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Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions
Sales revenue. 850
Cost of goods sold (290)
All other expenses (325)
Net income.. $ 235

Beginning cash.. $ 75
Collections ($850 $27).. 823
Payments for: inventory. (380)
everything else. (255)
Ending cash $ 263

(10 min.) S 3-2

Statement Reports (Amounts in millions)


Income Interest expense $ .8
statement

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

Chapter 3 Accrual Accounting & Income


3- 1
.
Interest payable. 0.3

3-2 Financial Accounting 9/e Solutions


(10 min.) S 3-3

At the end of each accounting period, the business reports


its performance through the preparation of financial
statements. In order to be useful to the various users of
financial statements they must be up-to-date. Accounts such
as cash, Equipment, Accounts Payable, Common Stock and
Dividends are up-to date and require no adjustment at the end
of the accounting period. Accounts such as Accounts
Receivable, Supplies, Salary Expense and Salaries Payable may
not be up to date as of the last day of the accounting period.
Why? Because certain transactions that took place during the
month may not have been recorded.

The accrued salaries, which are owed to the employees but


have not been paid, are an expense related to the current
period but also represent a liability or debt that is owed by the
business. The business must make an adjusting entry to
record the accrued salary owed as both an increase in Salary
Expense and an increase in Salaries Payable. If the business
does not make this adjustment, the expenses will be
understated, net income will be overstated, and liabilities will
be understated.

Chapter 3 Accrual Accounting & Income


3- 3
3-4 Financial Accounting 9/e Solutions
(10 min.) S 3-4

The large auto manufacturer should record sales revenue when


the revenue is earned by delivering automobiles to Budget or
Hertz. The large auto manufacturer should not record any
revenue prior to delivery of the vehicles, because the large
auto manufacturer hasnt earned the revenue yet. The revenue
principle governs this decision.

When the large auto manufacturer records the revenue from


the sale, at that time not before or after the large auto
manufacturer should also record cost of goods sold, the
expense. The expense recognition principle tells when to
record expenses.

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible


long-lived asset, less its estimated residual value, over its
estimated useful life. All long-lived or plant assets, except for
land, decline in usefulness during their life and this decline is
an expense. Accountants must allocate the cost of each plant
asset, except for land, over the assets useful life.
Depreciation is the process of allocating the cost of a plant

Chapter 3 Accrual Accounting & Income


3- 5
asset to expense. Depreciation also decreases the book value
of the asset to reflect its usage.

3-6 Financial Accounting 9/e Solutions


(10 min.) S 3-6
a. The Expense Recognition Principle

b. The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Expense Recognition Principle

(10 min.) S 3-7

a.

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


...
Prepaid 500
Rent.
To record rent expense.

Prepaid Rent Rent Expense


Oct. 1 3,000 Oct. 31 500 Oct. 31 500
Bal. 2,500 Bal. 500

b.

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



Supplies.. 550
Chapter 3 Accrual Accounting & Income
3- 7
To record supplies expense.

Supplies Supplies Expense


Oct. 1 950 Oct. 31 550 Oct. 31 550
Bal. 400 Bal. 550

(10 min.) S 3-8

Req. 1

(a) Jan. Computer Equipment. 50,00


1 .. 0
Cash. 50,00
0
Purchased computer equipment.

(b) Dec. Depreciation Expense


31
Computer Equipment ($50,000 / 5) 10,00
. 0
Accumulated Depreciation
Computer 10,00
Equipment....... 0
Record depreciation expense.

Req. 2

3-8 Financial Accounting 9/e Solutions


Accumulated Depreciation
Depreciation Expense
Computer Computer Computer
Equipment Equipment Equipment

Jan. 50,00 Dec. 10,00 Dec. 10,00


0 31 0 31 0

Bal. 50,00 Bal. 10,00 Bal. 10,00


0 0 0

Req. 3

Computer equipment. $50,000


Less: Accumulated depreciation (10,000)
Book value $40,000

Chapter 3 Accrual Accounting & Income


3- 9
(10 min.) S 3-9

(Amounts in millions)

Income statement: 2012


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

Balance sheet: 2012


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

(10 min.) S 3-10

Req. 1
Oct. 31 Interest Expense.. 250
Interest Payable.. 250
To accrue interest expense for October.

Nov. 30 Interest Expense.. 250


Interest Payable.. 250
To accrue interest expense for November.

Dec. 31 Interest Expense... 250


Interest Payable 250
To accrue interest expense for December.

Req. 2

Interest Payable
Oct. 31 250
Nov. 30 250
Dec. 31 250
Bal. 750

3-10 Financial Accounting 9/e Solutions


Req. 3

Dec. 31 Interest 750


Payable..........
Cash.. 750
To pay interest.

(10 min.) S 3-11

Req. 1

Oct. 31 Interest Receivable 250


Interest Revenue.. 250
To accrue interest revenue for October.

Nov. 30 Interest Receivable 250


Interest Revenue... 250
To accrue interest revenue for November.

Dec. 31 Interest Receivable 250


Interest Revenue...... 250
To accrue interest revenue for December.

Req. 2

Interest Receivable
Oct. 31 250
Nov. 30 250
Dec. 31 250
Bal. 750

Chapter 3 Accrual Accounting & Income


3- 11
Req. 3

Dec. 31 Cash. 750


Interest 750
Receivable.
To collect interest.

3-12 Financial Accounting 9/e Solutions


(5-10 min.) S 3-12

Unearned revenues are liabilities because The World Star has


received cash from subscribers in advance of providing them
with newspapers. Receiving the cash in advance creates an
obligation (a liability) for The World Star. As The World Star
delivers newspapers to subscribers, The World Star earns the
revenue, and the dollar amount of the unearned revenue then
goes into the revenue account.

a. Cash. 60,000
Unearned Subscription 60,000
Revenue.......
Received cash for revenue in advance.

b. Unearned Subscription 40,000


Revenue..................
Subscription Revenue 40,000
To record the earning of subscription
revenue that was collected in advance.

(5-10 min.) S 3-13

Prepaid Rent at December 31:


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

Chapter 3 Accrual Accounting & Income


3- 13
Rent Expense at December 31:
c. Unadjusted amount $ -0-
d. Adjusted amount ($18,000 / 3). 6,000

3-14 Financial Accounting 9/e Solutions


(10 min.) S 3-14

a. Accounts 55,000
Receivable...
Service 55,000
Revenue..

Cash. 35,000
Accounts Receivable. 35,000

b. Cash. 9,000
Unearned Service 9,000
Revenue..

Unearned Service 7,000


Revenue
Service Revenue.. 7,000

(15-30 min.) S 3-15

Sparrow Sporting Goods Company


Income Statement
For the Year Ended March 31, 2012
Thousands
Net revenues. $175,500
Cost of goods sold. 136,000
All other expenses.. 29,000
Net income $ 10,500

Sparrow Sporting Goods Company


Chapter 3 Accrual Accounting & Income
3- 15
Statement of Retained Earnings
For the Year Ended March 31, 2012
Thousands
Retained earnings, March 31, 2011... $21,500
Add: Net income 10,500
Retained earnings, March 31, 2012... $32,000

3-16 Financial Accounting 9/e Solutions


(continued) S 3-15

Sparrow Sporting Goods Company


Balance Sheet
March 31, 2012
Thousands
ASSETS
Current:
Cash.............................................. $
20,800
Accounts receivable..................... 28,000
Inventories.................................... 35,000
Other current assets.................... 5,000
Total current assets................. 88,800
Property and equipment, net........ 6,300
Other assets................................. 22,00
0
Total assets....................................... $117,100
LIABILITIES
Total current liabilities................. $
55,100
Long-term liabilities..................... 7,50
0
Total liabilities................................... 62,600
STOCKHOLDERS EQUITY
Common stock.............................. 22,500
Retained earnings......................... 32,00
0
Total stockholders equity................. 54,50
0

Chapter 3 Accrual Accounting & Income


3- 17
Total liabilities and stockholders equity $117,100

3-18 Financial Accounting 9/e Solutions


(5-10 min.) S 3-16

CLOSING ENTRIES
Thousands
Mar. 31 Net Revenues . 175,50
0
Retained 175,50
Earnings....... 0

Retained 165,00
31 Earnings. 0
Cost of Goods Sold. 136,00
0
All Other 29,000
Expenses..

Retained Earnings
Mar. 31, 2012 165,00 Mar. 31, 2011 Bal. 21,500
Expenses 0
Mar. 31, 2012 175,50
Revenues 0
Mar. 31, 2012 Bal. 32,000

Retained Earnings ending balance agrees with the amount


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

Chapter 3 Accrual Accounting & Income


3- 19
(5 min.) S 3-17
(Dollars in thousands)

Req. 1

Net working capital =Total current assets - Total

current liabilities

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

Req. 2

Total current assets $88,80


0 1.6
Current ratio = = =
Total current $55,10 1
liabilities 0

Req. 3

Total liabilities $62,60


0 0.5
Debt ratio = = =
Total assets $117,10 3
0

Req. 4

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


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

3-20 Financial Accounting 9/e Solutions


(10 min.) S 3-18

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

Net working capital = [($88,800 + $10,000)-


a.
$43,700 $55,100]

$98,800
b. Current ratio = = 1.79
$55,100

$62,600
c. Debt ratio = $127,100 ($117,100 + = 0.49
$10,000)

2
Paid accounts payable of $10,000:
.
Net working capital = $33,700 [($88,800 - $10,000) -
a.
($55,100- $10,000)]

$78,800
b. Current ratio = = 1.74
$45,100

$52,600 ($62,600 -
$10,000)
c. Debt ratio = = 0.49
$107,100 ($117,100 -
$10,000)

Chapter 3 Accrual Accounting & Income


3- 21
Exercises

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

Statement Reports (in millions)


1. Income statement Sales revenue $4,30
0
Operating expenses. 1,200

Balance sheet Accounts receivable $


900
Accounts payable. 1,000

2. Cash basis would report only the cash collections of


$4,500 from customers and the payment of operating
expenses ($1,200). Their balance sheet should have
included neither accounts receivable nor accounts
payable.

