Accounting - Ch04 Solutions

CHAPTER 4
Accrual Accounting Concepts

Study Objectives
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Explain the revenue recognition principle and the matching principle.

Differentiate between the cash basis and the accrual basis of accounting.
Explain why adjusting entries are needed, and identify the major types of adjusting entries.
Prepare adjusting entries for deferrals.
Prepare adjusting entries for accruals.
Describe the nature and purpose of the adjusted trial balance.
Explain the purpose of closing entries.
Describe the required steps in the accounting cycle.
Understand the causes of differences between net income and cash provided by
operating activities.
Describe the purpose and the basic form of a worksheet.
Summary of Questions by Study Objectives and Blooms Taxonomy

Item SO
1.
2.
3.
4.
5.
6.
7.
8.
1
1
1
1
3
3
3
4
BT
Item
SO
BT
Item
C
K
C
AP
C
C
C
K
9.
10.
11.
12.
13.
14.
15.
4
4
4
4
1
1
5
C
C
K
K
C
AN
C
16.
17.
18.
19.
20.
21.
22.
1.
2.
3.
2, 9
3
3
C
C
AN
4.
5.
6.
4
4
4
AP
AP
AP
1.
AP
2.
AP
1.
5.
2, 9
AP
2.
6.
3.
4.
1
2, 4,
5, 9
7.
8.
2, 4,
5, 9
2, 3, 9
3, 4,
5
AP
AP
C
AN
SO
BT
Questions
5
K
5
AN
5
AP
4, 5
K
4, 5
K
5
C
5
C
Item
SO
BT
Item
SO
BT
23.
24.
25.
26.
27.
28.
29.
6
2
6
7
7
7
7
C
C
C
K
C
C
K
30.
31.
32.
33.
34.
35.
36.
7
8
8
8
8
10*
10*
K
K
K
C
C
K
K
6
6
6
AP
AP
K
13.
14.
15.
7
7
8
K
AP
K
AP
1, 4, 5,
6
7
AN
AP
17.
AP
18.
AP
Brief Exercises
7.
4
AP
10.
8.
5
AP
11.
9.
6
AN
12.
Do It! Review Exercises
3.
6
C
4.
Exercises
9.
4, 5
AP
13.
10.
4, 5
AP
14.
11.
12.
4, 5
1, 4, 5,
6
AP
15.
16.
AP
4, 5, 6
4, 5,
6
AN
AP
Copyright 2009 John Wiley & Sons, Inc.Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
4-1
Summary of Questions by Study Objectives and Blooms Taxonomy (Continued)

1.
2.
1.
2.
4-2
2, 4,
9
4, 5,
6
AP
AP
2, 4,
9
4, 5,
6
AP
AP
3.
4.
3.
4.
4, 5,
6, 7
4, 5,
6, 7
4, 5,
6, 7
4, 5,
6, 7
AP
AP
AP
AP
Problems: Set A
5.
4, 5
AP
6.
4, 5
4, 5
4, 5,
6
AP
4, 5,
6
AP
8.
AN
Problems: Set B
5.
4, 5
AP
6.
7.
AN
7.
8.
4, 5, 6,
7,
8
AP
4, 5, 6,
7,
8
AP
ASSIGNMENT CHARACTERISTICS TABLE

Problem
Number
Description
Difficulty
Level
Time
Allotted (min.)
1A
Record transactions on accrual basis; convert revenue to

cash receipts.
Simple
2030
2A
Prepare adjusting entries, post to ledger accounts, and

prepare an adjusted trial balance.
Simple
4050
3A
Prepare adjusting entries, adjusted trial balance, and

financial statements.
Simple
5060
4A
Prepare adjusting entries and financial statements; identify

accounts to be closed.
Moderate
4050
5A
Prepare adjusting entries.
Moderate
3040
6A
Prepare adjusting entries and a corrected income

statement.
Moderate
3040
7A
Journalize transactions and follow through accounting

cycle to preparation of financial statements.
Moderate
6070
8A
Complete all steps in accounting cycle.
Moderate
7080
1B
Record transactions on accrual basis; convert revenue to

cash receipts.
Simple
2030
2B
Prepare adjusting entries, post to ledger accounts, and

prepare adjusted trial balance.
Simple
4050
3B
Prepare adjusting entries, adjusted trial balance, and

Simple
5060
4B
Prepare adjusting entries and financial statements;

identify accounts to be closed.
Moderate
4050
5B
Prepare adjusting entries.
Moderate
3040
6B
Prepare adjusting entries and a corrected income

statement.
Moderate
3040
7B
Journalize transactions and follow through accounting

cycle to preparation of financial statements.
Moderate
6070
8B
Complete all steps in accounting cycle.
Moderate
7080
4-3
ANSWERS TO QUESTIONS
1.
(a) Under the time period assumption, an accountant is required to determine the effect of each
accounting transaction on specific accounting periods.
(b) An accounting time period that is one year in length is referred to as a fiscal year.
2.
The two generally accepted accounting principles that pertain to adjusting the accounts are:
The revenue recognition principle, which states that revenue should be recognized in the time
period in which it is earned.
The matching principle which states that efforts (expenses) be matched with accomplishments
(revenues) that they helped generate.
3.
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.
4.
Expenses of $4,500 should be deducted from the revenues in April. Under the matching principle
efforts (expenses) should be matched with accomplishments (revenues).
5.
No, adjusting entries are required by the revenue recognition and matching principles.
6.
The financial information in a trial balance may not be up-to-date because:

(1) Some events are not journalized daily because it is not useful or efficient 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.
7.
The two categories of adjusting entries are deferrals and accruals. Deferrals consist of revenues and
expenses paid before they are earned or incurred. Accruals consist of revenues and expenses earned
or incurred prior to payment.
8.
In a prepaid expense adjusting entry, expenses are debited and assets are credited.
9.
No. Depreciation is the process of allocating the cost of an asset to expense over its useful life.
Depreciation results in the presentation of the book value of the asset, not its market value.
10.
Depreciation 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 depreciation is a contra
asset account whose normal balance is a credit. The balance in this account is the depreciation that
has been recognized from the date of acquisition to the balance sheet date.
11.
Equipment.................................................................................................
Less: Accumulated Depreciation..............................................................
12.
In an unearned revenue adjusting entry, liabilities are debited and revenues are credited.
13.
The sale of a three-year maintenance contract on December 29, 2009 will have no effect on the 2009
income statement but receipt of $100,000 on December 29, 2009 will increase an asset, cash, and a
liability, unearned revenue. As Computer Technologies provides service to its
customer during 2010, 2011, and 2012, the liability will decrease and revenue will be recognized.
Accrual accounting rules require that revenue be recognized as it is earned rather than when cash is
received.
4-4
$15,000
9,000
$6,000
Questions Chapter 4 (Continued)

14.
This promotion plan sounds like a bad idea for two reasons.
(1) GAAP requires that the sale of a gift card be recorded as unearned revenue (a liability) rather
than sales revenue. Revenue recognition is delayed until the gift card is used or expires.
Mickeys plan will not help the company meet its target revenue unless customers use the cards
by year-end.
(2) Selling a $50 card for $40 will probably not help the company meet its target net income.
Although this promotion may result in additional sales revenue as the cards are used, the
income resulting from the cards will be much less than usual since they eliminate $10 of normal
gross profit.
15.
Asset and revenue. An asset is debited and revenue is credited.
16.
Expense and liability. An expense is debited and a liability is credited.
17.
Net income was understated $300 because prior to adjustment revenues are understated by $800
and expenses are understated by $500. The difference in this case is $300 ($800 $500).
18.
The entry is:

Jan. 9 Salaries Payable................................................................................
Salaries Expense..............................................................................
Cash.........................................................................................
1,100
4,900
6,000
19.
(a) Accrued revenues.

(b) Unearned revenues.
(c) Accrued expenses.
(d) Accrued expenses or prepaid expenses.

(e) Prepaid expenses.
(f) Accrued revenues or unearned revenues.
20.
(a) Salaries Payable.

(b) Accumulated Depreciation.
(c) Interest Expense.
(d) Supplies Expense.

