Keath Yhap, Capital .........................................
Total liabilities and owner's equity.........
3-53
6,500
400
533
1,800
80,000
89,233
109,355
$198,588
PROBLEM 3-11A
(a) Dec. 31
31
31
31
31
31
31
Accounts Receivable.......................................
Advertising Revenue................................
1,500
Art Supplies Expense ......................................

Art Supplies ..............................................
3,400
Insurance Expense ..........................................

Prepaid Insurance ....................................
850
Amortization Expense .....................................

Accumulated Amortization......................
7,000
Interest Expense ..............................................

Interest Payable........................................
150
Unearned Advertising Revenue......................

Advertising Revenue................................
1,400
Salaries Expense .............................................

Salaries Payable .......................................
1,300
3-54
1,500
3,400
850
7,000
150
1,400
1,300

(b)
YOUNT ADVERTISING AGENCY

Income Statement
Revenues
Advertising revenue..............................................
Expenses
Salaries expense ...................................................
Amortization expense ...........................................
Rent expense.........................................................
Art supplies expense ............................................
Insurance expense................................................
Interest expense....................................................
Total expenses...............................................
Net income ...................................................................
$61,500
$11,300
7,000
4,000
3,400
850
000500
27,050
$34,450

T. Yount, Capital, January 1..........................................................
Add: Net income ..........................................................................
Less: Drawings .............................................................................
T. Yount, Capital, December 31 ....................................................
3-55
$25,500
34,450
59,950
12,000
$47,950

(b) (Continued)
Balance Sheet
December 31, 2002
Assets
Cash ................................................................................
Accounts receivable......................................................
Art supplies ....................................................................
Prepaid insurance..........................................................
Printing equipment ........................................................ $60,000
Less: Accumulated amortization
Printing equipment
35,000
Total assets.......................................................
$11,000
21,500
5,000
2,500
25,000
$65,000

Liabilities
Notes payable .........................................................
Accounts payable...................................................
Interest payable ......................................................
Unearned advertising revenue..............................
Salaries payable .....................................................
Total liabilities.................................................
$ 5,000
5,000
150
5,600
1,300
17,050
Owner's equity
T. Yount, Capital.......................................................
Total liabilities and owner's equity .............
47,950
$65,000
3-56

(c) $5,000 x ? x 10/12 mos. = $500
$500 interest for 10 months is equivalent to $600 interest for 12
months.
$600 / $5,000 = 12% interest per year
(d) Salaries Expense, $11,300 less Salaries Payable on 12/31/02, $1,300 =
$10,000 payment made for 2002 salaries. Total Payments, $13,500
$10,000 = $3,500 Salaries Payable on 12/31/01
Salaries Payable
12/31/01
Payments 13,500 Expense
12/31/02
3-57
3,500
11,300
1,300
*PROBLEM 3-12A
1.
Jan. 1
Dec. 31
2.
Sept. 1
Dec. 31
3.
4.
Nov. 15
Supplies Expense..........................................
Cash ........................................................
4,500
Office Supplies .............................................

Office Supplies Expense .......................
900
Insurance Expense........................................
Cash ........................................................
3,600
Prepaid Insurance ($3,600 12 x 8) ............

Insurance Expense ................................
2,400
Cash................................................................
Service Revenue ....................................
1,200
4,500
900
3,600
2,400
1,200
Dec. 31
No entry required
Dec. 15
Cash................................................................
Rental Revenue ......................................
460
Rental Revenue ($460 2) ............................

Unearned Rental Revenue ....................
230
Dec. 31
3-58
460
230
*PROBLEM 3-13A
(a) 1. June 30
2.
3.
4.
5.
6.
30
30
30
30
30
Supplies .....................................................
Supplies Expense ..............................
1,500
Interest Expense ($17,000 8% 5/12) ..

Interest Payable ................................
567
Prepaid Insurance ($1,800 x 8/12)............

Insurance Expense ...........................
1,200
Consulting Revenue..................................
Unearned Consulting Revenue ........
1,000

Graphic Revenue ...............................
2,000
Amortization Expense ($9,000 2) ..........

Equipment .......................................
4,500
3-59
1,500
567
1,200
1,000
2,000
4,500
*PROBLEM 3-13A (Continued)

(b)
GLOBAL GRAPHICS COMPANY

June 30, 2003
Debit
Cash .........................................................................
Accounts Receivable ($14,000 + $2,000)...............
Supplies ...................................................................
Equipment................................................................
Accumulated Amortization.....................................
Notes Payable..........................................................
Accounts Payable ...................................................
Interest Payable.......................................................
Unearned Consulting Revenue ..............................
Jill Batke, Capital.....................................................
Graphic Revenue ($52,100 + $2,000) .....................
Consulting Revenue ($5,000 $1,000) ..................
Supplies Expense ($2,700 $1,500) ......................
Advertising Expense...............................................
Rent Expense...........................................................
Utilities Expense......................................................
Amortization Expense.............................................
Insurance Expense ($1,800 $1,200) ....................
Interest Expense......................................................
3-60
Credit
$ 9,500
16,000
1,500
1,200
45,000
$ 4,500
17,000
9,000
567
1,000
25,000
54,100
4,000
30,000
1,200
1,900
1,500
1,700
4,500
600
567
$115,167
$115,167

(c)

Income Statement
For the Six Months Ended June 30, 2003
Revenues
Graphic revenue...................................................
Consulting revenue..............................................
Total revenues...............................................
Expenses
Salaries expense..................................................
Advertising expense ............................................
Utilities expense...................................................
Rent expense........................................................
Supplies expense.................................................
Amortization expense..........................................
Interest expense...................................................
Insurance expense...............................................
Total expenses ..............................................
Net income ...................................................................
$54,100
4,000
58,100
$30,000
1,900
1,700
1,500
1,200
4,500
567
600
41,967
$16,133