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

a. Cash Basis b. Accrual


Basis

Revenues.. $540,000 $530,000


.
Expenses.. 420,000 440,000
.
Net $120,000 $ 90,000
3-22 Financial Accounting 9/e Solutions
income

The accrual basis measures net income better because its


information about revenues and expenses is more complete
than the information provided by the cash basis.

Chapter 3 Accrual Accounting & Income


3- 23
(5-10 min.) E 3-21A

Millions

a. Revenue. $840

The revenue principle says to record revenue when it


has been earned, regardless of when cash is collected.
Therefore, report the amount of revenue earned,
regardless of when the company collects cash.

b. Total expense... $500

The expense recognition principle governs accounting


for expenses.

c. The income statement reports revenues and expenses.


The statement of cash flows reports cash receipts and
cash payments.

3-24 Financial Accounting 9/e Solutions


(15-20 min.) E 3-22A
Req. 1

Adjusting Entries
DAT CREDI
E ACCOUNT TITLES DEBIT T

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


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

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


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

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


Service Revenue................................... 600

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


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

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


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

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


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

Req. 2

Net income understated by omission


of:
Interest $ 1,600
revenue
Service 600
revenue....
Total $ (2,200)
understatement..
Chapter 3 Accrual Accounting & Income
3- 25
Net income overstated by omission
of:
Insurance $ 900
expense
Depreciation 4,800
expense..
Salary 10,800
expense..
Income tax 5,250
expense.
Total 21,750
overstatement.

Overall effect net income $19,550


overstated by

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

Missing amounts in italics.

1 2 3 4
Beginning Supplies $ 500 $ 400 1,000 $1,000
Add: Payments for
supplies
during the year 1,700 800 1,000 400
Total amount to 2,200 1,200 2,000 1,400
account for
Less: Ending (500) (500) (700) (500)
Supplies
Supplies Expense $1,700 $ 700 $1,300 $ 900

3-26 Financial Accounting 9/e Solutions


Journal entries:

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


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

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


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

Chapter 3 Accrual Accounting & Income


3- 27
(10-20 min.) E 3-24A

Req. 1

Adjusting Entries
DEBI CREDI
DATE ACCOUNT TITLES T T

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


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

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


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

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


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

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


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

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


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

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


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

Req. 2

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

3-28 Financial Accounting 9/e Solutions


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

Accounts Receivable Supplies


Bal. 1,500 Bal. 500 (a) 200
(c) 900 Bal. 300
Bal. 2,400

Salary Payable Unearned Service Revenue


(b) 400 (d) 500 Bal. 600
Bal. 400 Bal. 100

Service Revenue Salary Expense


Bal. 4,200 Bal. 1,900
(c) 900 (b) 400
(d) 500 Bal. 2,300
Bal. 5,600

Supplies Expense
(a) 200
Bal. 200

Chapter 3 Accrual Accounting & Income


3- 29
(20-30 min.) E 3-26A

Honeyglazed Hams, Inc.


Income Statement
Year Ended December 31, 2012
Thousands
Revenues:
Sales revenue..................... $40,900
Expenses:
Cost of goods sold............. $25,000
Selling, administrative, and
general expense........... 10,300
Total expenses............... 35,300
Income before tax.................. 5,600
Income tax expense............ 2,100
Net income.............................. $ 3,500

Honeyglazed Hams, Inc..


Statement of Retained Earnings
Year Ended December 31, 2012
Thousands
Retained earnings, December 31, $4,700
2011.
Add: Net income 3,500
.
8,200
Less: (1,500)
Dividends..

3-30 Financial Accounting 9/e Solutions


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

Chapter 3 Accrual Accounting & Income


3- 31
(continued) E 3-26A

Honeyglazed Hams, Inc.


Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash $ Accounts $
. 3,700 payable 7,900
Accounts 1,700 Income tax 500
receivable payable..
Inventories 1,600 Other 2,40
. liabilities.. 0
Prepaid 1,600 Total 10,800
expenses. liabilities...
Prop., plant, $ STOCKHOLDERS
equip. 6,800
Less: Accum. EQUITY
deprec. 4,000 Common 4,600
(2,800
. stock..
)
Other 9,500 Retained 6,70
assets.. earnings 0
Total stockholders 11,30
equity
Total liabilities and

Total $22,10 stockholders $22,10


assets 0 equity... 0

3-32 Financial Accounting 9/e Solutions


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

One mechanism for solving this exercise is to prepare the


relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.

Amounts in millions

Receivables
Beg. bal. 220
Sales revenue 20,550 Collections 20,400
End. bal. 370

Prepaid Insurance
Beg. bal. 150
Insurance expense 42
Payment 440 0
End. bal. 170

Accrued Liabilities Payable


Beg. bal. 600
Other operating
Payments 4,300 expenses 4,400
End. bal. 700

Chapter 3 Accrual Accounting & Income


3- 33
3-34 Financial Accounting 9/e Solutions
(10-15 min.) E 3-28A

Req. 1

Millio
ns
Income statement
Service revenue (430 80). 350

Balance sheet
Unearned service revenue... 80

Req. 2

Income statement
Service revenue (65 + 430 80).. 415

Balance sheet
Unearned service revenue... 80

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


year owing more phone service to customers. With collections
for the year and the amount of the ending liability unchanged,
Bennett must have earned more revenue in situation 2 than in
situation 1.

Not required but helpful:

Unearned Service Revenue


Beg. bal. 65
Earned revenue 415 Collected cash 430
Chapter 3 Accrual Accounting & Income
3- 35
End. bal. 80

3-36 Financial Accounting 9/e Solutions


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

Req. 1

Journal
CREDI
DATE ACCOUNT TITLES DEBIT T

Closing Entries
Dec. 31 Service Revenue............................. 23,900
Other Revenue................................. 400
Retained Earnings...................... 24,300

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


Cost of Services Sold................. 11,000
Selling, General, and
Administrative
Expense................................. 6,400
Depreciation Expense................ 4,100
Income Tax Expense................... 500

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


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

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

Req. 2

Retained Earnings
Dec. 31, 2011 2,600
Expenses 22,000
Dividends 300 Revenues 24,30
Chapter 3 Accrual Accounting & Income
3- 37
0
Dec. 31, 2012 4,600

3-38 Financial Accounting 9/e Solutions


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

Journal
DEBI CREDI
DATE ACCOUNT TITLES T T

Adjusting Entries
Dec. 31 Unearned Service Revenue.................. 6,300
Service Revenue ($19,500 $13,200). 6,600

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


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

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


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

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


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

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


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

Closing Entries
31 Service Revenue................................... 19,50
0
Retained Earnings............................ 19,500

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


Salary Expense................................. 4,600
Rent Expense................................... 1,600
Depreciation Expense...................... 700
Income Tax Expense........................ 1,500

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


Dividends.......................................... 1,400
Chapter 3 Accrual Accounting & Income
3- 39
3-40 Financial Accounting 9/e Solutions
(20-30 min.) E 3-31A

Req. 1

Anderson Production Company


Balance Sheet
December 31, 2012
ASSETS
Current Assets:
Cash................................................................. $14,100
Prepaid rent ($800 $300).............................. 500
Total current assets..................................... 14,600
Plant Assets:
Equipment...... $42,000
Less accumulated depreciation
($3,400 + $700). (4,100) 37,900

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

LIABILITIES

Current:
Accounts payable............................................ $ 5,100
Salary payable ($4,600 $4,300)................. 300
Unearned service revenue ($9,100 $6,300). 2,800
Income tax payable...................................... 1,500
Total current liabilities................................ 9,700
Note payable, long-term....................................... 16,000
Total liabilities...................................................... 25,700
STOCKHOLDERS EQUITY
Common stock................................................... 8,600
Chapter 3 Accrual Accounting & Income
3- 41
Retained earnings ($8,500 + $19,500 $4,600
$1,600
$700 $1,500 $1,400)............................ 18,200
Total stockholders equity................................. 26,800
Total liabilities and stockholders equity............. $52,500

(continued) E 3-31A

Req. 2

Current Prior
Year Year
Net = Total current assets $14,600
working - current liabilities - = $4,900 $5,00
capital $9,700 0
Current Total current assets $14,600
rat = Total current = $9,700 = 1.51 1.55
io liabilities

Both net working capital and the current ratio have decreased
indicating that the ability to pay current liabilities with current
assets has deteriorated.

Total liabilities $25,70


Debt 0
= = = 0.49 0.30
ratio Total assets $52,50
0

The overall ability to pay total liabilities deteriorated a little.

3-42 Financial Accounting 9/e Solutions


(30 min.) E 3-32A

$50 $40 + $5
Current Debt
a. = $40 + = 1.11 = $70 + $5 = 0.60
ratio ratio
$5

The purchase of equipment on account hurts both ratios.

Current $50 $6 1.1 Debt $40 $6


b. = = = = 0.53
ratio $40 0 ratio $70 $6

The payment of long-term debt hurts the current ratio and


improves the debt ratio.