(e) Service Revenue.
(f) Service Revenue.
21.
Disagree. An adjusting entry affects only one balance sheet account and one income statement
account.
22.
Tootsie Roll reports Accounts Receivable. This suggests that it records revenue when it has delivered
goods, even though it hasnt received payment. If it used a cash basis it wouldnt record revenue until
cash was received, and it would therefore not establish receivables.
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.
(a) Information presented on an accrual basis is useful because it reveals important information
about the relationship between efforts and results. This information is useful in predicting future
results. Trends in revenues and expenses are thus more meaningful.
(b) Information presented on a cash basis is useful for predicting the future availability of cash.
Cash basis financial statements provide useful information about a companys sources and uses
of cash.
25.
The amount shown in the adjusted trial balance column for an account equals the account
balance in the ledger after adjusting entries have been journalized and posted.
4-5
Questions Chapter 4 (Continued)

26. (1)
(2)
(3)
(4)
(Dr) Individual revenue accounts and (Cr) Income Summary.

(Dr) Income Summary and (Cr) Individual expense accounts.
(Dr) Income Summary and (Cr) Retained Earnings (for net income).
(Dr) Retained Earnings and (Cr) Dividends.
27. Financial information is used by managers to direct and evaluate a companys performance. The
sooner such information is made available; the sooner changes can be made to get a company back
on track. A virtual close speeds up the reporting process and allows managers to react much
faster to changing economic conditions.
28. Income Summary is a temporary account that is used in the closing process. The account is
debited for expenses and credited for revenues. The difference, either net income or net loss, is then
closed to Retained Earnings.
29. The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the
equality of the permanent account balances that are carried forward into the next accounting period.
30. The accounts that will not appear in the post-closing trial balance are: Depreciation Expense;
Dividends; and Service Revenue.
31. The steps that involve journalizing are (1) journalize the transactions, (2) journalize the adjusting
entries, and (3) journalize the closing entries.
32. The three trial balances are the (1) trial balance, (2) adjusted trial balance, and (3) post-closing trial
balance.
33. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out
bumps in net income. Such action is undertaken to help a company meet target financial numbers.
Quality of earnings indicates the level of full and transparent information that a company provides to users
of financial statements.
34. Examples of ways a company can manage earnings include the following.
Use of one-time items to prop up earnings numbers. A company may decide to sell property that
has appreciated in value in order to record a gain on the sale. Such a gain will increase the current
years net income but future income will probably not include a similar increase.
Inflating revenue in the short-run to the detriment of the long-run. A company may implement
changes in its promotion activities near the end of an accounting period to boost year-end
revenues. Offering a special rebate or a twoforone package is likely to increase sales for the time
the promotion runs but usually results in lower sales in subsequent periods. Savvy
customers may even postpone purchases until special deals are available.
Recording improper adjusting entries. Some adjusting entries require estimates and judgment to
properly recognize revenue and match expenses. By recognizing revenue sooner and delaying the
recognition of expenses, earnings can be overstated in early periods and understated in
subsequent periods. This type of management is most prevalent with multi-year contracts and
prepaid expenses.
*35. The worksheet is a working paper designed to make it easier to prepare adjusting entries and
*36. The columns of the worksheet from left to right are two columns each for the trial balance,
adjustments, adjusted trial balance, income statement, and balance sheet.
4-6
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1
(a)
(b)
(c)
(d)
(e)
(f)
Cash
$100
0
0
+800
2,500
0
Net Income
$0
40
+1,300
0
0
600
BRIEF EXERCISE 4-2

(a) Prepaid Insuranceto recognize insurance expired during the period.
(b) Depreciation Expenseto account for the allocation of the cost of an
asset to expense during its useful life.
(c) Unearned Service Revenueto account for unearned revenue that has
been earned during the period.
(d) Interest Payableto recognize interest accrued but unpaid on notes
payable.
BRIEF EXERCISE 4-3
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Prepaid Expenses
Assets Overstated
Expenses Understated
(b)
Accrued Revenues
Assets Understated
Revenues Understated
(c)
Accrued Expenses
Liabilities Understated
(d)
Unearned Revenues
Liabilities Overstated
4-7
BRIEF EXERCISE 4-4

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

Advertising Supplies................................
Advertising Supplies
8,800 12/31
7,400
12/31 Bal. 1,400
7,400
7,400
Advertising Supplies Expense

12/31
7,400
BRIEF EXERCISE 4-5

Dec. 31
Depreciation Expense......................................
Accumulated Depreciation
Equipment..............................................
2,200
2,200
Equipment
12/31
2,200
Depreciation Expense
12/31
2,200
Balance Sheet:
Equipment...................................................................
Less: Accumulated Depreciation.............................
$22,000
2,200
$19,800
BRIEF EXERCISE 4-6

July 1
Prepaid Insurance.............................................
Cash...........................................................
10,800
Dec. 31
Insurance Expense ($10,800 X 6/24)...............

Prepaid Insurance.....................................
2,700
Prepaid Insurance
7/1
10,800 12/31
12/31 Bal. 8,100
4-8
2,700
12/31
10,800
2,700
Insurance Expense
2,700
BRIEF EXERCISE 4-7

July 1
Cash...................................................................
Unearned Insurance Revenue..................
10,800
Dec. 31
Unearned Insurance Revenue.........................

Insurance Revenue ($10,800 X 6/24).......
2,700
Unearned Insurance Revenue

12/31
2,700 7/1
10,800
12/31 Bal. 8,100
10,800
2,700
Insurance Revenue
12/31
2,700
BRIEF EXERCISE 4-8

(a) Dec. 31
Interest Expense.......................................
Interest Payable.................................
300
(b)
31
Accounts Receivable................................
Service Revenue................................
1,400
(c)
31
Salaries Expense......................................
Salaries Payable................................
780
300
1,400
780
BRIEF EXERCISE 4-9

Account
(1)
Type of Adjustment
(2)
Related Account
(a)
Accounts Receivable
Accrued Revenues
Service Revenue
(b)
Prepaid Insurance
Prepaid Expenses
Insurance Expense
(c)
Equipment
Not required
(d)
Accum. Depreciation
Equipment
Prepaid Expenses
(e)
Notes Payable
Not required
(f)
Interest Payable
Accrued Expenses
Interest Expense
(g)
Unearned Service
Revenue
Unearned Revenues
Service Revenue
4-9
BRIEF EXERCISE 4-10

ROSE CORPORATION
Income Statement
For the Year Ended December 31, 2010
Revenues
Service revenue......................................................
Expenses
Salaries expense....................................................
Rent expense..........................................................
Insurance expense.................................................
Supplies expense...................................................
Depreciation expense............................................
Total expenses................................................
Net income.....................................................................
$32,000
$13,000
3,500
1,800
1,200
1,000
20,500
$11,500
BRIEF EXERCISE 4-11

ROSE CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2010
Retained earnings, January 1..........................................................
Add: Net income.............................................................................
Less: Dividends...............................................................................
Retained earnings, December 31.....................................................
$17,200
10,000
27,200
6,000
$21,200
BRIEF EXERCISE 4-12

Account
(a)
(b)
(c)
(d)
(e)
(f)
(g)
4-10
Retained Earnings
Dividends
Service Revenue
Supplies
Accounts Payable
Balance Sheet
Income Statement
Retained Earnings Statement and Balance Sheet
Income Statement
Balance Sheet
Balance Sheet
BRIEF EXERCISE 4-13

The accounts that will appear in the post-closing trial balance are:
Retained Earnings
Supplies
Accounts Payable
BRIEF EXERCISE 4-14
(a)
(b)
July 31
Closing Entries
Green Fees Revenue................................
Income Summary...............................
(To close revenue account)
16,000
Income Summary......................................
Salaries Expense...............................
Maintenance Tax Expense................
Income Tax Expense.........................
(To close expense accounts)
11,900
Income Summary......................................
Retained Earnings.............................
(To close net income to
retained earnings)
4,100
Retained Earnings....................................
Dividends............................................
(To close dividends to retained
earnings)
1,000
16,000
8,400
2,500
1,000
4,100
1,000
Retained Earnings
1,000
20,000
4,100
7/31 Bal. 23,100
4-11
BRIEF EXERCISE 4-15

The proper sequencing of the required steps in the accounting cycle is as
follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
4-12
(c)
(e)
(i)
(d)
(h)
(b)
(g)
(f)
(a)
Analyze business transactions.

Journalize the transactions.
Post to ledger accounts.
Prepare a trial balance.
Journalize and post adjusting entries.
Prepare an adjusted trial balance.
Prepare financial statements.
Journalize and post closing entries.
Prepare a post-closing trial balance.
SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 4-1
1.
Insurance Expense.........................................................
Prepaid Insurance....................................................
(To record insurance expired)
300
2.
Office Supplies Expense................................................