For the Six Months Ended June 30, 2003
Jill Batke, Capital, January 1 ........................................................
Add: Investment by owner ..........................................................
Net income ..........................................................................
Jill Batke, Capital, June 30............................................................
3-61
0
25,000
16,133
$41,133

(c) (Continued)
Balance Sheet
June 30, 2003
Assets
Cash...........................................................................
Accounts receivable.................................................
Supplies.....................................................................
Prepaid insurance.....................................................
Equipment .................................................................
Less: Accumulated amortization ...........................
Total assets ......................................................
$ 9,500
16,000
1,500
1,200
$45,000
4,500
40,500
$68,700

Liabilities
Notes payable .............................................................
Accounts payable.......................................................
Interest payable ..........................................................
Unearned consulting revenue...................................
Total liabilities.....................................................
$17,000
9,000
567
1,000
27,567
Owner's equity
Jill Batke, Capital .......................................................
Total liabilities and owner's equity ...................
41,133
$68,700
3-62
PROBLEM 3-1B
3
4
5
4
2
(a)
(b)
(c)
(d)
(e)
3
1
(f)
(g)
(h)
Record interest on overdue account payable.

Record interest earned on overdue account receivable.
Allocate cost of equipment over its useful life.
Record revenue owed by customers for services provided.
Record fees that have been earned that were previously
received in advance.
Record signing of lease for rental space.
Record property taxes due.
Record expiration of rent at the end of the month.
3-63
PROBLEM 3-2B
1.
Jan. 1
Dec. 31
2.
Aug. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 15
Dec. 31
Office Supplies ..............................................

Cash ........................................................
2,800
Supplies Expense ($2,800 $500) ...............

Office Supplies.......................................
2,300
Prepaid Insurance .........................................

Cash ........................................................
3,600
Insurance Expense ($3,600 12 x 5) ...........

Prepaid Insurance..................................
1,500
Cash................................................................
1,200
Unearned Service Revenue ($400 x 2).........

Service Revenue ....................................
800
Prepaid Rent ..................................................

Cash ........................................................
4,500
No entry required
3-64
2,800
2,300
3,600
1,500
1,200
800
4,500
PROBLEM 3-3B
$43,900
+3,600
- 2,700
+1,550
- 1,310
- 1,500
+2,200
- 1,360
+1,500
- 2,000
$43,880
Cash basis earnings.

Accounts receivable arise from sales that have been made,
thus revenue must be recognized for balance outstanding at
the end of the current year.
Accounts receivable collected in current year, for sales
made in previous year must be deducted from earnings.
Prepaid expenses at year end should be set up as an asset
rather than expensed, this increases earnings.
Prepaid expenses at the end of the previous year should be
expensed this year, this decreases earnings.
Accounts payable owing at the end of the current year
should be accrued, thus reducing earnings.
Accounts payable owed at the end of the previous year
should not be deducted from the current years earnings,
thus increasing earnings.
Unearned revenue at the end of the current year should be
accrued, thus reducing earnings.
Unearned revenue at the end of the previous year should
not be deducted from the current years income, thus
increasing earnings.
Amortization expense is equal to the increase in
accumulated amortization from 2001 to 2002 ($22,000 $20,000 = $2,000)
Accrual basis income.
3-65
PROBLEM 3-4B
(a)
1. Cash ...............................................................
Dues Receivable...................................
11,000
2. Unearned Ticket Revenue.............................

Ticket Revenue.....................................
25,000
3. Cash ...............................................................
Unearned Ticket Revenue ...................
35,000
11,000
25,000
35,000
Unearned Ticket Revenue ($35,000- $20,000)

Ticket Revenue.....................................
15,000
15,000
4. Dues Receivable ............................................

Dues Revenue .....................................
148,000
5. Cash ...............................................................
Dues Receivable ($148,000 $15,000)
133,000
148,000
133,000
Dues Revenue
4.
148,000
Dues Receivable
2001 Bal. 11,000
4.
148,000 1.
11,000
5.
133,000
2002 Bal. 15,000
2002 Bal.148,000
Ticket Revenue
2.
25,000
3.
15,000
2002 Bal. 50,000
Unearned Ticket Revenue

2001 Bal. 25,000
35,000
2.
25,000 3.
3.
15,000
2002 Bal. 20,000
(b)
Cash received with respect to dues and tickets:
1.
3.
5.
Collection of 2001 dues

Sale of tickets
Collection of 2002 dues
$ 11,000
35,000
133,000
$179,000
3-66
PROBLEM 3-5B
1. (a) Jan. 31 Supplies .......................................................
Cash ......................................................
,500
(b) Dec. 31 Supplies Expense ($300 + $1,500 $500).

Office Supplies .....................................
1,300
2. (a) June 1
1,500
1,300
Cash .............................................................
Note Payable.........................................
4,000
(b) Dec. 31 Interest Expense .........................................

Interest Payable ($4,000 X 8% x 7/12).
187
3. (b) Dec. 31 Utilities Expense .........................................

Accounts Payable ................................
1,400
4. (a) Jan. 1
5.
4,000
187
1,400
Truck ............................................................
Cash ......................................................
38,000
(b) Dec. 31 Amortization Expense ................................

Accumulated Amortization Truck....
10,000
Dec. 31 Wages Expense ($3,000 x 2/12* days).......

Wages Payable .....................................
500
38,000
10,000
500
*See errata note.

Note to Instructors: The January 11, 2003 journal entry follows for
information:
Jan. 11
Wages Expense ($3,000 x 10/12 days) ......

Wages Payable ($3,000 x 1/12 days) .........
Cash ......................................................
Errata Note: Advise students to see errata sheet if

they have the first printing of the text. In
transaction #5, December 31 falls on a Tuesday,
not Thursday, in 2002. December 28 falls on a
Saturday. No adjusting entry has been recorded
for the period from December 30 through
December 31. Assume a six-day (Monday through
Saturday) work week.
3-67
2,500
500
3,000
PROBLEM 3-6B
(a)
Prepaid Insurance before adjustments

A2958 $ 5,800
B4564
9,600
$15,400
(b)
1.
Dec. 31
Insurance Expense ..........................