Current $50 + $5 1.2 Debt $40 + $5


c. = = = = 0.60
ratio $40 + $5 2 ratio $70 + $5

Collecting cash in advance hurts both ratios.

Current $50 1.1 Debt $40 + $2


d. = = = = 0.60
ratio $40 + $2 9 ratio $70

Accruing an expense hurts both ratios.

Current $50 + $6 1.4 $40


e. = = Debt ratio = = .53
ratio $40 0 $70 + $6

A cash sale improves both ratios.

Chapter 3 Accrual Accounting & Income


3- 43
(5-10 min.) E 3-33B

Statement Reports (in millions)


1. Income statement Sales $4,40
revenue.. 0
Operating 1,300
expenses...

Balance sheet Accounts $ 700


receivable..
Accounts 1,200
payable..

2. Cash basis would report only the cash collections of


$4,600 from customers and the payment of operating
expenses ($1,300).The balance sheet would include
neither accounts receivable nor accounts payable.

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

a. Cash Basis b. Accrual


Basis

Revenues.. $510,000 $500,000


.
Expenses.. 410,000 450,000
.
Net $100,000 $ 50,000
income

3-44 Financial Accounting 9/e Solutions


The accrual basis measures net income better because its
information about revenues and expenses is more complete
than the information provided by the cash basis.

(5-10 min.) E 3-35B

Millions

a. Revenue. $780

The revenue principle says to record revenue when it


has been earned, regardless of when cash is collected.
Therefore, report the amount of revenue earned,
regardless of when the company collects cash.

b. Total expense... $530

The expense recognition principle governs accounting


for expenses.

c. The income statement reports revenues and expenses.


The statement of cash flows reports cash receipts and
cash payments.

Chapter 3 Accrual Accounting & Income


3- 45
(15-20 min.) E 3-36B
Req. 1

Adjusting Entries
DAT CREDI
E ACCOUNT TITLES DEBIT T

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


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

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


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

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


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

3-46 Financial Accounting 9/e Solutions


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

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


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

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


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

Req. 2

Net income understated by omission


of:
Interest $ 1,300
revenue..
Service 900
revenue.............
Total $ (2,200)
understatement

Net income overstated by omission


of:
Insurance $ 700
expense
Depreciation 4,400
expense..
Salary 10,200
expense..
Income tax 6,500
expense............
Total 21,800
overstatement...........
.

Overall effect net income $19,600


overstated by.
Chapter 3 Accrual Accounting & Income
3- 47
(10-15 min.) E 3-37B

Missing amounts in italics.

1 2 3 4
Beginning Supplies $ 400 $ 600 $1,100 $ 900
Add: Payments for
supplies
during the year 1,600 1,100 1,500 600
Total amount to 2,000 1,700 2,600 1,500
account for
Less: Ending Supplies (200) (300) (1,000) (300)
Supplies Expense $1,800 $1,400 $1,600 $1,200

Journal entries:

Situation 1: Supplies 1,600


.
Cash.. 1,600

Situation 2: Supplies 1,400


Expense
1,400
Supplies.......

3-48 Financial Accounting 9/e Solutions


Chapter 3 Accrual Accounting & Income
3- 49
(10-20 min.) E 3-38B
Req. 1

Adjusting Entries
DEBI
DATE ACCOUNT TITLES T CREDIT

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


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

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


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

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


Rent Revenue........................................... 3,475

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


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

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


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

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


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

Req. 2

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

3-50 Financial Accounting 9/e Solutions


Chapter 3 Accrual Accounting & Income
3- 51
(10-20 min.) E 3-39B

Accounts Receivable Supplies


Bal. 1,400 Bal. 300 (a) 200
(c) 500 Bal. 100
Bal. 1,900

Salary Payable Unearned Service Revenue


(b) 700 (d) 200 1,000
Bal. 700 Bal. 800

Service Revenue Salary Expense


Bal. 4,600 Bal. 2,400
(c) 500 (b) 700
(d) 200 Bal. 3,100
Bal. 5,300

Supplies Expense
(a) 200
Bal. 200

3-52 Financial Accounting 9/e Solutions


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

Honeybee Hams, Inc.


Income Statement
Year Ended December 31, 2012
Thousands
Revenues:
Sales revenue................... $42,200

Expenses:
Cost of goods sold........... $25,500
Selling, administrative,
and
general expense............ 10,000
Total expenses............ 35,500
Income before tax.................... 6,700
Income tax expense................. 2,500
Net income............................... $ 4,200

Honeybee Hams, Inc.


Statement of Retained Earnings
Year Ended December 31, 2012
Thousands
Retained earnings, December 31, $4,600
2011..
Add: Net income . 4,200
8,800
Less: Dividends (1,400)
Retained earnings, December 31, $7,400

Chapter 3 Accrual Accounting & Income


3- 53
2012..

3-54 Financial Accounting 9/e Solutions


(continued) E 3-40B

Honeybee Hams, Inc.


Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash $ Accounts $
. 3,400 payable. 7,700
Accounts 1,900 Income tax 600
receivable payable..
Inventories 1,700 Other 2,40
. liabilities.. 0
Prepaid 1,700 Total 10,700
expenses liabilities...
Prop., plant, $ STOCKHOLDERS
equip. 6,700
Less: Accum. EQUITY
4,200 Common 4,500
(2,500)
deprec. stock..
Other 9,700 Retained 7,40
assets.. earnings 0
Total stockholders 11,90
equity
Total liabilities and

Total $22,60 stockholders $22,6


assets 0 equity... 00

Chapter 3 Accrual Accounting & Income


3- 55
(10-20 min.) E 3-41B

One mechanism for solving this exercise is to prepare the


relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.

Amounts in millions

Receivables
Beg. bal. 210
Sales revenue 21,010 Collections 20,900
End. bal. 320

Prepaid Insurance
Beg. bal. 160
Insurance expense 43
Payment 470 0
End. bal. 200

Accrued Liabilities Payable


Beg. bal. 640
Other operating
Payments 4,200 expenses 4,290
End. bal. 730

3-56 Financial Accounting 9/e Solutions


(10 min.) E 3-42B

Req. 1

Millions
Income statement
Service revenue (380 95).. 285

Balance sheet
Unearned service revenue... 95

Req. 2

Income statement
Service revenue (75 + 380 95) 360

Balance sheet
Unearned service revenue... 95

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


owing more phone service to customers. With collections for
the year and the amount of the ending liability unchanged,
Terra must have earned more revenue in situation 2 than in
situation 1.

Not required but helpful:


Chapter 3 Accrual Accounting & Income
3- 57
Unearned Service Revenue
Beg. bal. 75
Earned revenue 360 Collected cash 380
End. bal. 95

3-58 Financial Accounting 9/e Solutions


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

Req. 1

Journal
CREDI
DATE ACCOUNT TITLES DEBIT T

Closing Entries
Dec. 31 Service Revenue................................ 24,300
Other Revenue................................. 200
Retained Earnings.......................... 24,500

31 Retained Earnings.............................. 22,500


Cost of Services Sold..................... 11,400
Selling, General, and
Administrative
Expense.................................. 6,000
Depreciation Expense.................... 4,500
Income Tax Expense...................... 600

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


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

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

Req. 2

Retained Earnings
Dec. 31, 2011 2,200
Expenses 22,500
Dividends 400 Revenues 24,50
Chapter 3 Accrual Accounting & Income
3- 59
0
Dec. 31, 2012 3,800

3-60 Financial Accounting 9/e Solutions


(15-25 min.) E 3-44B

Journal
CREDI
DATE ACCOUNT TITLES DEBIT T

Adjusting Entries
Dec. 31 Unearned Service Revenue................ 6,300
Service Revenue ($19,600 $13,300) 6,300

31 Salary Expense ($5,600 $4,700)..... 900


Salary Payable............................... 900

31 Rent Expense ($2,300 $1,500)........ 800


Prepaid Rent.................................. 800

31 Depreciation Expense ($600 $0)..... 600


Accumulated Depreciation............ 600

31 Income Tax Expense ($1,200 $0).... 1,200


Income Tax Payable....................... 1,200

Closing Entries
31 Service Revenue................................ 19,600
Retained Earnings.......................... 19,600

31 Retained Earnings.............................. 9,700


Salary Expense.............................. 5,600
Rent Expense.............................. 2,300
Depreciation Expense.................... 600
Income Tax Expense...................... 1,200

31 Retained Earnings.............................. 1,100


Dividends........................................ 1,100

Chapter 3 Accrual Accounting & Income


3- 61
(20-30 min.) E 3-45B
Req. 1

Durkin Production Company


Balance Sheet
December 31, 2011
ASSETS
Current:
Cash.... $14,200
Prepaid rent ($1,500 $800)......... 700
Total current assets 14,900
Plant:
Equipment.. $44,000
Less accumulated depreciation
($3,500 + $600). (4,100) 39,900
.......
Total assets. $54,800

LIABILITIES
Current:
Accounts payable.................................................... $ 4,700
Salary payable ($5,600 $4,700)........................... 900
Unearned service revenue ($8,400 $6,300)........ 2,100
Income tax payable................................................ 1,200
Total current liabilities....................................... 8,900
Note payable, long-term........................................... 17,000
Total liabilities.......................................................... 25,900
STOCKHOLDERS EQUITY
Common stock............................................................. 8,700
Retained earnings ($11,400 + $9,900* $1,100)........ 20,200
Total stockholders equity........................................... 28,900

3-62 Financial Accounting 9/e Solutions


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

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


$1,200)

Chapter 3 Accrual Accounting & Income


3- 63
(continued) E 3-45B

Req. 2
Current Prior
Year Year
Net = Total current assets $14,900
working - current liabilities = - = $6,000 $7,00
capital $8,900 0
Current Total current assets $14,900
rat = Total current = $8,900 = 1.67 1.70
io liabilities

Both net working capital and the current ratio have decreased
indicating that the ability to pay current liabilities with current
assets has deteriorated.