Office Supplies.........................................................
(To record supplies used)
1,600
3.
Depreciation Expense....................................................
Accumulated DepreciationOff. Equip.................
(To record monthly depreciation)
500
4.
Unearned Revenue.........................................................
Service Revenue......................................................
(To record revenue for services provided)
4,000
300
1,600
500
4,000
DO IT! 4-2
1.
Salaries Expense............................................................
Salaries Payable.......................................................
(To record accrued salaries)
1,100
2.
Interest Expense.............................................................
Interest Payable........................................................
(To record accrued interest)
200
3.
Accounts Receivable ....................................................

Service Revenue......................................................
(To record revenue for service provided)
1,600
1,100
200
1,600
DO IT! 4-3
Income statement: Service Revenue, Utilities Expense
Balance sheet: Accounts Receivable, Accumulated Depreciation, Notes
Payable, Common Stock.
4-13
DO IT! 4-4
Dec. 31 Income Summary...................................................... 29,000
Retained Earnings..............................................
(To close net income to retained earnings)
29,000
Dec. 31 Retained Earnings..................................................... 22,000

Dividends............................................................
(To close dividends to retained earnings)
22,000
4-14
SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a) Since the sales effort is not complete until the flight actually occurs,
revenue should not be recognized until December. Southwest Airlines
should recognize the revenue in December when the customer has been
provided with the flight.
(b) If Ultimate Electronics is reasonably certain of collection, revenue should
be recognized at the time of sale. If the company has concerns over the
collectibility of the accounts receivable, revenue should not be recognized
until the time that collection is reasonably assured.
(c) Revenue should be recognized on a per game basis over the season from
April through October.
(d) Interest revenue should be accrued and recognized by RBC evenly over
the term of the loan.
(e) Revenue should be recognized when the sweater is shipped to the
customer in September provided there is reasonable assurance of
collectibility.
EXERCISE 4-2
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
8.
1.
7.
3.
6.
4.
2.
5.
Going concern assumption.

Economic entity assumption.
Full disclosure principle.
Monetary unit assumption.
Materiality.
Time period assumption.
Matching principle.
Cost principle.
EXERCISE 4-3
(a)
(b)
(c)
(d)
(e)
(f)
Revenue recognition principle.

Time period assumption.
No violation.
Going concern assumption.
Cost principle or conservatism.
Economic entity assumption.
4-15
EXERCISE 4-4
$ 33,640
+3,400
2,800
+1,300
1,160
2,000
+2,400
1,400
+1,600
$ 34,980
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.
Supplies on hand at year end should be set up as an asset
rather than expensed, this increases earnings.
Supplies on hand at the end of the previous year should be
expensed this year, this decreases earnings.
Wages owing at the end of the current year should be
accrued, thus reducing earnings.
Wages owed at the end of the previous year should not be
deducted from the current years earnings, thus increasing
earnings.
Other unpaid amounts owed at the end of the current year
should be accrued, thus reducing earnings.
Other unpaid amounts owed at the end of the previous year
should not be deducted from the current years earnings, thus
increasing earnings.
Accrual basis earnings.
EXERCISE 4-5
(a)
Service Revenue
Operating Expenses
Insurance Expense
Net Income
Cash Basis
$22,000
13,000
2,600
$6,400
Accrual Basis
$28,000
15,500
$12,500
(b) The accrual basis of accounting provides more useful information for
decision makers because it recognizes revenues when earned and
expenses when incurred.
4-16
EXERCISE 4-6
(a)
BOULDER COMPANY
Income Statement
For the Six Months Ended April 30, 2010
Revenues
Repair services ($32,150 + $350).....................
Expenses
Income tax expense..........................................
Wages expense ($2,600 + $420).......................
Rent expense ($1,225 $175)...........................
Utilities expense................................................
Depreciation expense [($9,200 5) X 6/12].....
Advertising expense.........................................
Total expenses............................................
Net income................................................................
(b)
$32,500
$10,000
3,020
1,050
970
920
375
16,335
$16,165
BOULDER COMPANY
Balance Sheet
April 30, 2010
Assets
Current Assets
Cash................................................................
Accounts receivable.......................................
Prepaid rent....................................................
Total current assets................................
Property, plant, and equipment
Equipment.......................................................
Less: Accumulated depreciation.................
Total assets............................................................
$27,780
350
175
9,200
920
Liabilities and Stockholders Equity

Current Liabilities
Wages payable...............................................
Stockholders equity
Common stock...............................................
$20,000
Retained earnings.........................................
16,165
Total stockholders equity...............
Total liabilities and stockholders
equity....................................................
$28,305
8,280
$36,585
420
36,165
$36,585
4-17
EXERCISE 4-7
(a) Event
180-day
financing for
large customers
Cash Accounting
Revenue is recorded
as cash is received.
Accrual Accounting
Revenue is recorded as it
is earned. FunPlay
records revenue (and a
receivable) as soon as
goods are shipped but
may wait up to 180 days
to receive cash.
Payment to
suppliers upon
delivery of
goods
Cost of goods is
recorded as an
expense as soon as
goods are delivered.
Cost of goods is recorded

as an asset until goods
are shipped to customers.
Cost of goods is recorded
as an expense when
goods are shipped to
customers.
Prepayment for
2 years of
insurance
coverage
Insurance expense is
recorded as soon as
payment is made.
Prepayment is recorded
as an asset and recognized as an expense as
time passes.
One months
salaries owed at
year-end
No salary expense is
recorded until wages
are paid.
Salary expense is recorded

as employees perform
work. Amounts owed at
year-end would be
recorded as a liability.
Proper accrual accounting would require adjusting entries for prepaid

insurance and accrued wages.
4-18
EXERCISE 4-7 (Continued)

(b) Accrual accounting rules require that revenue be recognized as it is
earned and expenses be matched with the revenue they help produce.
Receipt or payment of cash does not influence the calculation of net
income.
FunPlay has made many sales during the year and thus shipped large
amounts of goods with the result being positive net income. Since
FunPlay has allowed its largest customers to take up to 180 days to pay,
but was forced to pay cash for all purchases, it is likely that the company
has very little cash at year-end. New companies frequently experience
cash shortages because they extend credit to attract customers but are
unable to receive credit from their suppliers. As time passes, the cash
supply
should
increase
as
payments
on
accounts
receivable come in and offset current purchases.
EXERCISE 4-8
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Accrued Revenues
Assets Understated
(b)
Prepaid Expenses
Assets Overstated
(c)
Accrued Expenses
(d)
Unearned Revenues
Liabilities Overstated
(e)
Accrued Expenses
(f)
Prepaid Expenses
Assets Overstated
4-19
EXERCISE 4-9
1.
Mar. 31Depreciation Expense ($280 X 3).......................

Equipment...........................................
840
840
2.
31
Unearned Rent Revenue...............................

Rent Revenue ($10,200 X 1/2)................
5,100
3.
31
Interest Expense............................................
Interest Payable......................................
440
4.
31
Supplies Expense..........................................
Supplies ($3,000 $850)........................
2,150
5.
31
Insurance Expense ($400 X 3)...................... 1,200

Prepaid Insurance..................................
1,200
5,100
440
2,150
EXERCISE 4-10
1.
Jan. 31
Accounts Receivable.....................................
Service Revenue....................................
680
2.
31
Utilities Expense............................................
Utilities Payable......................................
520
3.
31
Depreciation Expense...................................
Dental Equipment...............................
400
31
500
4.
31
Insurance Expense ($24,000 12)................

2,000
5.
31
Supplies Expense ($1,750 $550)................

Supplies..................................................
1,200
4-20
680
520
400
500
2,000
1,200
EXERCISE 4-11
1.
Oct. 31
Advertising Supplies Expense.....................

Advertising Supplies
($2,500 $500)....................................
2,000
2,000
2.
31
Insurance Expense........................................
100
3.
31
Office Equipment................................
50
100
50
4.
31
Unearned Service Revenue...........................