Prepaid Insurance...................
5,300
Prepaid Insurancebalance after adjustment

($15,400 - $5,300 = $10,100)
A2958 $5,800 24 = $242 per month
for 12 months =
$ 2,900
B4564 $9,600 24 = $400 per month
for 18 months =
0 7,200
$10,100
Insurance Expense
A2958 $5,800 24 = $242 per month
for 12 months =
$2,900
B4564 $9,600 24 = $400 per month
for 6 months =
2,400
$5,300
3-68
5,300
PROBLEM 3-6B (Continued)

(b) (Continued)
2.
Dec. 31
Unearned Subscription Revenue....

Rent Subscription Revenue ...
Subscription Revenue Earned

October 200 x $50 x 3/12 =
November 300 x $50 x 2/12 =
December 480 x $50 x 1/12 =
7,000
7,000
$2,500
2,500
2,000
$7,000
Unearned Subscription Revenue ($49,000 - $7,000 = $42,000)

October 200 x $50 x 9/12 =
$ 7,500
November 300 x $50 x 10/12 =
12,500
December 480 x $50 x 11/12 =
22,000
$42,000
3.
Dec. 31
Salaries Expense ........................ 3,060

Salaries Payable ................
5 x $600 x 3/5 days =
3 x $700 x 3/5 days =
Total
3-69
$1,800
1,260
$3,060
3,060
PROBLEM 3-7B
(a)
THE RADICAL EDGE

Income Statement
For the Six Months Ended April 30, 2003
Revenues
Repair services ($32,150 + $650) ...................
Expenses
Wages expense ($2,600 + $120).....................
Rent expense ($1,225 - $175) .........................
Advertising expense .......................................
Amortization expense ($9,200 (i) 8 x 6/12 )
Total expenses.........................................
Net income...............................................................
$32,800
$2,720
1,050
375
575
970
5,690
$27,110
(b)
THE RADICAL EDGE
Balance Sheet
April 30, 2003
Assets
Cash ........................................................................
Rent deposit ...........................................................
Accounts receivable .............................................
Equipment ..............................................................
Less: Accumulated amortizationequip............
Total assets.....................................................
$37,780
175
650
$9,200
575
8,625
$47,230

Liabilities
Wages payable ..............................................
Owners equity
Charron, Capital ($20,000 + $27,110) ...........
Total liabilities and owners equity ......
47,110
$47,230
3-70
120
PROBLEM 3-8B
Adj.
Entry
1.
2.
3.
4.
5.
6.
Balance Sheet
Assets =
$300 O
$1,000 O
NA
$2,000 U
NA
$1,000 O
Liabilities +
NA
NA
$750 O
NA
$250 U
NA
Income Statement
Owners
Revenues - Expenses =
Equity
$300 O
NA
$300 U
$1,000 O
NA
$1,000 U
$750 U
$750 U
NA
$2,000 U
$2,000 U
NA
$250 O
NA
$250 U
$1,000 O
NA
$1,000 U
3-71
Net
Income
$300 O
$1,000 O
$750 U
$2,000 U
$250 O
$1,000 O
PROBLEM 3-9B
(a) 1. Dec. 31
2.
31

Service Revenue ................................
2,500
Insurance Expense ($3,600 1/2) ............

1,800
2,500
1,800
3.
31
Amortization ExpenseAutomobiles .... 15,000

Automobiles ....................................
15,000
4.
31
Interest Payable .................................
5,400
Unearned Service Revenue ......................

Service Revenue ...............................
1,000
Salaries Payable ($500 3) ...............
1,500
Repair Expense .........................................

Accounts Payable..............................
650
5.
6.
7.
31
31
31
3-72
5,400
1,000
1,500
650

(b)
Cash
Date
Explanation
Dec. 31
Balance
Ref.
Debit
Credit
Balance
12,400
Accounts Receivable
Date
Explanation
Dec. 31
31
Balance
Ref.
Debit
9
J2
2,500
Ref.
Debit
Credit
Balance
3,200
5,700
Prepaid Insurance
Date
Explanation
Dec. 31
31
Balance
9
J2
Credit
0,1,800
Balance
003,600
001,800
Automobiles
Date
Explanation
Dec. 31
Balance
Ref.
Debit
Credit
Balance
0058,000
Accumulated AmortizationAutomobiles
Date
Explanation
Ref.
Dec. 31
Debit
J2
Credit
0,015,000
Balance
0015,000
Notes Payable
Date
Explanation
Dec. 31
Balance
Ref.
9
3-73
Debit
Credit
Balance
45,000

(b) (Continued)
Accounts Payable
Date
Explanation
Dec. 31
Ref.
Debit
Credit
Balance
J2
0,
650
Ref.
Debit
Credit
Balance
0,5,400
000,5,400
Credit
Balance
0,5650
Interest Payable
Date
Explanation
Dec. 31
J2
Salaries Payable
Date
Explanation
Ref.
Dec. 31
Debit
J2
1,500
001,500
Unearned Revenue
Date
Explanation
Dec. 31
31
Balance
Ref.
Debit
9
J2
1,000
Ref.
Debit
Credit
Balance
2,500
1,500
C. Orosco, Capital
Date
Explanation
Dec. 31
Balance
Credit
Balance
18,000
Service Revenue
Date
Explanation
Dec. 31
31
31
Balance
Ref.
9
J2
J2
3-74
Debit
Credit
2,500
1,000
Balance
84,000
86,500
87,500