Total liabilities $25,90


Debt 0
= = = 0.47 0.40
ratio Total assets $54,80
0

The overall ability to pay total liabilities deteriorated a little.

3-64 Financial Accounting 9/e Solutions


(30 min.) E 3-46B

$60 $70 +
Current Debt $8
a. = = 1.03 = = 0.80
ratio $50 + ratio $90 +
$8 $8

The purchase of equipment on account hurts both ratios.

$60 $70
Current $5 Debt $5
b. = = 1.10 = = 0.76
ratio $50 ratio $90
$5

The payment of long-term debt hurts the current ratio and


improves the debt ratio.

$60 + $70 +
Current $4 Debt $4
c. = = 1.19 = = 0.79
ratio $50 +$4 ratio $90 +
$4

Collecting cash in advance hurts both ratios.

$60 $70 +
Current Debt $4
d. = = 1.11 = = 0.82
ratio $50 + ratio $90
$4

Accruing an expense hurts both ratios.

Chapter 3 Accrual Accounting & Income


3- 65
$60 + $70
Current $8 Debt
e. = = 1.36 = = 0.71
ratio $50 ratio $90 +
$8

A cash sale improves both ratios.

3-66 Financial Accounting 9/e Solutions


Serial Exercise

(3 hours) E 3-47

Reqs. 1, 2, 5, and 7

Cash Accounts Receivable


Jan. 11,000 Jan. 2 700 Jan. 18 1,500 Jan. 28 1,500
2
9 1,000 3 3,900 Bal. 0
21 2,400 12 200 Adj. 2,000
28 1,500 26 400 Bal. 2,000
31 1,200
Bal. 9,500

Supplies Equipment
Jan. 5 400 Adj. 200 Jan. 3 3,900
Bal. 200 Bal. 3,900

Accumulated Depreciation
Equipment Furniture
Adj. 65 Jan. 4 4,700
Bal. 65 Bal. 4,700

Accumulated Depreciation
Furniture Accounts Payable
Adj. 78 Jan. 26 400 Jan. 4 4,700
Bal. 78 5 400

Chapter 3 Accrual Accounting & Income


3- 67
Bal. 4,700

3-68 Financial Accounting 9/e Solutions


(continued) E 3-47

Reqs. 1, 2, 5, and 7

Salary Payable Unearned Service Revenue


Adj. 500 Adj. 800 Jan. 21 2,400
Bal. 500 Bal. 1,600

Common Stock Retained Earnings


Jan. 2 11,00 Clo. 1,743 Clo. 5,300
0
Bal. 11,00 Clo. 1,200
0
Bal. 2,357

Dividends Service Revenue


Jan. 31 1,200 Clo. 1,200 Jan. 9 1,000
18 1,500
Bal. 2,500
Adj. 2,000
Adj. 800
Clo. 5,300 Bal. 5,300

Rent Expense Utilities Expense


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

Depreciation Expense
Salary Expense Equipment
Adj. 500 Clo. 500 Adj. 65 Clo. 65

Chapter 3 Accrual Accounting & Income


3- 69
Depreciation Expense
Furniture Supplies Expense
Adj. 78 Clo. 78 Adj. 200 Clo. 200

3-70 Financial Accounting 9/e Solutions


(continued) E 3-47
Req. 1

January 2 through 18 entries are repeated from Solution to E 2-36.


Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Jan. 2 Cash................................................ 11,000
Common Stock............................. 11,000

2 Rent Expense................................. 700


Cash............................................. 700

3 Equipment................................... 3,900
Cash............................................. 3,900

4 Furniture......................................... 4,700
Accounts Payable........................ 4,700

5 Supplies.......................................... 400
Accounts Payable........................ 400

9 Cash................................................ 1,000
Service Revenue.......................... 1,000

12 Utilities Expense............................ 200


Cash............................................. 200

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


Service Revenue.......................... 1,500

21 Cash................................................. 2,400
Unearned Service Revenue.......... 2,400

21 No entry; no transaction yet

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

Chapter 3 Accrual Accounting & Income


3- 71
Cash.............................................. 400

28 Cash................................................. 1,500
Accounts Receivable.................... 1,500

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

3-72 Financial Accounting 9/e Solutions


(continued) E 3-47
Reqs. 3 and 4
Steve Ruiz, Certified Public Accountant, P.C.
Adjusted Trial Balance
January 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 9,500 9,500
Accounts receivable (a) 2,000 2,000
Supplies 400 (c) 200 200
Equipment 3,900 3,900
Accumulated depr. equip. (d1) 65 65
Furniture 4,700 4,700
Accumulated depr. furn. (d2) 78 78
Accounts payable 4,700 4,700
Salary payable (e) 500 500
Unearned service revenue 2,400 (b) 800 1,600
Common stock 11,000 11,000
Retained earnings
Dividends 1,200 1,200
Service revenue 2,500 (a)2,000 5,300
(b) 800
Rent expense 700 700
Utilities expense 200 200
Salary expense (e) 500 500
Depreciation expense (d1) 65 65
equip.
Chapter 3 Accrual Accounting & Income 3- 73
Depreciation expense furn. (d2) 78 78
Supplies expense (c) 200 200
20,600 20,600 3,643 3,643 23,243 23,243

3-74 Financial Accounting 9/e Solutions


(continued) E 3-47

Req. 5

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

Adjusting Entries
(a) Jan. 31 Accounts Receivable...................... 2,000
Service Revenue.......................... 2,000

(b) 31 Unearned Service Revenue............ 800


Service Revenue.......................... 800

(c) 31 Supplies Expense ($400 $200).... 200


Supplies....................................... 200

(d1) 31 Depreciation Expense Equipment 65


Accumulated Depreciation 65
Equip...............................................

(d2) 31 Depreciation Expense Furniture.. 78


Accumulated Depreciation Furn 78

(e) 31 Salary Expense............................... 500


Salary Payable............................. 500

Chapter 3 Accrual Accounting & Income


3- 75
(continued) E 3-47

Req. 6

Steve Ruiz, Certified Public Accountant, P.C.


Income Statement
Month Ended January 31, 2012
Revenues:
Service revenue $5,30
0
Expenses:
Rent expense $700
Salary expense 500
Supplies expense 200
Utilities expense 200
Depreciation expense furniture 65
Depreciation expense equipment 78
Total expenses 1,743
Net income $3,55
7

Steve Ruiz, Certified Public Accountant, P.C.


Statement of Retained Earnings
Month Ended January 31, 2012
Retained earnings, January 1, 2012 $ 0
Add: Net income 3,557
3,557
Less: Dividends (1,200)
Retained earnings, January 31, 2012 $ 2,357

3-76 Financial Accounting 9/e Solutions


Chapter 3 Accrual Accounting & Income
3- 77
(continued) E 3-47

Req. 6

Steve Ruiz, Certified Public Accountant, P.C.


Balance Sheet
January 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ Accounts payable $
9,500 4,700
Accounts 2,000 Salary payable 500
receivable
Supplies 20 Unearned service
0
Total current revenue 1,600
assets 11,70
0
Plant assets: Total current 6,800
liabilities
Equipment
$3,900
Less: accum. STOCKHOLDERS EQUITY
depr. 3,835 Common stock 11,000
(65)
Retained earnings 2,357
Furniture Total stockholders 13,357
$4,700 equity
Less: accum.
depr. 4,62 Total liabilities and ______
(78) 2
Total assets $20,15 stockholders' $20,15

3-78 Financial Accounting 9/e Solutions


7 equity 7

Chapter 3 Accrual Accounting & Income


3- 79
(continued) E 3-47

Req. 7

Journal
CREDI
DATE ACCOUNT TITLES DEBIT T

Closing Entries
Jan. 31 Service Revenue 5,300
Retained Earnings.. 5,300

31 Retained Earnings 1,743


Rent Expense 700
Utilities 200
Expense..
Salary Expense 500
Depreciation Expense 65
Equipment...
Depreciation Expense 78
Furniture..
Supplies 200
Expense.......

31 Retained Earnings 1,200


Dividends.. 1,200

3-80 Financial Accounting 9/e Solutions


(continued) E 3-47

Req. 8

Net = Total current assets $11,700


working - current liabilities - = $4,900
capital $6,800
Total current assets $11,70
Current
= = 0 = 1.72
ratio
Total current liabilities $6,800

Total liabilities $6,800 0.3


Debt ratio = = =
Total assets $20,157 4

The company has an excess of current assets over its current


liabilities. The current and debt ratios indicate an excellent
financial position. The business has $1.72 in current assets for
every $1.00 of current liabilities. The debt ratio of 34% is not
too high, which suggests that, overall, the business should be
able to pay its debts.