Service Revenue....................................
800
5.
31
Service Revenue....................................
200
6.
31
70
7.
31
Salaries Expense...........................................
Salaries Payable.....................................
1,400
800
200
70
1,400
EXERCISE 4-12
MARX CO.
Income Statement
For the Month Ended July 31, 2010
Revenues
Service revenue ($5,500 + $700)..............................
Expenses
Wages expense ($2,300 + $300)...............................
Utilities expense........................................................
Supplies expense ($900 $200)...............................
Insurance expense....................................................
Depreciation expense...............................................
Total expenses...................................................
Net income........................................................................
$6,200
$2,600
800
700
350
150
4,600
$1,600
4-21
EXERCISE 4-13
Answer
Computation
(a) Supplies balance = $1,000
Supplies expense
Add: Supplies (1/31)
Less: Supplies purchased
Supplies (1/1)
(b) Total premium = $6,240
Total premium = Monthly premium X 12;

$520 X 12 = $6,240
Purchase date = May 1, 2009
(c) Salaries payable = $1,900
Purchase date:On Jan. 31, there are

3 months coverage remaining ($520 X 3).
Thus, the purchase date was 9 months
earlier on May 1, 2009.
Cash paid
Salaries payable (1/31/10)
Less: Salaries expense
Salaries payable (12/31/09)
(d) Service revenue = $950
Service revenue
Unearned revenue (1/31/10)
Cash received in Jan.
Unearned revenue (12/31/09)
4-22
$ 950)
700)
(650)
$1,000)
$2,500
1,200
3,700
1,800
$1,900
$2,000
750
2,750
1,800
$ 950
EXERCISE 4-14
Jan. 31
Service Revenue...................................................
Income Summary..........................................
2,000
31
Income Summary..................................................
3,270
31
Retained Earnings.................................................
Income Summary..........................................
1,270
2,000
1,800
950
520
1,270
EXERCISE 4-15
(a) July 10
Supplies..........................................................
Cash........................................................
200
14
Cash................................................................
Service Revenue....................................
4,100
15
Cash........................................................
1,200
20
Cash................................................................
Unearned Service Revenue...................
600
(b) July 31
Supplies..................................................
750
31
Service Revenue....................................
500
31
1,200
31
Unearned Service Revenue...........................

Service Revenue....................................
900
200
4,100
1,200
600
750
500
1,200
900
4-23
EXERCISE 4-16
Aug. 31
Accounts Receivable............................................
Service Revenue............................................
600
31
Office Supplies Expense......................................

Office Supplies..............................................
2,000
31
Insurance Expense...............................................
Prepaid Insurance.........................................
1,500
31
Depreciation Expense...........................................
Accumulated DepreciationOffice
Equipment..................................................
1,200
31
Salaries Expense..................................................
Salaries Payable............................................
1,100
31
Unearned Rent Revenue.......................................

Rent Revenue.................................................
900
600
2,000
1,500
1,200
1,100
900
EXERCISE 4-17
IVY COMPANY
Income Statement
For the Year Ended August 31, 2010
Revenues
Service revenue......................................................
Rent revenue..........................................................
Total revenues................................................
Expenses
Salaries expense....................................................
Rent expense..........................................................
Office supplies expense........................................
Insurance expense.................................................
Depreciation expense............................................
Total expenses................................................
Net income.....................................................................
4-24
$34,600
14,100
$18,100
12,000
2,000
1,500
1,200
$48,700
34,800
$13,900
EXERCISE 4-17 (Continued)

IVY COMPANY
For the Year Ended August 31, 2010
Retained earnings, September 1, 2009...........................................
Add: Net income.............................................................................
Less: Dividends...............................................................................
Retained earnings, August 31, 2010................................................
$5,600
13,900
19,500
2,800
$16,700
IVY COMPANY
Balance Sheet
August 31, 2010
Assets
Current Assets
Cash.........................................................................
Accounts receivable...............................................
Office supplies.........................................................
Prepaid insurance...................................................
Total current assets.........................................
Office equipment.....................................................
Less: Accum. depreciationoffice equipment......
Total assets......................................................
$10,900
9,400
500
2,500
$16,000
4,800
$23,300
11,200
$34,500
Current Liabilities
Accounts payable....................................................
Salaries payable......................................................
Unearned rent revenue...........................................
Total current liabilities.....................................
Stockholders equity
Common stock........................................................
Retained earnings...................................................
Total stockholders equity...........................
Total liabilities and stockholders equity.......
$ 5,800
1,100
900
10,000
16,700
$ 7,800
26,700
$34,500
4-25
EXERCISE 4-18
Aug. 31
4-26
Service Revenue...............................................
Rent Revenue....................................................
Income Summary......................................
34,600
14,100
31
Income Summary.............................................
Rent Expense............................................
Office Supplies Expense..........................
Insurance Expense...................................
Depreciation Expense..............................
34,800
31
Income Summary.............................................
13,900
31
Retained Earnings............................................
Dividends...................................................
2,800
48,700
18,100
12,000
2,000
1,500
1,200
13,900
2,800
SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
(a)
1. Cash....................................................................... 11,000
11,000
2. Unearned Ticket Revenue....................................

Ticket Revenue...............................................
26,000
26,000
3. Cash.......................................................................
Unearned Ticket Revenue..............................
44,000
Unearned Ticket Revenue

($44,000 $20,000)............................................
Ticket Revenue...............................................
24,000
44,000
24,000
4. Accounts Receivable........................................... 153,000

Dues Revenue.................................................
153,000
5. Cash....................................................................... 135,000
Accounts Receivable ($153,000 $18,000)....
135,000
(b)
Cash received with respect to fees and dues

1.
3.
5.
Collection of 2009 dues

Sale of tickets
Collection of 2010 dues
$ 11,000
44,000
135,000
$190,000
Accounts Receivable
2009 Bal. 11,000
4.
153,000 1.
11,000
5.
135,000
2010 Bal. 18,000
2.
3.
Unearned Ticket Revenue

2009 Bal. 26,000
26,000 3.
44,000
24,000
2010 Bal. 20,000
Dues Revenue
4.
153,000
2010 Bal.153,000
Ticket Revenue
2.
26,000
3.
24,000
2010 Bal. 50,000
1.
3.
5.
Cash
11,000
44,000
135,000
4-27
2010 Bal. 190,000
4-28
PROBLEM 4-2A
(a)
1.
Date
2010
June 30
Account Titles
Debit
Supplies Expense.......................................
Supplies ($2,000 $980)....................
1,020
2.
30
Utilities Expense.........................................
Utilities Payable..................................
180
3.
30
Insurance Expense.....................................
Prepaid Insurance
($2,640 12 months).......................
220
30
Unearned Service Revenue.......................

Service Revenue.................................
3,900
5.
30
Salaries Expense........................................
Salaries Payable.................................
1,250
6.
30
Depreciation Expense................................
Office Equipment............................
250
Accounts Receivable.................................
Service Revenue.................................
3,500
30
1,020
180
220
4.
7.
Credit
3,900
1,250
250
3,500
(b)
6/30 Bal.
Cash
6,850
Accounts Receivable
6/30 Bal. 7,000
6/30
3,500
6/30 Bal. 10,500
Prepaid Insurance
6/30 Bal. 2,640 6/30
6/30 Bal. 2,420
6/30 Bal.
6/30 Bal.
Supplies
2,000 6/30
980
220
1,020
4-29
PROBLEM 4-2A (Continued)

Office Equipment
6/30 Bal. 15,000
6/30 Bal.
Office Equipment
6/30
250
6/30 Bal. 250
Accounts Payable
6/30 Bal. 4,540
Utilities Payable
6/30
180
6/30 Bal. 180
Salaries Payable
6/30
1,250
6/30 Bal. 1,250
Unearned Service Revenue
6/30
3,900 6/30 Bal. 5,200
6/30 Bal. 1,300
5,250
Rent Expense
6/30 Bal. 2,000
6/30
250
6/30 Bal. 250
Insurance Expense
6/30
220
6/30 Bal. 220
Utilities Expense
6/30
180
6/30 Bal. 180
Supplies Expense
6/30
1,020
6/30 Bal. 1,020
Common Stock
6/30 Bal. 21,750
Service Revenue
6/30 Bal.
6/30
6/30
6/30 Bal.
Salaries Expense
6/30 Bal. 4,000
6/30
1,250
8,000
3,900
3,500
15,400
4-31

(c)
WAEGELEIN CONSULTING
Adjusted Trial Balance
June 30, 2010
Cash......................................................................
Accounts Receivable..........................................
Prepaid Insurance...............................................
Supplies................................................................
Office Equipment.................................................
Accumulated DepreciationOffice
Equipment........................................................
Accounts Payable................................................
Utilities Payable...................................................
Salaries Payable..................................................
Unearned Service Revenue................................
Common Stock....................................................
Service Revenue..................................................
Salaries Expense.................................................
Rent Expense.......................................................
Depreciation Expense.........................................
Insurance Expense..............................................
Utilities Expense..................................................
Supplies Expense................................................
Debit
$6,850
10,500
2,420
980
15,000
5,250
2,000
250
220
180
1,020
$44,670
Credit
$ 250
4,540
180
1,250
1,300
21,750
15,400
$44,670
4-33
PROBLEM 4-3A
(a) 1. May 31
Insurance Expense..................................
Prepaid Insurance............................
300
1,550
2.
31
Supplies Expense....................................
Supplies ($2,600 $1,050)...............
3.
31
Depreciation ExpenseLodge
($3,600 X 1/12).......................................
Lodge.............................................
31
4.
31
Depreciation ExpenseFurniture
($3,000 X 1/12).......................................
Furniture........................................
300
250
250
210
210
5.
31
Unearned Rent Revenue..........................