(b) (Continued)
Salaries Expense
Date
Explanation
Dec. 31
31
Balance
Ref.
Debit
9
J2
1,500
Ref.
Debit
Credit
Balance
057,000
58,500
Repair Expense
Date
Explanation
Dec. 31
31
Balance
9
J2
650
Ref.
Debit
Credit
Balance
00,6,000
6,650
Gas and Oil Expense

Date
Explanation
Dec. 31
Balance
Credit
Balance
9,300
Insurance Expense
Date
Explanation
Dec. 31
Ref.
Debit
J2
0,1,800
Ref.
Debit
J2
0,015,000
Ref.
Debit
J2
05,400
Credit
Balance
0,11,800
Amortization ExpenseAutomobiles
Date
Explanation
Dec. 31
Credit
Balance
0,15,000
Interest Expense
Date
Explanation
Dec. 31
3-75
Credit
Balance
05,400

(c)
OROSCO SECURITY SERVICE

December 31, 2002
Debit
Cash ..........................................................................
Automobiles .............................................................
AmortizationAutomobiles....................................
Notes Payable ..........................................................
Accounts Payable ....................................................
Unearned Revenue ..................................................
C. Orosco, Capital....................................................
Service Revenue ......................................................
Repair Expense ........................................................
Gas and Oil Expense ...............................................
Amortization ExpenseAutomobiles....................
3-76
Credit
$ 12,400
5,700
1,800
58,000
$ 15,000
45,000
5,400
650
1,500
1,500
18,000
87,500
58,500
6,650
9,300
1,800
15,000
0005,400
$174,550
0000000
$174,550
PROBLEM 3-10B
(a) 1. May 31
2.
3.
31
31
31
4.
5.
6.
7.
31
31
31
31
Insurance Expense ($1,800 x 1/12) ..........

150
Supplies Expense ($1,900 $1,000) ........

Supplies..............................................
900
150
900
Amortization ExpenseLodge
($3,500 1/12) ......................................
Accum. Amort.Lodge.....................
292
($3,360 1/12) ......................................
Accum. Amort.Furniture................
280
Interest Payable ($35,000 8% 1/12)
292
280
233
233
Unearned Rent Revenue ...........................

Rent Revenue.....................................
1,500

Rent Revenue.....................................
800
Salaries Payable ................................
300
3-77
1,500
800
300

(b)
Cash
Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
2,500
Accounts Receivable
Date
Explanation
May 31
Ref.
Debit
J1
800
Ref.
Debit
Credit
Balance
00,800
Prepaid Insurance
Date
Explanation
May 31
31
Balance
9
J1
Credit
0, 150
Balance
001,800
001,650
Supplies
Date
Explanation
May 31
31
Balance
Ref.
Debit
9
J1
Credit
900
Balance
001,900
001,000
Land
Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
015,000
Lodge
Date
Explanation
May 31
Balance
Ref.
9
3-78
Debit
Credit
Balance
70,000

(b) (Continued)
Accumulated AmortizationLodge
Date
Explanation
Ref.
May 31
Debit
J1
Credit
292
Balance
292
Furniture
Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
016,800
Accumulated AmortizationFurniture
Date
Explanation
Ref.
May 31
Debit
J1
Credit
280
Balance
000,280
Accounts Payable
Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
004,700
Unearned Rent Revenue

Date
Explanation
May 31
31
Balance
Ref.
Debit
9
J1
1,500
Ref.
Debit
Credit
Balance
003,600
002,100
Salaries Payable
Date
Explanation
May 31
J1
3-79
Credit
300
Balance
000,300

(b) (Continued)
Interest Payable
Date
Explanation
Ref.
May 31
Debit
Credit
0,233
Balance
0,233
Debit
Credit
Balance
J1
Mortgage Payable
Date
Explanation
May 31
Balance
Ref.
9
035,000
Sara Sutton, Capital

Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
60,000
Rent Revenue
Date
Explanation
May 31
31
31
Balance
Ref.
Debit
9
J1
J1
Credit
1,500
0,800
Balance
9,200
10,700
11,500
Salaries Expense
Date
Explanation
May 31
31
Balance
Ref.
Debit
9
J1
300
Ref.
Debit
Credit
Balance
3,000
3,300
Utilities Expense
Date
Explanation
May 31
Balance
3-80
Credit
Balance
01,000

(b) (Continued)
Advertising Expense
Date
Explanation
May 31
Balance
Ref.
Debit
Credit
Balance
0 500
Insurance Expense
Date
Explanation
May 31
Ref.
Debit
J1
150
Ref.
Debit
Credit
Balance
150
Supplies Expense
Date
Explanation
May 31
J1
Credit
900
Balance
900
Amortization ExpenseLodge
Date
Explanation
Ref.
May 31
J1
Debit
Credit
292
Balance
292
Date
Explanation
May 31
Ref.
Debit
J1
0,280
Ref.
Debit
J1
0,233
Credit
Balance
0280
Interest Expense
Date
Explanation
May 31
3-81
Credit
Balance
0233

(c)
SUPER MOTEL
May 31, 2003
Debit
Cash ..........................................................................
Supplies....................................................................
Land ..........................................................................
Lodge ........................................................................
Accumulated AmortizationLodge .......................
Furniture ...................................................................
Accumulated AmortizationFurniture ..................
Accounts Payable ....................................................
Unearned Rent Revenue .........................................
Mortgage Payable ....................................................
Sara Sutton, Capital.................................................
Rent Revenue...........................................................
Utilities Expense ......................................................
Advertising Expense ...............................................
Supplies Expense ....................................................
Amortization ExpenseLodge...............................
Amortization ExpenseFurniture..........................
3-82
Credit
2,500
800
1,650
1,000
15,000
70,000
$
292
16,800
280
4,700
2,100
300
233
35,000
60,000
11,500
3,300
1,000
500
150
900
292
280
00 00233
$114,405
0000 000
$114,405