Chapter 3 Accrual Accounting & Income


3- 81
Quiz

Q3-48 b
Q3-49 b
Q3-50 c
Q3-51 d
Q3-52 a
Q3-53 b
Q3-54 b
Q3-55 a
Q3-56 b ($3,000 9/12 = $2,250)
Q3-57 d ($5,000 + $22,000 $15,000 = revenue of $12,000)
Q3-58 b
Q3-59 a
Q3-60 b
Q3-61 d
Q3-62 d Current = $29,700 / = 1.183
ratio $25,100
$25,100 + $113,000
Debt ratio = = .633
$29,700 + $188,500
Q3-63 $7,965 ($8,000 $510 $125 + $800 $200)
Q3-64 d Salary Payable
Beg. bal. 20,000
Payment 136,000 Salary exp. 122,000
End. bal. 6,000

3-82 Financial Accounting 9/e Solutions


Problems

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

(All amounts in millions)

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

2. Revenues.. $40
Expenses.. (34)
Net income... $ 6

3. Beginning receivables.. $ 10
Add: Revenues 40
Less: Collections... (25)
Ending receivables $25

Balance sheet
ASSETS
Current assets:
Receivables. $ 25

4. Beginning accounts payable. $ 7


Add: Expenses.. 34
Less: Payments.... (37)
Ending accounts payable $ 4

Balance sheet
LIABILITIES
Current liabilities:
Accounts payable $ 4
Chapter 3 Accrual Accounting & Income
3- 83
3-84 Financial Accounting 9/e Solutions
(20-30 min.) P 3-66A

Req. 1

Masters Consulting
Amount of Revenue (Expense) for July
Date Cash Basis Accrual
Basis
July 1 Expense $(2,000) $ 0
4 Expense (1,000) 0
5 Revenue 800 800
8 Expense (700) (700)
11 Revenue 0 3,400
19 0 0
24 Revenue 3,400 0
26 Expense (2,000) 0
29 Expense (1,500) (1,500)
31 Expense 0 $2,000 5 (400)
=
31 Revenue 0 1,000

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


tax

Req. 3
The accrual-basis measure of net income is preferable because it
accounts for revenues and expenses when they occur, not when
they are received or paid in cash. For example, on July 11, the
company earned $3,400 of revenue and increased its wealth as a
result. The accrual basis records this revenue, but the cash basis
ignores it. On July 24, the business collected the receivable that
Chapter 3 Accrual Accounting & Income
3- 85
was created by the revenue earned on account at July 11. The
accrual basis records no revenue on July 24 because the
companys increase in wealth occurred back on July 11. The cash
basis waits until cash is received, on July 24, to record the
revenue. This is too late.

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

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

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


Prepaid Insurance.. 4,650
To record insurance expense.

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


..
Salary Payable 2,320
To accrue salary expense.

31 c. Interest Receivable. 600


Interest Revenue 600
To accrue interest revenue.

31 d. Supplies Expense..
6,300**
Supplies.. 6,300
To record supplies expense.

31 e. Unearned Service Revenue


($12,100 60%)... 7,260
Service Revenue 7,260
To record revenue collected in advance.

3-86 Financial Accounting 9/e Solutions


31 f. Depreciation Expense Office 3,000
Furniture
Depreciation Expense 6,300
Equipment..
Accumulated Depreciation
Office Furniture.. 3,000
Accumulated Depreciation
Equipment 6,300
To record depreciation expense.
_____
* $1,050 + $4,800 $1,200 = $4,650
** $2,300 + $6,100 $2,100 = $6,300

Chapter 3 Accrual Accounting & Income


3- 87
(45-60 min.) P 3-68A
Req. 1
Lady, Inc.
Adjusted Trial Balance
July 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 8,800 8,800
Accounts receivable 1,600 (a) 1,700 3,300
Prepaid rent 3,000 (b 1,000* 2,000
Supplies 2,100 (c) 1,630 470
Furniture 90,000 90,000
Accumulated 3,000 (d) 4,500
depreciation 1,500**
Accounts payable 3,200 3,200
Salary payable (e) 3,000
3,000***
Common stock 14,000 14,000
Retained earnings 75,060 75,060
Dividends 3,900 3,900
Service revenue 17,000 (a) 1,700 18,700
Salary expense 2,400 (e) 5,400
3,000***
Rent expense (b) 1,000
1,000*
3-88 Financial Accounting 9/e Solutions
Utilities expense 460 460
Depreciation expense (d) 1,500
1,500**
Supplies expense (c) 1,630 _____ 1,630
112,26 112,260 8,830 8,830 118,460 118,460
0
_____

* $3,000 3 = $1,000
** $90,000 5 = $18,000 12 = $1,500
*** $5,000 3/5 = $3,000

Chapter 3 Accrual Accounting & Income 3- 89


(continued) P 3-68A

Req. 2

Lady, Inc.
Income Statement
Month Ended July 31, 2012
Revenues:
Service revenue $18,700
Expenses:
Salary expense $5,400
Supplies expense 1,630
Depreciation expense 1,500
Rent expense 1,000
Utilities expense 460
Total expenses 9,990
Net income $ 8,710

Lady, Inc.
Statement of Retained Earnings
Month Ended July 31, 2012
Retained earnings, July 1, 2012 $75,060
Add: Net income 8,710
83,770
Less: Dividends (3,900)
Retained earnings, July 31, 2012 $79,870

3-90 Financial Accounting 9/e Solutions


(continued) P 3-68A

Req. 2 (continued)

Lady, Inc.
Balance Sheet
July 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ Accounts payable $
8,800 3,200
Accounts receivable 3,300 Salary payable 3,00
0
Prepaid rent 2,000 Total current 6,200
liabilities
Supplies 470
Total current 14,570
assets
Furniture $90,000 STOCKHOLDERS EQUITY

Less: Accum. Common stock 14,000


deprec. 85,500 Retained earnings 79,87
(4,500) 0
Total stockholders 93,870
equity
Total liabilities and

Total assets $100,0 stockholders equity $100,07


70 0

Chapter 3 Accrual Accounting & Income


3- 91
(10-20 min.) P 3-69A

Req. 1

Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T

Apr. 30 Accounts Receivable ($6,830 530


$6,300)..........
Rental 530
Revenue.
To accrue rental revenue.

30 Interest Receivable ($500 $0) 500


..
Interest Revenue ($1,300 $800). 500

To accrue interest revenue.

30 Supplies Expense ($400 $0) 400



Supplies ($1,200 $400) 400

To record supplies expense.

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


..
Prepaid Insurance ($2,400 $1,000) 1,400
..
To record insurance expense.

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


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

3-92 Financial Accounting 9/e Solutions


..
To record depreciation expense.

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


.........
Wages Payable ($700 $0). 700
..
To accrue wage expense.

30 Unearned Rental Revenue ($1,700 400


$1,300)..
Rental Revenue*.. 400
To record revenue that was collected in advance.
_____
* ($20,630 - $19,700 - $530)

Chapter 3 Accrual Accounting & Income


3- 93
(continued) P 3-69A

Req. 2

Total assets = $80,230 ($8,200 + $6,830 + $500 +


$4,900 +
$800 + $1,000 + $69,000 $11,000)

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

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


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

Total equity = $71,430 ($80,230 $8,800) or ($19,000 +


$41,000 + $15,230 - $3,800)

3-94 Financial Accounting 9/e Solutions


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

Req. 1

Simpson Corporation
Income Statement
Year Ended March 31, 2012
Revenues:
Service revenue $105,50
0
Expenses:
Salary expense $39,800
Rent expense 10,100
Insurance expense 4,000
Interest expense 2,700
Supplies expense 2,400
Depreciation expense 1,300 60,30
0
Income before tax 45,200
Income tax expense 7,00
0
Net income $
38,200

Simpson Corporation
Statement of Retained Earnings
Year Ended March 31, 2012
Retained earnings, March 31, 2011 $ 2,000
Add: Net income 38,200
40,200
Chapter 3 Accrual Accounting & Income
3- 95
Less: Dividends (23,000)
Retained earnings, March 31, 2012 $17,200

(continued) P 3-70A

Req. 1 (continued)

Simpson Corporation
Balance Sheet
March 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $ 3,100
1,700
Accounts receivable 8,800 Interest payable 700
Supplies 2,000 Unearned service 800
revenue
Prepaid rent 1,700 Income tax payable 2,400
Note payable 18,400
Equipment $36,00 Total liabilities 25,400
0
Less:
Accum.
deprec. (4,60 31,400 STOCKHOLDERS EQUITY
0)
Common stock 3,000
Retained earnings 17,2

3-96 Financial Accounting 9/e Solutions


00
Total stockholders 20,200
equity
Total liabilities and

Total assets $45,60 stockholders equity $45,600


0

Req. 2

$25,400
Debt ratio: = 0.56
$45,600

Simpson is in compliance with its debt agreement, which


requires the company to maintain a debt ratio no higher than
0.60.

Chapter 3 Accrual Accounting & Income


3- 97
(20 min.) P 3-71A

Req. 1

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

Closing Entries
Mar. 31 Service 94,100
Revenue..
Retained 94,100
Earnings.........

31 Retained 35,200
Earnings..
Advertising 11,000
Expense
Depreciation 1,000
Expense..
Interest Expense.. 300
.
Salary 17,900
Expense..
Supplies 5,000
Expense.