Rent Revenue...................................
2,500
6.
31
Salaries Expense.....................................
Salaries Payable...............................
750
(b)
5/31 Bal.
Prepaid Insurance
5/31 Bal. 1,800 5/31
5/31 Bal. 1,500
Supplies
Land
5/31 Bal. 15,000
300
1,550
300
Interest Expense......................................
Interest Payable
[($36,000 X 7%) X 1/12].................
Cash
2,500
300
2,500
750

Lodge
5/31 Bal. 70,000
Lodge
5/31
300
5/31 Bal. 300
Furniture
5/31 Bal. 16,800
Furniture
5/31
250
5/31 Bal. 250
Accounts Payable
5/31 Bal.
4,700
Unearned Rent Revenue

5/31
2,500 5/31 Bal. 3,300
5/31 Bal.
800
Salaries Payable
5/31
5/31 Bal.
750
750
Interest Payable
5/31
210
5/31 Bal. 210
Mortgage Payable
5/31 Bal. 36,000
Common Stock
5/31 Bal. 60,000
Rent Revenue
5/31 Bal. 9,000
5/31
2,500
5/31 Bal. 11,500
Salaries Expense
5/31 Bal. 3,000
5/31
750
5/31 Bal. 3,750
Utilities Expense
5/31 Bal.
800
Advertising Expense
5/31 Bal. 500
Interest Expense
5/31
210
5/31 Bal. 210
Insurance Expense
5/31
300
5/31 Bal. 300
4-35

Supplies Expense
5/31
1,550
5/31 Bal. 1,550
Depreciation ExpenseFurniture
5/31
250
5/31 Bal.
250
Depreciation LodgeLodge
5/31
300
5/31 Bal.
300
(c)
OLATHE HOTEL
Adjusted Trial Balance
May 31, 2010
Cash......................................................................
Supplies................................................................
Land......................................................................
Lodge....................................................................
Accumulated DepreciationLodge...................
Furniture...............................................................
Accumulated DepreciationFurniture..............
Unearned Rent Revenue.....................................
Interest Payable...................................................
Mortgage Payable................................................
Common Stock....................................................
Rent Revenue.......................................................
Salaries Expense.................................................
Utilities Expense..................................................
Advertising Expense...........................................
Interest Expense..................................................
Insurance Expense..............................................
Supplies Expense................................................
Depreciation ExpenseLodge...........................
Depreciation ExpenseFurniture......................
Debit
$2,500
1,500
1,050
15,000
70,000
16,800
3,750
800
500
210
300
1,550
300
250
$114,510
Credit
$ 300
250
4,700
800
750
210
36,000
60,000
11,500
$114,510
4-37

(d)
OLATHE HOTEL
Income Statement
For the Month Ended May 31, 2010
Revenues
Rent revenue....................................................
Expenses
Salaries expense..............................................
Supplies expense.............................................
Utilities expense...............................................
Advertising expense........................................
Insurance expense...........................................
Depreciation expenselodge.........................
Depreciation expensefurniture...................
Interest expense...............................................
Total expenses..........................................
Net income...............................................................
$11,500
$3,750
1,550
800
500
300
300
250
210
7,660
$ 3,840
OLATHE HOTEL
For the Month Ended May 31, 2010
Retained earnings, May 1.......................................
Add: Net income....................................................
Retained earnings, May 31.....................................
0
3,840
$3,840
4-39

OLATHE HOTEL
Balance Sheet
May 31, 2010
Assets
Current Assets
Cash...............................................
Supplies.........................................
Prepaid insurance........................
Total current assets..............
Land...............................................
Lodge.............................................
Less: Accumulated deprec.........
Furniture........................................
Less: Accumulated deprec.........
Total assets...........................
$ 2,500
1,050
1,500
$70,000
300
16,800
250
5,050
15,000
69,700
16,550

Current Liabilities
Accounts payable............................................
$ 4,700
Unearned rent revenue....................................
800
Salaries payable...............................................
750
Interest payable................................................
210
Total current liabilities.............................
Long-term Liabilities
Mortgage payable............................................
Total liabilities...........................................
Stockholders equity
Common stock.................................................
60,000
Retained earnings............................................
3,840
Total stockholders equity................
equity.....................................................
101,250
$106,300
6,460
36,000
$ 42,460
63,840
$106,300
(e) The following accounts would be closed:

Rent Revenue, Salaries Expense, Utilities Expense, Advertising Expense,
Interest Expense, Insurance Expense, Supplies Expense, Depreciation
ExpenseLodge, Depreciation ExpenseFurniture.
PROBLEM 4-4A
(a) Sept. 30
Dues Revenue.........................................
600
30
Rent Expense.................................................
Prepaid Rent...........................................
900
30
Supplies..................................................
840
30
Accum. DepreciationEquipment.......
350
30
50
30
Unearned Rent Revenue...............................

Rent Revenue.........................................
200
30
600
(b)
600
900
840
350
50
200
600
FOUR OAKS GOLF INC.

Income Statement
For the Quarter Ended September 30, 2010
Revenues
Dues revenue...................................................
Rent revenue....................................................
Total revenues..........................................
Expenses
Rent expense....................................................
Utilities expense...............................................
Depreciation expense......................................
Interest expense...............................................
Total expenses..........................................
$14,400
600
$15,000
9,400
1,800
840
510
350
50
12,950
4-41
Net income...............................................................
$ 2,050

FOUR OAKS GOLF INC.
For the Quarter Ended September 30, 2010
Retained earnings, July 1, 2010.................................................
Add: Net income........................................................................
0
2,050
2,050
600
$1,450
Less: Dividends..........................................................................
Retained earnings, September 30, 2010....................................
FOUR OAKS GOLF INC.
Balance Sheet
September 30, 2010
Assets
Current Assets
Cash.................................................................
Accounts receivable.......................................
Supplies..........................................................
Prepaid rent....................................................
Total current assets................................
Property, Plant and Equipment
Equipment.......................................................
Less: Accumulated depreciation
equipment............................................
Total assets.............................................
$ 6,700
1,000
360
900
$ 8,960
15,000
350

Current Liabilities
Notes payable.................................................
$ 5,000
Accounts payable...........................................
1,710
Unearned rent revenue..................................
800
Salaries payable.............................................
600
Interest payable..............................................
50
Total current liabilities............................
Stockholders equity
Common stock...............................................
14,000
Retained earnings..........................................
1,450
Total stockholders equity..................
14,650
$23,610
$8,160
15,450
4-43

equity...................................................
$23,610

(c) The following accounts would be closed: Dues Revenue, Rent Revenue,
Salaries Expense, Rent Expense, Utilities Expense, Depreciation Expense,
Supplies Expense, Interest Expense, Dividends.
(d) 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.
4-45
PROBLEM 4-5A
1.
Dec. 31
[($9,600 3) = $3,200
[($7,200 2) = 3,600
$6,800]
6,800
2.
Dec. 31
Unearned Subscription Revenue..................

Subscription Revenue...........................
[Oct. 280 X $30 X 3/12 = $2,100
[Nov. 300 X $30 X 2/12 = 1,500
[Dec. 400 X $30 X 1/12 = 1,000
$4,600]
4,600
3.
Dec. 31
Interest Payable
($40,000 X 7% X 3/12)..........................
700
[5 X $600 X 3/5 = $1,800
[3 X $700 X 3/5 = 1,260
$3,060]
3,060
4.
Dec. 31
6,800
4,600
700
3,060
PROBLEM 4-6A
(a) 1. June
30
Travel Court Rental Revenue...........