(d)
SUPER MOTEL
Income Statement
For the Month Ended May 31, 2003
Revenues
Rent revenue ...................................................
Expenses
Salaries expense.............................................
Utilities expense..............................................
Advertising expense.......................................
Supplies expense............................................
Amortization expenselodge .......................
Insurance expense..........................................
Interest expense..............................................
Amortization expensefurniture ..................
Total expenses ........................................
Net income ...............................................................
$11,500
$3,300
1,000
500
900
292
150
233
280
6,655
$ 4,845
SUPER MOTEL
For the Month Ended May 31, 2003
Sara Sutton, Capital, May 1.........................................................
Add: Investment by owner .........................................................
Net income .........................................................................
Less: Drawings ...........................................................................
Sara Sutton, Capital, May 31.......................................................
3-83
0
60,000
4,845
64,845
0
$64,845

(d) (Continued)
SUPER MOTEL
Balance Sheet
May 31, 2003
Assets
Cash ..........................................................................
Accounts receivable................................................
Prepaid insurance....................................................
Supplies....................................................................
Land ..........................................................................
Cottages ...................................................................
Less: Accumulated amortizationcottages ........
Furniture ...................................................................
Less: Accumulated amortizationfurniture ........
Total assets .....................................................
$ 2,500
800
1,650
1,000
15,000
$70,000
000292
16,800
000280
69,708
0016,520
$107,178

Liabilities
Accounts payable ............................................
Salaries payable ...............................................
Interest payable................................................
Unearned revenue............................................
Mortgage payable.............................................
Total liabilities ..........................................
4,700
300
233
2,100
0035,000
42,333
Owner's equity
Sara Sutton, Capital .........................................
Total liabilities and owner's equity.........
0064,845
$107,178
3-84
PROBLEM 3-11B
(a) Sept. 30
30
30
30
30
30
30
Accounts Receivable ....................................

Commission Revenue...........................
600
Rent Expense ................................................

Prepaid Rent ..........................................
600
Supplies Expense .........................................

Supplies .................................................
200
Amortization Expense ..................................

Accum. AmortizationEquipment ......
350
Interest Expense ...........................................

Interest Payable.....................................
50
Unearned Rent Revenue...............................

Rent Revenue ........................................
300
Salaries Expense ..........................................

Salaries Payable ....................................
400
3-85
600
600
200
350
50
300
400

(b)
IRABU CO.
Income Statement
For the Quarter Ended September 30, 2003
Revenues
Commission revenue ......................................
Rent revenue....................................................
Total revenues .........................................
Expenses
Salaries expense .............................................
Rent expense ...................................................
Amortization expense .....................................
Supplies expense ............................................
Interest expense ..............................................
Total expenses.........................................
Net income .......................................................
$14,600
700
15,300
$9,400
1,500
510
350
200
50
12,010
$ 3,290
IRABU CO.
Statement of Owners Equity
For the Quarter Ended September 30, 2003
Yosuke Irabu, Capital, July 1 .....................................................
Add: Investment .......................................................................
Net income.......................................................................
Less: Drawings ..........................................................................
Yosuke Irabu, Capital, September 30 ........................................
3-86
$
0
14,000
3,290
17,290
600
$16,690

(b) (Continued)
IRABU CO.
Balance Sheet
September 30, 2003
Assets
Cash ........................................................................
Accounts receivable ..............................................
Prepaid rent ............................................................
Supplies ..................................................................
Equipment ..............................................................
Less: Accum. amortizationequipment.............
Total assets.....................................................
$ 6,700
1,000
900
1,000
$15,000
350
14,650
$24,250

Liabilities
Notes payable .................................................
Accounts payable...........................................
Salaries payable .............................................
Interest payable ..............................................
Unearned rent revenue ..................................
Total liabilities.........................................
$ 5,000
1,510
400
50
600
7,560
Owners equity
Yosuke Irabu, Capital.....................................
Total liabilities and owners equity .......
16,690
$24,250
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
3-87
*PROBLEM 3-12B
1.
Jan. 1
Dec. 31
2.
Aug. 1
Dec. 31
3.
Nov. 15
Dec. 31
4.
Dec. 15
Dec. 31
Supplies Expense..........................................
Cash ........................................................
2,800
Office Supplies ..............................................

Supplies Expense ..................................
500
Insurance Expense........................................
Cash ........................................................
3,600
Prepaid Insurance ($3,600 12 x 7) .............

Insurance Expense ................................
2,100
Cash................................................................
Service Revenue ....................................
1,200
Service Revenue ...........................................

400
Rent Expense.................................................
Cash ........................................................
4,500
Prepaid Rent ..................................................

Rent Expense .........................................
4,500
3-88
2,800
500
3,600
2,100
1,200
400
4,500
4,500
*PROBLEM 3-13B
(a) 1. Dec. 31
2.
3.
4.
5.
6.
31
31
31
31
31
Supplies .....................................................
Supplies Expense ($3,300 - $1,500) .
1,800
Interest Expense ($18,000 10% 2/12)

Interest Payable ................................
300
Prepaid Insurance ($2,100 x 8/12)............

Insurance Expense ...........................
1,400
Consulting Fees Earned ...........................

Unearned Consulting Fees ...............
1,600
Amortization Expense ($2,200 2) ..........