31 Retained 32,500
Earnings..
32,500
Dividends........

Req. 2

Retained Earnings
Mar. 31, 2012 Expenses 35,20 Mar. 31, 2011 Bal. 19,50
0 0

3-98 Financial Accounting 9/e Solutions


Mar. 31, 2012 Dividends 32,50 Mar. 31, 2012 Revenues 94,10
0 0
Mar. 31, 2012 Bal. 45,90
0

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

Req. 3

Retained Earnings increased during the year because net


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

Chapter 3 Accrual Accounting & Income


3- 99
(25-40 min.) P 3-72A

Req. 1
Mountain Lodge Service, Inc.
Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash $
7,500
Accounts receivable
16,600
Prepaid expenses 5,000
Supplies
3,700
Total current assets
32,800
Plant assets:
Equipment $42,500
Less: Accumulated depreciation (6,700) 35,800
Other assets 13,700
Total assets $82,300
LIABILITIES
Current liabilities:
Current portion of note payable $ 400
Accounts payable 14,100
Salary payable 2,500
Unearned service revenue 3,700
Total current liabilities 20,700
Note payable, long-term 5,700
Total liabilities 26,400

3-100 Financial Accounting 9/e Solutions


STOCKHOLDERS EQUITY
Common stock 10,000
Retained earnings 45,900*
Total stockholders equity 55,900
Total liabilities and stockholders equity $82,300

(continued) P 3-72A

Req. 1 (continued)

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


Add: Net income ($94,100 $11,000 $1,000
$300 $17,900 $5,000). 58,900
78,400
Less: Dividends........... (32,500)
Retained earnings, March 31, 2012 $45,900

Req. 2

2012 2011
Net = Total current assets $32,800
working - current liabilities - = $12,100$11,800
capital $20,70
0
Total current assets $32,800
Current 1.2
= Total current = $20,700 = 1.58
ratio 0
liabilities

Chapter 3 Accrual Accounting & Income


3- 101
The increase in both working capital and the current ratio
indicate that the ability to pay current liabilities with current
assets improved during 2012.
2012
2011
Total liabilities $26,400
Debt ratio = = = 0.32 0.25
Total assets $82,300

The overall debt position deteriorated a little during 2012. The


improvement in the current ratio is greater than the
deterioration in the debt ratio. However, Mountain Lodges
overall debt position is strong because a debt ratio of .32 is not
troublesome.

3-102 Financial Accounting 9/e Solutions


(45-60 min.) P 3-73A
Req. 1
(All amounts in millions)

Total current assets $15.


Current 8
= = = 1.84
ratio Total current $8.6
liabilities

$13.9

Total liabilities $8.6 + $5.3


Debt ratio = = = 0.43
Total assets $32.1

Req. 2

Current Ratio Debt Ratio

$15.8 ($8.6 1/2) $13.9 ($8.6 1/2)


a. = 2.67 = 0.35
($8.6 1/2) $32.1 ($8.6 1/2)

$15.8 + $2.0 $13.9 + $2.0


b. = 2.07 = 0.47
$8.6 $32.1 + $2.0

$15.8 + $2.4 $13.9


c. = 2.12 = 0.40
$8.6 $32.1 + $2.4

$15.8 $.7 $13.9


d. = 1.75 = 0.44
$8.6 $32.1 $.7

$15.8 $13.9 + $0.5


e. = 1.74 = 0.45
$8.6 + $0.5 $32.1

Chapter 3 Accrual Accounting & Income


3- 103
$15.8 $1.5 $13.9 + $2.5
f. = 1.66 = 0.47
$8.6 $32.1 + $4.0 $1.5

$15.8 $13.9
g. = 1.84 = 0.44
$8.6 $32.1 $0.4

3-104 Financial Accounting 9/e Solutions


(continued) P 3-73A

Req. 3

a. Revenues usually increase the current ratio.


b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as it is for
Harrington, paying off a current liability will always increase
the current ratio.
f. Borrowing money on long-term debt will always increase the
current ratio and increase the debt ratio.

Chapter 3 Accrual Accounting & Income


3- 105
(15-20 min.) P 3-74B

(All amounts in millions)

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

2. Revenues.. $37
Expenses.. 30
Net income... $ 7

3. Beginning $ 11
receivables.........
Add: 37
Revenues
Less: Collections.. (20)
Ending $ 28
receivables

Balance sheet
ASSETS
Current assets:
Receivables $ 28

4. Beginning accounts payable.. $ 6


Add: Expenses 30
Less: Payments..... (35)
Ending accounts payable. $ 1

Balance sheet
LIABILITIES
Current liabilities:
Accounts payable $1

3-106 Financial Accounting 9/e Solutions


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

Req. 1

Healthy Hearts Consulting


Amount of Revenue (Expense) for December
Date Cash Basis Accrual Basis
Dec. 1 Expense $ (3,500) Expense 0
4 Expense $(900) Expense 0
5 Revenue $500 Revenue $500
8 Expense $(200) Expense $(200)
1 Revenue 0 Revenue $3,100
1
1 Expense 0 Expense 0
9
2 Revenue $3,100 Revenue 0
4
2 Expense $(1,800) Expense 0
6
2 Expense $(800) Expense $(800)
9
3 Expense 0 Expense $(700)
1
3 Revenue 0 Revenue $400
1
Req. 2 Income
(loss)
before tax $(3,600) Income before $2,300
tax

Req. 3

Chapter 3 Accrual Accounting & Income


3- 107
The accrual-basis measure of net income is preferable because it
accounts for revenues and expenses when they occur, not when
they are received or paid in cash. For example, on Dec. 11, the
company earned $3,100 of revenue and increased its wealth as a
result. The accrual basis records this revenue, but the cash basis
ignores it. On Dec. 24, the business collected the receivable that
was created by the revenue earned on account at Dec. 11. The
accrual basis records no revenue on Dec. 24 because the
companys increase in wealth occurred back on Dec. 11. The
cash basis waits until cash is received, on Dec. 24, to record the
revenue. This is too late.

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

Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T

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


Prepaid Insurance................. 3,500
To record insurance expense

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


Salary Payable................... 1,240
To accrue salary expense.

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


Interest Revenue................... 500
To accrue interest revenue.

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


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

3-108 Financial Accounting 9/e Solutions


To record supplies expense.

31 e. Unearned Service Revenue


($11,900 70%)......................... 8,330
Service Revenue................... 8,330
To record revenue that was collected
in advance.

31 f. Depreciation Expense Office .


Furniture............................ 3,500
Depreciation Expense 5,800
Equipment..
Accumulated Depreciation
Office Furniture................. 3,500
Accumulated Depreciation
Equipment......................... 5,800
To record depreciation expense.
_____
* $800 + $3,600 $900 = $3,500
** $2,700 + $6,400 $2,300 = $6,800

Chapter 3 Accrual Accounting & Income


3- 109
(45-60 min.) P 3-77B
Req. 1
Princess, Inc.
Adjusted Trial Balance
August 31, 2012
ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 8,300 8,300
Accounts receivable 1,900 (a) 2,100 4,000
Prepaid rent 2,100 (b) 700* 1,400
Supplies 2,400 (c) 2,090 310
Furniture 63,000 63,000
Accumulated 3,700 (d) 5,450
depreciation 1,750**
Accounts payable 4,000 4,000
Salary payable (e) 3,060
3,060***
Common stock 13,000 13,000
Retained earnings 53,430 53,430
Dividends 4,300 4,300
Service revenue 11,000 (a) 2,100 13,100
Salary expense 2,600 (e) 5,660
3,060***
Rent expense (b) 700* 700
Utilities expense 530 530

3-110 Financial Accounting 9/e Solutions


Depreciation expense (d) 1,750
1,750**
Supplies expense (c) 2,090 _____ 2,090
85,130 85,130 9,700 9,700 92,040 92,040
* $2,100 3 = $700
** $63,000 3 = $21,000 12 = $1,750
*** $5,100 3/5 = $3,060

Chapter 3 Accrual Accounting & Income 3- 111


(continued) P 3-77B

Req. 2 (continued)

Princess, Inc.
Income Statement
Month Ended August 31, 2012
Revenues:
Service revenue $13,100
Expenses:
Salary expense $5,660
Supplies expense 2,090
Depreciation expense 1,750
Rent expense 700
Utilities expense 530
Total expenses 10,730
Net income $2,370

Princess, Inc.
Statement of Retained Earnings
Month Ended August 31, 2012
Retained earnings, August 1, 2012 $53,430
Add: Net income 2,370
55,800
Less: Dividends (4,300)
Retained earnings, August 31, 2012 $51,500

3-112 Financial Accounting 9/e Solutions Manual


(continued) P 3-77B

Req. 2 (continued)

Princess, Inc.
Balance Sheet
August 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $8,30 Accounts payable $
0 4,000
Accounts 4,000 Salary payable 3,06
receivable 0
Prepaid rent 1,400 Total current liabilities 7,060
Supplies 3
10
Total current assets 14,010
Furniture $63,000 STOCKHOLDERS EQUITY
Less: Accum. Common stock 13,000
deprec. 57,550 Retained earnings 51,500
(5,450)
Total stockholders 64,500
equity
______ Total liabilities and ______
Total assets $71,5 stockholders equity $71,56
60 0

Chapter 3 Accrual Accounting and 3-113


Income
(10-20 min.) P 3-78B
Req. 1

Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T

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


.
Rental 500
Revenue.
To accrue rental revenue.

30 Interest Receivable ($400 $0). 400



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

30 Supplies Expense ($700 $0) 700


..........
Supplies ($1,300 $600) 700
.......
To record supplies expense.

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


..
Prepaid Insurance ($2,400 $900) 1,500
..
To record insurance expense.

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


....
Accumulated Depreciation
($10,200 $8,800) 1,400

To record depreciation expense.

3-114 Financial Accounting 9/e Solutions Manual


30 Wage Expense ($2,500 $1,300) 1,200
.
Wages Payable ($1,200 $0).. 1,200
.
To accrue salary expense.

30 Unearned Rental Revenue ($2,000 200


$1,800).
Rental 200
Revenue*..
To record revenue that was collected in
advance.