Unearned Rental Revenue......
55,000
2.
30
Supplies Expense.............................
Supplies ($8,200 $1,800)......
6,400
3.
30
Insurance Expense
($14,400 X 3/12)..............................
Prepaid Insurance...................
4.
30
Advertising Expense........................
Repairs Expense...............................
Utilities Expense...............................
Accounts Payable...................
110
4,450
215
600
5.
30
Wages Expense ($300 X 2)...............

Wages Payable........................
6.
30
Interest Expense
($12,000 X 8% X 2/12).....................
Interest Payable ......................
7.
30
3,600
Income Tax Expense.........................

Income Tax Payable................
160
13,400
55,000
6,400
3,600
4,775
600
160
13,400
4-47

(b)
HAPPY CAMPER TRAVEL COURT

Income Statement
For the Quarter Ended June 30, 2010
Revenues
Travel court rental revenues ($216,000 $55,000)
$161,000
Expenses
Wages expense ($80,500 + $600)........................... $81,100
Income tax expense................................................
13,400
Repairs expense ($4,000 + $4,450)........................
8,450
Supplies expense....................................................
6,400
Advertising expense ($3,800 + $110)....................
3,910
Insurance expense..................................................
3,600
Depreciation expense.............................................
2,700
Utilities expense ($900 + $215)..............................
1,115
Interest expense......................................................
160
Total expenses........................................................
120,835
Net income..............................................................
$ 40,165
(c)
The generally accepted accounting principles pertaining to the income

statement not recognized by Kristen were the revenue recognition
principle and the matching principle.
The revenue recognition principle states that revenue is recognized
when it is earned. The cash payments of $55,000 for summer rentals
have not been earned and, therefore, should not be reported as
income for the quarter ended June 30.
The matching principle dictates that efforts (expenses) be matched with
accomplishments (revenue) whenever it is reasonable and practicable to
do so. This means that the expenses should include amounts incurred in
June but not paid until July, and any other costs related to the
operations of the business during the period AprilJune.
The difference in reported expenses was $28,935 ($120,835 $91,900). The
overstatement of revenues ($55,000) plus the under-statement of
expenses ($28,935) equals the difference in reported income of $83,935
($124,100 $40,165).
PROBLEM 4-7A
(a), (c) & (e)
Cash
11/1 Bal. 2,790 11/8
11/10
1,500 11/20
11/12
1,700 11/22
11/29
550 11/25
11/30 Bal. 1,370
1,220
2,500
450
1,000
Accounts Receivable
11/1 Bal. 2,910 11/10
1,500
11/27
900
11/30 Bal. 2,310
Supplies
11/1 Bal. 1,120 11/30
11/17
1,300
11/30 Bal. 1,100
1,320
Store Equipment
11/1 Bal. 10,000
11/15
4,000
11/30 Bal.14,000
11/1 Bal. 500
11/30
250
11/30 Bal. 750
11/20
11/30
11/8
Accounts Payable
2,500 11/1 Bal. 2,300
11/15
4,000
11/17
1,300
11/30 Bal. 5,100
Unearned
Service Revenue
300 11/1 Bal. 400
11/29
550
11/30 Bal. 650
Salaries Payable
620 11/1 Bal. 620
11/30
480
11/30 Bal. 480
Common Stock
11/1 Bal. 10,000
11/30 Bal.10,000
Retained Earnings
11/1 Bal. 3,000
11/30 Bal. 3,000
4-49

Service Revenue
11/12
11/27
11/30
11/30 Bal.
11/30
250
11/30 Bal. 250
Supplies Expense
11/30
1,320
11/30 Bal. 1,320
1,700
900
300
2,900
Salaries Expense
11/8
600
11/25
1,000
11/30
480
11/30 Bal. 2,080
Rent Expense
11/22
450
11/30 Bal. 450
4-51

(b)
Date
Nov.8
General Journal
Account Titles
Salaries Payable...............................................
Salaries Expense..............................................
Cash...........................................................
Debit
620
600
10
Cash...................................................................
Accounts Receivable................................
1,500
12
Cash...................................................................
Service Revenue.......................................
1,700
15
Store Equipment...............................................
Accounts Payable.....................................
4,000
17
Supplies.............................................................
Accounts Payable.....................................
1,300
20
Accounts Payable.............................................
Cash...........................................................
2,500
22
Rent Expense....................................................
Cash...........................................................
450
25
Salaries Expense..............................................
Cash...........................................................
1,000
27
Accounts Receivable........................................
Service Revenue.......................................
900
29
Cash...................................................................
Unearned Service Revenue......................
550
Credit
1,220
1,500
1,700
4,000
1,300
2,500
450
1,000
900
550

(d) & (f)
MONTANA EQUIPMENT REPAIR

Trial Balances
November 30, 2010
Cash.............................................
Accounts Receivable.................
Supplies......................................
Store Equipment.........................
Accumulated Depreciation........
Accounts Payable.......................
Unearned Service Revenue.......
Salaries Payable.........................
Common Stock...........................
Retained Earnings......................
Service Revenue.........................
Salaries Expense........................
Rent Expense..............................
Supplies Expense.......................
Depreciation Expense................
(e)
Before
Adjustment
Dr.
Cr.
$1,370
2,310
2,420
14,000
$ 500
5,100
950
After
Adjustment
Dr.
Cr.
$1,370
2,310
1,100
14,000
$ 750
5,100
650
480
10,000
10,000
3,000
3,000
2,600
2,900
1,600
2,080
450
450
1,320
250
$22,150 $22,150 $22,880 $22,880
1.
Nov. 30Supplies Expense.................................................
Supplies ($2,420 $1,100)......................
1,320
30
2.
Salaries Expense.............................................
Salaries Payable......................................
480
30
3.
Depreciation Expense.....................................
Accum. Depr.Store Equipment...........
250
30
4.
Unearned Service Revenue............................
Service Revenue......................................
300
1,320
480
250
300
4-53

(g)

Income Statement
For the Month Ended November 30, 2010
Revenues
Service revenue...............................................
Expenses
Rent expense....................................................
Depreciation expense......................................
Total expenses..........................................
Net loss.....................................................................
($2,900)
$2,080
1,320
450
250
4,100)
($1,200)

For the Month Ended November 30, 2010
Retained earnings, November 1.............................
Less: Net loss.........................................................
Retained earnings, November 30...........................
$3,000
1,200
$1,800

Balance Sheet
November 30, 2010
Assets
Current assets
Cash.....................................................................
Accounts receivable...........................................
Supplies...............................................................
Total current assets....................................
Property, plant and equipment
Store equipment.................................................
Less: Accumulated depreciationstore
equipment................................................
Total assets.................................................
$ 1,370
2,310
1,100
$ 4,780
14,000
750
13,250
$18,030
Current liabilities
Accounts payable............................................... $ 5,100
Unearned service revenue.................................
650
Salaries payable..................................................
480
Total current liabilities................................
Stockholders equity
Common stock....................................................
10,000
Retained earnings...............................................
1,800
Total stockholders equity......................
equity........................................................
$ 6,230
11,800
$18,030
4-55
PROBLEM 4-8A
(a)
General Journal
Date
July 1
Account Titles
Debit
Cash.................................................................... 11,000
Common Stock...........................................
Credit
11,000
Equipment.......................................................... 9,000
Cash.............................................................
Accounts Payable.......................................
2,000
7,000
Cleaning Supplies.............................................. 900

Accounts Payable.......................................
900
Prepaid Insurance.............................................. 1,800

Cash.............................................................
1,800
12
Accounts Receivable......................................... 3,200

Service Revenue.........................................
3,200
18
Accounts Payable.............................................. 1,500

Cash.............................................................
1,500
20
Salaries Expense................................................ 2,000

Cash.............................................................
2,000
21
Cash.................................................................... 1,400
Accounts Receivable.................................
1,400
25
Accounts Receivable......................................... 2,500

Service Revenue.........................................
2,500
31
Gas & Oil Expense............................................. 260

Cash.............................................................
260
31
Dividends............................................................ 600
Cash.............................................................
600