Equipment .......................................
1,100
Utilities Expense........................................
Accounts Payable.............................
200
3-89
1,800
300
1,400
1,600
1,100
200
*PROBLEM 3-13B (Continued)

(b)
ROYAL GRAPHICS COMPANY

December 31, 2002
Debit
Cash.......................................................................... $ 8,600
Accounts Receivable .............................................
13,000
Supplies ...................................................................
1,800
1,400
Equipment ................................................................
48,000
Accumulated Amortization .....................................
Notes Payable ..........................................................
Accounts Payable ($11,000 + $200) .......................
Unearned Consulting Fees .....................................
Jan Bejar, Capital ....................................................
Graphic Fees Earned ..............................................
Consulting Fees Earned ($7,600 $1,600) ............
33,000
Supplies Expense ($3,300 $1,800) ......................
1,500
Advertising Expense ...............................................
1,700
Rent Expense...........................................................
2,500
Utilities Expense ($1,900 + $200) ...........................
2,100
Amortization Expense.............................................
1,100
Insurance Expense ($2,100 $1,400) ....................
700
Interest Expense...................................................... 00 00300
$115,700
3-90
Credit
$ 1,100
18,000
11,200
300
1,600
22,000
55,500
6,000
00 0000
$115,700

(c)

Income Statement
For the Six Months Ended December 31, 2002
Revenues
Graphic fees earned ...........................................
Consulting fees earned ......................................
Total revenues ............................................
Expenses
Salaries expense................................................. $33,000
Advertising expense...........................................
1,700
Utilities expense..................................................
2,100
Rent expense.......................................................
2,500
Supplies expense................................................
1,500
Amortization expense.........................................
1,100
Interest expense..................................................
300
Insurance expense.............................................. 000700
Total expenses ............................................
Net income ...................................................................
$55,500
6,000
61,500
42,900
$18,600

For the Six Months Ended December 31, 2002
Jan Bejar, Capital, July 1 ..............................................................
Add: Investment by owner ............................................................
Net income ............................................................................
Jan Bejar, Capital, December 31 ..................................................
3-91
0
22,000
18,600
$40,600

(c) (Continued)
Balance Sheet
December 31, 2002
Assets
Cash.............................................................................
Accounts receivable...................................................
Supplies.......................................................................
Prepaid insurance ......................................................
Equipment ................................................................... $48,000
Less: Accumulated amortization ............................. 001,100
Total assets..................................................
$ 8,600
13,000
1,800
1,400
46,900
$71,700

Liabilities
Notes payable .............................................................
Accounts payable.......................................................
Interest payable ..........................................................
Unearned consulting fees .........................................
Total liabilities.....................................................
$18,000
11,200
300
1,600
31,100
Owner's equity
Jan Bejar, Capital .......................................................
Total liabilities and owner's equity ...................
40,600
$71,700
3-92
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3

(a), (c), & (e)
Cash
No. 101
Date
Explanation
Ref.
Sept. 1
8
10
12
20
22
25
29
Balance
9
J102
J102
J102
J102
J102
J102
J102
Debit
Credit
1,200
1,200
3,400
6,000
0,500
1,200
0,650
Accounts Receivable
Balance
04,880
03,680
04,880
08,280
02,280
01,780
0 580
01,230
No. 112
Date
Explanation
Ref.
Sept. 1
10
27
Balance
9
J102
J102
Debit
Credit
1,200
1,000
Supplies
Balance
03,520
02,320
03,320
No. 126
Date
Explanation
Ref.
Sept. 1
17
30
Balance
9
J102
J103
Adj. entry
Debit
Credit
1,500
500
Store Equipment
Balance
01,000
02,500
02,000
No. 153
Date
Explanation
Ref.
Sept. 1
15
Balance
9
J102
3-93
Debit
3,000
Credit
Balance
15,000
18,000
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)

(a), (c), & (e) (Continued)
Accumulated AmortizationStore Equipment
Date
Explanation
Ref.
Sept. 1
30
Balance
Adj. entry
9
J103
No. 154
Debit
Credit
0,300
Accounts Payable
Explanation
Ref.
Sept. 1
15
17
20
Balance
9
J102
J102
J102
Debit
Credit
3,000
1,500
6,000
Unearned Service Revenue

Explanation
Ref.
Sept. 1
29
30
Balance
9
J102
J103
Debit
Credit
0,650
300
Salaries Payable
Explanation
Ref.
Sept. 1
8
30
Balance
9
J102
J103
Debit
Credit
0,500
500
R. Pitre, Capital
Explanation
Sept. 1
Balance
03,400
06,400
07,900
01,900
Balance
00,400
01,050
00,750
No. 212
Date
Date
Balance
No. 209
Date
Adj. entry
01,500
01,800
No. 201
Date
Adj. entry
Balance
Balance
00,500
00,000
00,500
No. 301
Ref.
9
3-94
Debit
Credit
Balance
18,600

(a), (c), & (e) (Continued)
Service Revenue
Date
Sept. 12
27
30
No. 400
Explanation
Ref.
Adj. entry
J102
J102
J103
Debit
Credit
3,400
1,000
0,300
Amortization Expense
Explanation
Ref.
Debit
Sept. 30
Adj. entry
J103
0,300
Credit
No. 631
Date
Explanation
Ref.
Debit
Sept. 30
Adj. entry
J103
0,500
Credit
No. 726
Explanation
Ref.
Debit
Adj. entry
J102
J102
J103
0,700
1,200
0,500
Credit
Balance
0,700
1,900
2,400
Rent Expense
Sept. 22
Balance
0,500
Salaries Expense
Date
Balance
0,3300
Supplies Expense
Sept. 8
20
30
3,400
4,400
4,700
No. 711
Date
Date
Balance
No. 729
Explanation
Ref.
Debit
J102
0,500
3-95
Credit
Balance
0,500

(b)
GENERAL JOURNAL
J102
Date
Account Titles and Explanation
Ref.
Sept. 8
Salaries Payable
Salaries Expense
Cash
212
726
101
0,500
0,700
Cash
Accounts Receivable
101
112
1,200
Cash
Service Revenue
101
400
3,400
Store Equipment
Accounts Payable
153
201
3,000
Supplies
Accounts Payable
126
201
1,500
Accounts Payable
Cash
201
101
6,000
Rent Expense
Cash
729
101
0,500
Salaries Expense
Cash
726
101
1,200
Accounts Receivable
Service Revenue
112
400
0,1,000
Cash
Unearned Service Revenue
101
209
0,650
10
12
15
17
20
22
25
27
29
3-96
Debit
Credit
1,200
1,200
3,400
3,000
1,500
6,000
0,500
1,200
0,1,000
0,650