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

Chapter 3 Accrual Accounting and 3-115


Income
(continued) P 3-78B

Req. 2

Total assets = $75,200 ($8,400 + $6,800 + $400 +


$5,300 + $600 + $900 + $63,000
$10,200)

Total liabilities = $9,300 ($6,300 + $1,200 + $1,800)

Net income = $9,200 ($15,700 + $700 $1,400 $700


$400
$2,500 $700 $1,500)

Total equity = $65,900 ($75,200 $9,300) or ($9,300 +


$46,200
+ $9,200 - $3,500)

3-116 Financial Accounting 9/e Solutions Manual


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

Req. 1

Nicholl Corporation
Income Statement
Year Ended May 31, 2012
Revenues:
Service revenue $97,800
Expenses:
Salary expense $40,200
Rent expense 10,300
Insurance expense 3,600
Interest expense 2,600
Supplies expense 2,500
Depreciation expense 1,200 60,400
Income before tax 37,400
Income tax expense 7,100
Net income $30,300

Nicholl Corporation
Statement of Retained Earnings
Year Ended May 31, 2012
Retained earnings, May 31, 2011 $ 4,000
Add: Net income 30,300
34,300
Less: Dividends (20,000)
Retained earnings, May 31, 2012 $14,300

Chapter 3 Accrual Accounting and 3-117


Income
3-118 Financial Accounting 9/e Solutions Manual
(continued) P 3-79B

Req. 1 (continued)

Nicholl Corporation.
Balance Sheet
May 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $
1,500 3,700
Accounts receivable 8,600 Unearned service
Supplies 2,200 revenue
900
Prepaid rent 1,800 Interest payable
500
Income tax payable 2,100
Equipment $37,300 Note payable 18,800
Less: Total liabilities 26,000
Accum.
deprec. (4,100) 33,200

STOCKHOLDERS EQUITY
Common stock
7,000
Retained earnings 14,300
Total stockholders 21,300
equity
Total liabilities and
Total assets $47,30 stockholders $47,300
0 equity

Chapter 3 Accrual Accounting and 3-119


Income
Req. 2

$26,000
Debt ratio: = 0.55
$47,300

Nicholl Corporations debt ratio of 0.55 is in compliance with


the lenders debt restriction.

(20 min.) P 3-80B


Req. 1

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

Closing Entries
Mar. 31 Service Revenue 91,500
Retained Earnings 91,500

31 Retained Earnings. 36,300


Salary Expense.. 17,700
Supplies Expense. 4,800
Advertising Expense 11,400
Depreciation Expense. 2,000
Interest Expense... 400

31 Retained Earnings. 32,500


Dividends 32,500

Req. 2

3-120 Financial Accounting 9/e Solutions Manual


Retained Earnings
Mar. 31, 2012 Expenses 36,30 Mar. 31, 2011 Bal. 20,00
0 0
Mar. 31, 2012 Dividends 32,50 Mar. 31, 2012 Revenues 91,50
0 0
Mar. 31, 2012 Bal. 42,70
0

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

Req. 3

Retained Earnings increased during the year because net


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

Chapter 3 Accrual Accounting and 3-121


Income
(30-40 min.) P 3-81B
Req. 1

Cool River Service, Inc.


Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash.......................................................... $ 7,400
Accounts receivable................................. 17,000
Prepaid expenses...................................... 3,000
Supplies..................................................... 5,500
Total current assets.............................. 32,900
Plant assets:
Equipment $42,800
Less: accumulated (6,900) 35,900
depreciation
Other assets.................................................. 14,000
Total assets................................................... $82,800
LIABILITIES
Current liabilities:
Accounts payable...................................... $14,400
Current portion of note payable................ 700
Salary payable........................................... 2,600
Unearned service revenue........................ 3,600
Total current liabilities.......................... 21,300
Note payable, long-term................................ 5,600
Total liabilities............................................... 26,900
STOCKHOLDERS EQUITY
Common stock............................................... 13,200

3-122 Financial Accounting 9/e Solutions Manual


Retained earnings ...................................... 42,700*
Total stockholders equity.......................... 55,900
Total liabilities and stockholders equity...... $82,800

Chapter 3 Accrual Accounting and 3-123


Income
(continued) P 3-81B

Req. 1 (continued)
_____
*Computation:
Retained earnings, March 31, 2011.. $ 20,000
Add: Net income ($91,500 $11,400 $2,000
$400 $17,700 $4,800).......... 55,200
75,200
Less: Dividends.. (32,500)
Retained earnings, March 31, 2012.. $42,700

Req. 2
2012 2011
Net = Total current assets $32,900
working - current liabilities - = $11,600
capital $21,30 $11,000
0
Current Total current assets $32,900
= = = 1.54 1.30
ratio Total current liabilities $21,300

The increase in both working capital and the current ratio


indicate that the ability to pay current liabilities with current
assets improved during 2012.

Total liabilities $26,900


Debt ratio = = = 0.32 0.35
Total assets $82,800

Cool River Services overall debt position improved a bit from


2011 to 2012.

3-124 Financial Accounting 9/e Solutions Manual


(45-60 min.) P 3-82B
Req. 1
(All amounts in millions)

Current Total current assets $15.4


= = = 1.64
ratio Total current liabilities $9.4

$14.9

Total liabilities $9.4 + $5.5 0.4


Debt ratio = = =
Total assets $31.2 8
Req. 2

Current Ratio Debt Ratio

$15.4 ($9.4 1/2) $14.9 ($9.4


2.2 1/2)
a. = = 0.38
($9.4 1/2) 8 $31.2 ($9.4
1/2)

$15.4 + $3.0 1.9 $14.9 + $3.0


b. = = 0.52
$9.4 6 $31.2 + $3.0

$15.4 + $2.4 1.8 $14.9 0.4


c. = =
$9.4 9 $31.2 + $2.4 4

$15.4 $.6 1.5 $14.9


d. = = 0.49
$9.4 7 $31.2 $.6

$15.4 1.5 $14.9 + $0.3


e. = = 0.49
$9.4 + $0.3 9 $31.2

$15.4 $2.0 $14.9 + $2.9


1.4
f. $9.4 = $31.2 + $4.9 = 0.52
3
$2.0

Chapter 3 Accrual Accounting and 3-125


Income
g $15.4 1.6 $14.9
= = 0.49
. $9.4 4 $31.2 $0.9

3-126 Financial Accounting 9/e Solutions Manual


(continued) P 3-82B

Req. 3

a. Revenues usually increase the current ratio.


b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as for
Hiaport, paying off a current liability will always increase
the current ratio.
f. Borrowing money on long-term debt will always increase the
current ratio and increase the debt ratio.

Chapter 3 Accrual Accounting and 3-127


Income
Challenge Exercises and Problem

(20-25 min.) E 3-83

(Dollar amounts in thousands)

December 31, 2011


Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)
Net working capital = $5,000 ($11,100 - $6,100)

Current $11,100
= = 1.82
ratio $6,100

December 31, 2012


Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
Net working capital = $5,500 ($10,700 - $5,200)

Current $10,70
= 0 = 2.06
ratio $5,200
_____
Computations of December 31, 2012 balances:
1
Cash = $1,500 $7,300 + $8,100 $1,400 = $900
2
Receivables = $5,900 + $9,000 $8,100 = $6,800
3
No change in the Inventory balance.
4
Prepaid expenses = $1,000 $700 = $300
5
Accounts payable = $2,600 $1,400 = $1,200
6
No change in the Unearned Revenues balance.
7
Accrued expenses payable = $1,900 + $500 = $2,400
3-128 Financial Accounting 9/e Solutions Manual
Conclusion: Valley Forges net working capital and current
ratio improved during 2012. The companys
current ratio is very strong.

(60 min.) E 3-84

a. Net income:

Service revenue:
($161,000 + $1,650 + $32,200) $194,85
. 0
Expenses:
Salary ($37,000 + $3,500) $
. 40,500
Depreciation 2,600
building 3,100
Supplies... 1,500
Insurance.
7,300
Advertising..
2,000
Utilities.
57,000
$137,850
Net income..

b. Total assets:

Cash $ 7,300
Accounts receivable ($7,500 + $32,200) 39,700
1,500
Supplies ($4,600 $3,100) 2,000

$110,00
Prepaid insurance ($3,500 $1,500) 0
.

Chapter 3 Accrual Accounting and 3-129


Income
Building (18,200 91,800
Less: Accum. Depr. )
53,00
($15,600 + $2,600). 0
. $195,300
Land
Total assets.