(b), (e) & (h)
Cash
7/1
11,000 7/1
7/21
1,400 7/5
7/18
7/20
7/31
7/31
7/31 Bal. 4,240
2,000
1,800
1,500
2,000
260
600
7/18
Accounts Receivable
7/12
3,200 7/21
1,400
7/25
2,500
7/31
1,700
7/31 Bal. 6,000
Cleaning Supplies
7/3
900 7/31
7/31 Bal. 360
Prepaid Insurance
7/5
1,800 7/31
7/31 Bal. 1,650
7/1
7/31 Bal.
540
150
Equipment
9,000
9,000
Equipment
7/31
250
7/31 Bal. 250
Accounts Payable
1,500 7/1
7/3
7/31 Bal.
7,000
900
6,400
Salaries Payable
7/31
7/31 Bal.
400
400
Common Stock
7/1
11,000
7/31 Bal. 11,000
7/31
7/31
7/31
7/31
7/31
Retained Earnings
600 7/31
7/31 Bal.
3,800
3,200
Dividends
600 7/31
600
Income Summary
3,600 7/31
3,800
7/31 Bal.
Service Revenue
7,400 7/12
7/25
7/31
7/31 Bal.
7,400
0
3,200
2,500
1,700
0
4-57

Gas & Oil Expense
7/31
260 7/31
7/31 Bal.
0
260
Cleaning Supplies Expense

7/31
540 7/31
540
7/31 Bal.
0
7/31
250 7/31
7/31 Bal.
0
4-58
Insurance Expense
7/31
150 7/31
7/31 Bal. 0
Salaries Expense
7/20
2,000 7/31
7/31
400
7/31 Bal. 0
150
2,400
250

(c) & (f)
CARDINAL WINDOW WASHING INC.

Trial Balance
July 31, 2010
Cash....................................................
Accounts Receivable.........................
Cleaning Supplies..............................
Prepaid Insurance..............................
Equipment..........................................
Equipment.......................................
Accounts Payable..............................
Salaries Payable.................................
Common Stock...................................
Dividends............................................
Service Revenue................................
Salaries Expense................................
Gas & Oil Expense.............................
Depreciation Expense........................
Insurance Expense............................
Cleaning Supplies Expense..............
Before
Adjustment
Debit
Credit
$4,240
4,300
900
1,800
9,000
After
Adjustment
Debit
Credit
$4,240
6,000
360
1,650
9,000
$6,400
600
2,000
260
11,000
5,700
600
250
$6,400
400
11,000
7,400
2,400
260
250
150
540
$23,100 $23,100 $25,450 $25,450
4-59

(d)
General Journal
1.
Date
July 31
Account Titles
Accounts Receivable........................................
Service Revenue.........................................
Debit
1,700
2.
31
Depreciation Expense.......................................
Accumulated DepreciationEquipment....
250
3.
31
Insurance Expense ($1,800 X 1/12)..................

Prepaid Insurance.......................................
150
4.
31
Cleaning Supplies Expense ($900 $360)......

Cleaning Supplies.......................................
540
5.
31
Salaries Expense...............................................
Salaries Payable..........................................
400
(g)
Credit
1,700
250
150
540
400

Income Statement
Revenues
Service revenue.................................................
Expenses
Salaries expense...............................................
Cleaning supplies expense..............................
Gas & oil expense..............................................
Depreciation expense.......................................
Insurance expense............................................
Total expenses...........................................
Net income.................................................................
$7,400
$2,400
540
260
250
150
3,600
$3,800

(g)

Retained earnings, July 1.......................................
Add: Net income....................................................
Less: Dividends.....................................................
Retained earnings, July 31....................................
0
3,800
3,800
600
$3,200

Balance Sheet
July 31, 2010
Assets
Current assets
Cash..................................................................
Accounts receivable........................................
Cleaning supplies............................................
Prepaid insurance............................................
Total current assets.................................
Equipment........................................................
Less: Accumulated depreciation...................
Total assets...............................................
$ 4,240
6,000
360
1,650
9,000
250
$12,250
8,750
$21,000
Current liabilities
Accounts payable............................................
Salaries payable...............................................
Total current liabilities.............................
Stockholders equity
Common stock.................................................
Retained earnings............................................
Total stockholders equity..................
equity.....................................................
$ 6,400
400
$ 6,800
11,000
3,200
14,200
$21,000
4-61

(h)
Date
July 31
(i)
General Journal
Account Titles and Explanation
Service Revenue..............................................
Income Summary.....................................
Debit
7,400
31
Income Summary.............................................
Depreciation Expense..............................
Insurance Expense...................................
Cleaning Supplies Expense....................
Gas & Oil Expense...................................
3,600
31
Income Summary.............................................
3,800
31
Retained Earnings...........................................
Dividends..................................................
600
Credit
7,400
2,400
250
150
540
260
3,800
600

Post-Closing Trial Balance
July 31, 2010
Cash......................................................................
Accounts Receivable..........................................
Cleaning Supplies...............................................
Equipment............................................................
Accumulated DepreciationEquipment...........
Common Stock....................................................
Retained Earnings...............................................
Debit
$4,240
6,000
360
1,650
9,000
$21,250
Credit
$ 250
6,400
400
11,000
3,200
$21,250
BYP 4-1
FINANCIAL REPORTING PROBLEM
(a) Items that may result in adjusting entries for prepayments are:
a.
b.
c.
Prepaid expenses.
Accumulated depreciation.
Deferred income taxes.
(b) Accrual adjusting entries are often made for other income (i.e., interest)
and provision for income taxes, as well as interest expense on bank
loans and bonds.
(c) Depreciation expense was $15,859,000 in 2007 and $15,816,000 in 2006.
Accumulated depreciation was reported in the balance sheet as a
deduction from total Property, Plant, and Equipment, at cost.
(d) The statement of cash flows (at the bottom) reports income taxes paid in
2007 of $11,343,000. The income statement reports income tax expense of
$25,542,000. Income taxes payable is reported under current liabilities in the
consolidated balance sheet.
4-63
BYP 4-2
COMPARATIVE ANALYSIS PROBLEM
Accounts that provide evidence of the use of accrual accounting are:

Balance Sheet
Income Statement
(a) Hershey Foods

1. Accounts receivabletrade
2. Prepaid expenses
3. Accrued income taxes
4. Accrued liabilities
1.
2.
3.
4.
Sales
Insurance (or supplies) expense
Income tax expense
Miscellaneous expense
1.
2.
3.
4.
5.
Insurance (or supplies) expense

Depreciation expense
Sales
Miscellaneous expense
Income tax expense
(b) Tootsie Roll

1. Prepaid expenses
2. Accumulated depreciation
3. Accounts receivable trade
4. Accrued liabilities
5. Income taxes payable
BYP 4-3
RESEARCH CASE
(a) Under so-called cookie-jar accounting companies will over accrue for
an expense, reducing current period income. In a future period they will
reverse part of the previous accrual, thus reducing the expense and
increasing income in the future period. The article suggests that one
motivation for using cookie-jar accounting is to smooth net income. That
is, if income is extremely high this period, by increasing an accrued
expense in the current period you can reduce current period income, and
therefore make it a little easier to report strong income in the next period.
(b) If a company provides unaudited financial statements, it means that
they have not been examined by independent certified public accountants. It
also means that the financial statements have not received an expression of
an opinion from the independent accounting saying that they were prepared
in accordance with generally accepted accounting principles. As a
consequence, financial statement users should be reluctant to rely very
heavily on Beazers unaudited financial statements.
(c) As part of the agreement that Beazer would have signed when it issued
bonds to borrow money, it agreed to provide audited financial statements to
bondholders within a specified number of days of its year-end. In
the event that it does not meet this deadline, it will have violated its
agreement, and the bondholders can demand full payment. This could
create a cash crisis for Beazer, since it would be unlikely that it would
have enough available cash on hand to repay all of the bondholders.
4-65
BYP 4-4
INTERPRETING FINANCIAL STATEMENTS
LASER RECORDING SYSTEMS