(d) & (f)
PITRE EQUIPMENT REPAIR

Unadjusted and Adjusted Trial Balances
September 30, 2003
Unadjusted
Dr.
Cash ................................................. $ 1,230

Accounts Receivable...................... 3,320
Supplies........................................... 2,500
Store Equipment ............................. 18,000
Accumulated Amortization ............
Accounts Payable ...........................
Unearned Service Revenue ...........
Salaries Payable .............................
R. Pitre, Capital ...............................
Service Revenue .............................
Amortization Expense ....................
Supplies Expense ...........................
Salaries Expense ............................ 1,900
Rent Expense ..................................
500
$27,450
(e)
Cr.
Adjusted
Dr.
$ 1,230
3,320
2,000
18,000
$ 1,500
1,900
1,050
$ 1,800
1,900
750
500
18,600
4,700
18,600
4,400
300
500
2,400
500
$ 27,450 $28,250 $ 28,250
GENERAL JOURNAL
Date
Account Titles and Explanation
J103
Ref.
Debit
1. Sept. 30 Supplies Expense.................................. 631

Supplies ($2,500 $2,000) ............ 126
500
2.
30 Salaries Expense................................... 726

Salaries Payable ............................ 212
500
30
Amortization Expense.......................... 711

Store Equipment......................... 154
300
Unearned Service Revenue ................. 209

Service Revenue............................ 400
300
3.
4.
30
3-97
Cr.
Credit
500
500
300
300

(g)

Income Statement
For the Month Ended September 30, 2003
Revenues
Service revenue .................................................
Expenses
Salaries expense ............................................... $2,400
Supplies expense ..............................................
500
Rent expense .....................................................
500
Amortization expense .......................................
300
Total expenses...................................................
Net income ...............................................................
$4,700
3,700
$1,000

For the Month Ended September 30, 2003
R. Pitre, Capital, September 1 ................................................. $18,600
Add: Net income .....................................................................
1,000
R. Pitre, Capital, September 30 ............................................... $19,600
3-98

(g) (Continued)
Balance Sheet
September 30, 2003
Assets
Cash ....................................................................
Accounts receivable ..........................................
Supplies ..............................................................
Store equipment................................................. $18,000
Less: Accumulated amortizationstore
equipment...........................................................
1,800
Total assets................................................
$ 1,230
3,320
2,000
16,200
$22,750

Liabilities
Accounts payable........................................................... $01,900
Salaries payable .............................................................
500
Unearned service revenue............................................. 00 0750
Total liabilities ............................................................
3,150
Owner's equity
R. Pitre, Capital ...............................................................
Total liabilities and owner's equity ..........................
3-99
019,600
$22,750
BYP 3-1 FINANCIAL REPORTING PROBLEM
(a) The title The Second Cup used for its income statement is
Consolidated Statement of Operations and Deficit.
(b) The types of revenues reported include Franchise Revenue, Sales from
Corporate Stores, and Product Sales.
(c) For competitive reasons, The Second Cup does not want to disclose
details of its operating costs and expenses. Most of the items shown
on its income statement are minimum required disclosures (many of
which are related to non-typical events rather than regular operations).
(d) Prepayments: Prepaid Expenses and Sundry Assets are reported on
the balance sheet ($419,000). In adjusting this account the other side
of the entry would be an expense account, for example insurance
expense. Deferred Financing Charges are also reported ($125,000). The
other account involved in adjustments to this account would likely be
interest expense.
(e) Accruals: Accrued revenues might include Income Taxes Receivable
($1,150,000) and Future Income Taxes ($295,000). The other account
use in preparing adjustments for this account would be a reduction of
income taxes expense. Accounts Receivable ($2,294,000) may also
include some accrued revenue amounts. Accrued expenses are
included in the line Accounts Payable and Accrued Liabilities
($2,718,000). The other accounts used in preparing adjustments for
this account would be expense accounts.
3-100
BYP 3-2 INTERPRETING FINANCIAL STATEMENTS
COTT CORPORATION
(a) (in millions)
1997 Prepaid Contract Costs ...............................
Cash ........................................................
(b) (in millions)
1997 Amortization Expense .................................
(or Prepaid Contract Costs) ..................
(c)
29,743
29,743
26,349
26,349
I think it should be recorded as an expense not a reduction of sales

revenue. All expenses are incurred to earn revenuethis item should
not be treated any differently than other expenses.
(d) 1.
Cott may have made this change from capitalizing to expensing

these cost because of uncertainty relating to the future benefit of
the costs.
[The company states, in its 1999 Annual report, that this change
in accounting policy reflected the maturing of the companys
operations in the industry and its relationships with customers.]
2. (in millions)
1997
Contract Costs Expense .............................

Cash ........................................................
3-101
29,743
29,743
BYP 3-3 INTERPRETING FINANCIAL STATEMENTS
(a) The company is recording its legal expenses using an accrued

expense account.
(b) All of the adjustments are accrued expense adjustments, which
decrease net income.
(c) The accrued interest would have been recorded as follows:
Interest Expense.................................... 18,000
Interest Payable .............................
3-102
18,000
BYP 3-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the

world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can
be found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
3-103
BYP 3-5 COLLABORATIVE LEARNING ACTIVITY