(a)
Laser Recording is handling legal expense via an accrued expense

adjustment. This is explained by the fact that accrued professional
services increased during the year.
(b)
Each of the three adjustments is an accrued expense adjustment. Since

this type of adjustment increases expenses, net income is decreased by
each adjustment.
(c)
In recording accrued interest, Laser Recording debited Interest Expense

and credited Interest Payable.
BYP 4-5
FINANCIAL ANALYSIS ON THE WEB
(a) The SEC was created by Congress after the stock market crash of 1929.
The SEC was created to restore investor confidence in our capital
markets by providing more structure and government oversight.
(b) Division of Corporation Finance.The Division of Corporation Finance
oversees corporate disclosure of important information to the investing
public. Corporations are required to comply with regulations pertaining
to disclosure that must be made when stock is initially sold and then on a
continuing and periodic basis. The Divisions staff routinely reviews the
disclosure documents filed by companies. The staff also provides
companies with assistance interpreting the Commissions rules and
recommends to the Commission new rules for adoption.
Division of Trading and Markets.The Division of Trading and Markets
establishes and maintains standards for fair, orderly, and efficient markets. It
does this primarily by regulating the major securities market participants:
broker-dealer firms; self-regulatory organizations (SROs), which include
the stock exchanges and the National Association of Securities Dealers
(NASD), Municipal Securities Rulemaking Board (MSRB), and clearing
agencies (SROs that help facilitate trade settlement); transfer agents
(parties that maintain records of stock and bond owners); and securities
information processors. (A self-regulatory organization is a member
organization that creates and enforces rules for its members based on
the federal securities laws. SROs, which are overseen by the SEC, are the
front line in regulating broker-dealers.)
Division of Investment Management.The Division of Investment Management oversees and regulates the $15 trillion investment management
industry and administers the securities laws affecting investment
companies (including mutual funds) and investment advisers. In applying
the federal securities laws to this industry, the Division works to improve
disclosure and minimize risk for investors without imposing undue costs
on regulated entities.
Division of Enforcement.The Division of Enforcement investigates
possible violations of securities laws, recommends Commission action
when appropriate, either in a federal court or before an administrative law
4-67
judge, and negotiates settlements on behalf of the Commission.
BYP 4-5 (Continued)

While the SEC has civil enforcement authority only, it works closely with
various criminal law enforcement agencies throughout the country to
develop and bring criminal cases when the misconduct warrants more
severe action.
(c) The Chief Accountant is the principal adviser to the Commission on
accounting and auditing matters. The Office of the Chief Accountant also
works closely with domestic and international private-sector accounting
and auditing standards-setting bodies (e.g., the Financial Accounting
Standards Board, the International Accounting Standards Board, the
American Institute of Certified Public Accountants, and the Public
Company Accounting Oversight Board), consults with Registrants,
auditors, and other Commission staff regarding the application of accounting standards and financial disclosure requirements, and assists in
addressing problems that may warrant enforcement actions.
4-69
BYP 4-6
(a)
GROUP DECISION CASE

GRAND VALLEY PARK
Income Statement
For the Quarter Ended March 31, 2010
Revenues
Rental revenues ($89,000 $21,000)............
Expenses
Wages expense [$27,600 + ($290 X 3)].........
Advertising expense ($4,200 + $110)............
Supplies expense ($5,200 $1,800)..............
Repairs expense ($2,800 + $380)..................
Insurance expense ($7,200 X 3/12)...............
Utilities expense ($900 + $240)......................
Depreciation expense....................................
Interest expense ($20,000 X 8% X 3/12)........
Total expenses........................................
Net income..............................................................
$68,000
$28,470
4,310
3,400
3,180
1,800
1,140
800
400
43,500
$24,500
(b) The generally accepted accounting principles pertaining to the income

statement that were not recognized by Janet were the revenue recognition
principle and the matching principle. The revenue recognition principle
states that revenue is recognized when it is earned. The revenue of
$21,000 for summer rentals has 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) whenever it is reasonable and practicable to do so.
This means that the expenses should include amounts incurred in March
but not paid until April. The difference in expenses was $7,200 ($43,500
$36,300). The overstatement of revenues ($21,000) plus the
understatement of expenses ($7,200) equals the difference in reported
income of $28,200 ($52,700 $24,500).
BYP 4-7
COMMUNICATION ACTIVITY
(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. Information
presented on an accrual basis is useful because it reveals relationships that
are likely to be important in predicting future results. Conversely, under
cash basis 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 results in misleading financial statements.
(b) Politicians might desire a cash basis accounting system over an accrual
basis system because if an accrual accounting system is used, it could
mean that billions in government liabilities presently unrecorded would
have to be reported in the federal budget immediately. Currently, the
federal government is facing a huge budget deficit. The recognition of
these additional liabilities would make the deficit even worse. This is not
what politicians would like to see and be held responsible for.
(c) Dear Senator,
It is my understanding, after having taken a beginning course in accounting
principles, that the federal government uses a cash basis system rather
than an accrual basis accounting system.
I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded because they
havent been paid yet. I realize that the deficit would dramatically increase
if we were to implement an accrual system, but in all fairness, we citizens
should be given a more accurate picture of what our government is up to.
Sincerely,
CONCERNED STUDENT
4-71
BYP 4-8
ETHICS CASE
(a) The stakeholders in this situation are:
Terry Holton, controller.

The president of Diamond Company.
Diamond Company stockholders and potential stockholders.
(b) 1.
It is unethical for the president to place pressure on Terry to misstate

net income 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. Terry did
nothing unethical by dating the adjusting entries December 31.
(c) Terry 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).
BYP 4-9
ALL ABOUT YOU ACTIVITY
The following is a personal balance sheet using the classified presentation.

Note that the earnings from the part-time job as well as the tuition costs are
not listed since neither of those items is an asset, liability, or equity item.
Assets
Current assets
Cash...................................................................
Money market account.....................................
Certificate of deposit........................................
Accounts receivable from brother...................
Total current assets..................................
$1,200
1,800
3,000
300

Automobile........................................................
Video and stereo equipment............................
Home computer................................................
Total assets................................................
7,000
1,250
800
$ 6,300
9,050
$15,350
Liabilities and Owners Equity

Current liabilities
Current portion of automobile loan................
Current portion of credit card payable...........
Total current liabilities..............................
Long-term liabilities
Student loan......................................................
Automobile loan................................................
Credit card payable..........................................
Total long-term liabilities..........................
Total liabilities.....................................
$1,500
150
$ 1,650
5,000
4,000
1,650
10,650
12,300
Equity
M. Y. Own, Capital ($15,350 $12,300)...........
3,050
Total liabilities and equity....................
$15,350
4-73

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CHAPTER 4

Accrual Accounting Concepts

Explain the revenue recognition principle and the matching principle.

Summary of Questions by Study Objectives and Blooms Taxonomy

Summary of Questions by Study Objectives and Blooms Taxonomy (Continued)

ASSIGNMENT CHARACTERISTICS TABLE

Record transactions on accrual basis; convert revenue to

Prepare adjusting entries, post to ledger accounts, and

Prepare adjusting entries, adjusted trial balance, and

Prepare adjusting entries and financial statements; identify

Prepare adjusting entries.

Prepare adjusting entries and a corrected income

Journalize transactions and follow through accounting

Complete all steps in accounting cycle.

Record transactions on accrual basis; convert revenue to

Prepare adjusting entries, post to ledger accounts, and

Prepare adjusting entries, adjusted trial balance, and

Prepare adjusting entries and financial statements;

Prepare adjusting entries.

Prepare adjusting entries and a corrected income

Journalize transactions and follow through accounting

Complete all steps in accounting cycle.

The financial information in a trial balance may not be up-to-date because:

Questions Chapter 4 (Continued)

Asset and revenue. An asset is debited and revenue is credited.

Expense and liability. An expense is debited and a liability is credited.

The entry is:

(a) Accrued revenues.

(d) Accrued expenses or prepaid expenses.

(a) Salaries Payable.

(d) Supplies Expense.

Questions Chapter 4 (Continued)

(Dr) Individual revenue accounts and (Cr) Income Summary.

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-2

BRIEF EXERCISE 4-4

Advertising Supplies Expense........................

Advertising Supplies Expense

BRIEF EXERCISE 4-5

BRIEF EXERCISE 4-6

Insurance Expense ($10,800 X 6/24)...............

BRIEF EXERCISE 4-7

Unearned Insurance Revenue.........................

Unearned Insurance Revenue

BRIEF EXERCISE 4-8

BRIEF EXERCISE 4-9

BRIEF EXERCISE 4-10

BRIEF EXERCISE 4-11

BRIEF EXERCISE 4-12

BRIEF EXERCISE 4-13

BRIEF EXERCISE 4-15

Analyze business transactions.

SOLUTIONS TO DO IT! REVIEW EXERCISES

Office Supplies Expense................................................

Accounts Receivable ....................................................

Dec. 31 Retained Earnings..................................................... 22,000

Going concern assumption.

Revenue recognition principle.

Cash basis earnings.

Liabilities and Stockholders Equity

Cost of goods is recorded

Salary expense is recorded

Proper accrual accounting would require adjusting entries for prepaid