(a)
RV WORLD
Income Statement
For the Quarter Ended March 31, 2003
Revenues
Rental fees ($95,000 $30,000)...........................................
Expenses
Wages expense [$29,800 + ($400 2)] .............. $30,600
Advertising expense ($5,200 + $110).................
5,310
Supplies expense ($5,200 $1,300)...................
3,900
Repair expense ($4,000 + $260) .........................
4,260
Insurance expense ($7,200 3/12) ....................
1,800
Utilities expense ($900 + $180) ..........................
1,080
Amortization expense .........................................
800
Interest expense ($12,000 8% 3/12) .............
00,240
Total expenses..............................................................
Net income....................................................................................
$65,000
047,990
$17,010
(b) (1) The generally accepted accounting principles pertaining to the

income statement that were not recognized by Michel were the
revenue recognition principle and the matching principle.
The revenue recognition principle states that revenue is
recognized when it is earned. The fees of $30,000 for summer
rentals have not been earned and, therefore, should not be
reported in income for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be
matched with accomplishments (revenues). This means that the
expenses should include amounts incurred in March but not paid
until April, and any other costs related to the operations of the
business during the period January March.
(2) The difference in expenses was $7,290 ($47,990 $40,700). The
overstatement of revenues ($30,000) plus the understatement of
expenses ($7,290) equals the difference in reported income of
$37,290 ($54,300 $17,010).
3-104
BYP 3-6 COMMUNICATION ACTIVITY
Memorandum
To:
From:
Date:
Re:
Mary Lee Virgil

Student
Adjusting Journal Entries
Upon reviewing the accounts of your company at the end of the year, I
discovered that adjusting entries were not made.
Adjusting entries are made at the end of the accounting period to ensure
that the revenue recognition and matching principles required under
generally accepted accounting principles are followed. The use of adjusting
entries makes it possible to report on the balance sheet the appropriate
assets, liabilities, and owner's equity at the statement date, and to report
on the income statement the proper revenue, expense, and net income (or
loss) for the year.
Adjusting entries are needed because the trial balance may not contain an
up-to-date and complete record of transactions and events, for the
following reasons:
1.
Some events are not journalized daily because it is inexpedient to

do so. Examples are the use of supplies and the earning of wages
by employees.
2.
The expiration of some costs is not journalized during the

accounting period because these costs expire with the passage of
time, rather than as a result of recurring daily transactions.
Examples of such costs are building and equipment deterioration,
rent, and insurance.
3-105
BYP 3-6 (Continued)

3.
Some expenses, such as the cost of utility service and property

taxes, may be unrecorded because the bills for the costs have not
been received.
There are five types of adjusting entries:

1.
Prepaid expensesexpenses paid in cash and recorded as assets

until they are used.
2.
Unearned revenuesrevenues received in cash and recorded as

liabilities until they are earned.
3.
Accrued revenuesrevenues earned but not yet received in cash

or recorded.
4.
Accrued expensesexpenses incurred but not yet paid in cash or

recorded.
5.
Amortizationallocation of the cost of capital assets to expense,

over their estimated useful lives.
I will be happy to answer any questions you may have on adjusting entries.
3-106
BYP 3-7 ETHICS CASE
(a) The stakeholders in this situation are:
Carole Chiasson, controller

The president of Die Hard Company
The external users of Die Hards financial information
(b) 1.
It is unethical for the president to place pressure on Carole to

misstate net earnings by requesting her to prepare incorrect
adjusting entries.
2.
It is customary for adjusting entries to be dated as of the balance

sheet date although the entries are prepared at a later date. Carole
did nothing unethical by dating the adjusting entries December 31.
(c) Carole can accrue revenues and defer expenses through the
preparation of adjusting entries and be ethical so long as the entries
reflect economic reality. Intentionally misrepresenting the companys
financial condition and its results of operations is unethical (it is also
illegal).
3-107

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CHAPTER 3

Adjusting the Accounts

1. Explain the time period

2. Distinguish between the revenue

3. Explain the accrual basis of

4. Explain why and distinguish when

5. Identify and distinguish between

6. Identify and prepare adjusting

10, 11, 17,

7. Identify and prepare adjusting

12, 13, 14,

8. Identify and prepare the adjusting

18, 19, 20,

9. Describe the nature and purpose of

*10. Identify and prepare adjusting

ASSIGNMENT CHARACTERISTICS TABLE

Match adjusting entry type.

Prepare original and adjusting journal entries for

Convert income from cash to accrual basis.

Record transactions on accrual basis; convert revenue to

Prepare original and adjusting journal entries.

Prepare adjusting entries.

Prepare accrual-based income statement from cashbased information.

Identify effects of adjusting journal entries.

Prepare adjusting entries, post, and prepare adjusted trial

Prepare adjusting entries, post, and prepare adjusted trial

Prepare adjusting entries and financial statements.

Prepare original and adjusting journal entries for

Prepare adjusting entries, adjusted trial balance and

Match adjusting entry type.

Prepare original and adjusting journal entries for

Convert income from cash to accrual basis.

Record transactions on accrual basis; convert revenue to

Prepare original and adjusting journal entries.

Prepare adjusting entries.

Prepare accrual-based income statement from cashbased information.

Identify effects of adjusting journal entries.

Prepare adjusting entries, post and prepare adjusted trial

Prepare adjusting entries, post, and prepare adjusted trial

Prepare adjusting entries and financial statements.

Prepare original and adjusting journal entries for

Prepare adjusting entries, adjusted trial balance and

BLOOMS TAXONOMY TABLE

2. Distinguish between the

3. Explain the accrual basis

4. Explain why and

5. Identify and distinguish

6. Identify and prepare

7. Identify and prepare

9. Describe the nature and

*10. Identify and prepare

(a) Under the time period assumption, an accountant is required to

The two generally accepted accounting principles that pertain to

Information presented on an accrual basis is useful because it

Questions Chapter 3 (Continued)

Questions Chapter 3 (Continued)

On the income statement, net income was understated $300. Prior to

The entry is:

18. No. Amortization is the process of allocating the cost of an asset to

Questions Chapter 3 (Continued)

Salaries Payable is credited.

For Rent Revenue: revenues are overstated and liabilities (unearned

SOLUTIONS TO BRIEF EXERCISES