3-130 Financial Accounting 9/e Solutions Manual


(continued) E 3-84

c. Total liabilities:

Accounts payable............................... $ 6,100


Salary payable.................................... 3,500
Unearned service revenue
($5,500 $1,650)............................ 3,850
Total liabilities.................................... $ 13,450
d.
Total stockholders equity:

Common stock.................................... $ 14,000


Retained earnings, beginning............ $
Add: Net income................................ 46,000

Less: Dividends................................. 137,850


Total stockholders equity..................
197,850
(16,0 167,850
00)
$181,850

e. Total = Total liabilities + Total stockholders equity


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

Chapter 3 Accrual Accounting and 3-131


Income
(20 min.) P 3-85
Express Detail Inc.
Balance Sheet
December 31, 2012

ASSETS LIABILITIES
Cash (a) $ Accounts payable (g) $ 3,000
15,300
Accounts receivable 1,400 Advertising 500
(c) payable(h)
Supplies (d) 1,000 Salary payable (i)
500
Total current 17,700 Unearned gift
assets certificate revenue 1,200
(b)
5,200
Equipment (e) Total liabilities
$35,000
23,000
Less: Accum.
deprec.(f)
(12,000)
STOCKHOLDERS EQUITY
Common stock (j) 18,000
Retained earnings (k) 17,500
Total stockholders 35,500
equity
Total liabilities and
$40,70 stockholders
Total assets $40,700
0 equity

3-132 Financial Accounting 9/e Solutions Manual


(continued) P 3-85
Supporting computations
(a) Cash
Bal. 12/31/2011 1,300
Cash collections from 12,50 Salaries paid
customers 0 Dividends paid
31,00
Issuance of common stock 0 500 Purchase of equipment
8,000 5,000
5,500 Payments of accounts
payable
1,500 Advertising paid
1,500

Bal. 1/31/2012 15,30


0

(b) Unearned Gift Certificate Revenue

800 Bal. 12/31/2011


Gift certificate revenue 600 1,000 Sale of gift certificates
earned
1,200 Bal. 1/31/2012 (given)

(c) Accounts Receivable

Bal. 12/31/2011 2,000


Revenue on account 29,40 30,00 Collections from
0 0 customers*
Bal. 1/31/2012 1,400
* Excludes the $1,000 for gift certificates which was received in advance,
not on account

(d) Supplies

Bal. 12/31/2011 1,500


Purchase of supplies 3,500 4,000 Supplies expense
Bal. 1/31/2012 1,000

Chapter 3 Accrual Accounting and 3-133


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

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

3-134 Financial Accounting 9/e Solutions Manual


(continued) P 3- 85

(g) Accounts payable

5,000 Bal. 12/31/2011


Payments on account 5,500 3,500 Purchase of supplies
3,000 Bal. 1/31/2012

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

(i) Salary Payable

1,000 Bal. 12/31/2011


Salaries paid 12,50 12,00 Salary expense
0 0
500 Bal. 1/31/2012

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

(k) Retained Earnings

12,00 Bal. 12/31/2011


0
Dividends 500 6,000 Net income
17,500 Bal. 1/31/2012

Chapter 3 Accrual Accounting and 3-135


Income
Decision Cases

(25 min.) Decision Case 1

Req. 1 Unadjusted trial balance:


Debit Credit
Cash.. $ 8,000
Accounts receivable. 4,200
Supplies... 800
Prepaid rent 1,200
Land.. 43,000
Accounts payable.. $12,000
Salary payable 0
Unearned service revenue.. 700
Note payable, due in 3 years.. 23,400
Common stock.. 5,000
Retained earnings. 9,300
Service revenue. 9,100
Salary expense... 3,400
Rent expense.. 0
Advertising expense. 900
Supplies expense.. 0
Totals $61,500 $59,500

Out of balance
$2,000

3-136 Financial Accounting 9/e Solutions Manual


(continued) Decision Case 1

Req. 2 Adjusted trial balance:


Debit Credit

Cash... $8,000
Accounts receivable.. 4,200
Supplies ($800 - $400)... 400
Prepaid rent ($1,200 x 11/12) 1,100
Land ($41,000 + $2,000). 43,000
Accounts payable... 12,000
Salary payable. 1,000
Unearned service revenue ($700 - $500) 200
..
Note payable, due in 3 years... 25,400
Common stock 5,000
Retained earnings.. 9,300
Service revenue ($9,100 + $500). 9,600
Salary expense ($3,400 + $1,000) 4,400
Rent expense ($1,200 x 1/12).. 100
Advertising expense.. 900
Supplies expense... 400

Total $62,500 $62,50


0

Req. 3

Chapter 3 Accrual Accounting and 3-137


Income
$8,000 + $4,200 + $400 +
Current ratio = $1,100
$12,000 + $1,000 + $200

$13,70
0
= = 1.04
$13,20
0

We might have trouble sleeping at night with a current ratio of


1.04. To be safe, the current ratio should be around 1.50 or
higher.

3-138 Financial Accounting 9/e Solutions Manual


(20-30 min.) Decision Case 2

Eagle Restaurant, Inc.


Income Statement
Month Ended October 31, 2012
Sales revenue................................. $32,000
Cost of goods sold.......................... $12,000
Wages expense.............................. 5,000
Rent expense................................. 4,000
Insurance expense......................... 1,000
Depreciation expense.................... 1,000 23,000
Net income..................................... $ 9,000

Eagle Restaurant, Inc.


Statement of Retained Earnings
Month Ended October 31, 2012
Retained earnings, October 1, 2012........ $ 0
Add: Net income...................................... 9,000
Less: Dividends....................................... (3,000)
Retained earnings, October 31, 2012...... $6,000

Chapter 3 Accrual Accounting and 3-139


Income
(continued) Decision Case 2

Eagle Restaurant, Inc.


Balance Sheet
October 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $ 7,000
8,000
Food inventory 5,000 Unearned revenue 3,000
Prepaid insurance 1,000 10,000
Dishes, silver 4,000
Fixtures OWNERS EQUITY
$24,000
Less: Accum. Common stock $25,00
0
deprec. 23,00 Retained 6,00 31,00
(1,000) 0 earnings 0 0
Total assets $41,00 Total liabilities and $41,00
0 equity 0

Recommendation: Do not expand the business. It is not


meeting Marks goals for net income or for
total assets.

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(30-40 min.) Decision Case 3

Req. 1 (your highest price)

Advertising revenue ($22,000 + $26,000


$4,000)
Expenses:
Salary $4,000
Utilities 900
Other (unrecorded) 1,100
Salary of your manager 5,000 11,000
Your expected monthly net income $15,000
Multiplier to compute price X 16
Your highest price $240,000

Req. 2 (Williams asking price)

SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2012
Beginning retained earnings $ 93,000
Add: Net income
Revenue ($22,000 + $4,000) $26,000
Less: Expenses ($4,000 +

$900 + $1,100) 20,000


(6,000)
113,000
Less: Dividends
(9,000)
Ending retained earnings $104,000
Common stock 50,000
Stockholders equity, June 30, 2012 $154,000
Chapter 3 Accrual Accounting and 3-141
Income
Multiplier to compute price X 2__
Williams asking price $308,000

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(continued) Decision Case 3

Req. 3

You may start by offering Williams approximately $225,000 for


the business. His asking price is $308,000 so you are starting
out quite far apart. If Williams appears especially eager to sell
out, you may be able to buy the firm for closer to your highest
price of $240,000. However, if he is not so eager to sell and if
you want the business badly enough, you may have to pay
somewhere between $240,000 and $308,000. It might pay to
hire an expert to value the businesss assets. You may find
that Williams price is inflated based on the value of its assets.
You can always raise your offer, but you cannot decrease it, so
start the negotiating process with an offer around $225,000.

Chapter 3 Accrual Accounting and 3-143


Income
Ethical Issues

Ethical Issue 1

1. The journal entry to record the revenue is:

Dec. Accounts Receivable... XXX


Sales Revenue.. XXX

The debit to Accounts Receivable will increase total current


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

The credit to Sales Revenue will increase total owner equity


and, as a result, decrease (improve) the debt ratio.

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


revenue in the current year. The contract has been signed,
but the implication is that the company will not have done
everything it needs to do in order to earn the revenue in the
current year. The stakeholders are the company, the bank,
the stockholders, and the companys other creditors. From
an economic standpoint, the entry would obviously improve
the companys short term financial position. However, the
advantage would probably be short-lived. When the bank
finds out about this entry, they will likely protest, and
demand immediate payment, so the longer-term economic
impact will likely be negative. From a legal standpoint, to
record this transaction in December violates GAAP by
violating the revenue principle. In this case Cross Timbers
has not made the sale (has not delivered the merchandise)
to the customer and, therefore, has not earned the revenue
prior to December 31 of the current year. From an ethical
standpoint, recording this revenue violates the banks rights
for proper disclosure of the companys income and assets.
Revenue should be recorded no earlier than when it is
earned. Cross Timbers expects to earn the revenue in

3-144 Financial Accounting 9/e Solutions Manual


January of next year. Cross Timbers clearly cannot record
this revenue until it is earned. To do so is not in their best
economic, legal (GAAP) or ethical best interests.

(continued) Ethical Issue 1

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


Timbers can either:

a. Report the current ratio of 1.47 and the debt ratio of .51
because these are the true values. Then tell the bank of
the signed contract for additional work and the hope for a
better set of ratio values next year. In some cases, banks
will agree to sign a waiver of the terms of loan covenants,
meaning that, although the company is in violation, the
bank will not move to enforce the covenant. They may
give Cross Timbers a grace period to cure the violation
in the covenant.

b. Pay off some current liabilities before year end. This will
improve both the current ratio and the debt ratio. This may
enable Cross Timbers to bring its ratio values into
compliance with the banks requirements.

Chapter 3 Accrual Accounting and 3-145


Income
Ethical Issue 2

1. These transactions overstate the reported income of the


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

2. It appears that Almond wants to improve the companys


reported income in order to borrow on favorable terms. Her
action is unethical and probably illegal as well because she
is deliberately overstating the companys reported income.
Almond appears to be letting the potential short term
economic advantage of these deliberate misstatements take
precedence. She needs to remember that these
misstatements violate GAAP, and that, depending on what
use is made of the financial statements, could subject the
company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not
even come close to the long-term economic costs
associated with the legal actions, not to mention the
negative publicity. The business will need a bank loan, and
perhaps the money would be used to pay bills, expand the
business, and so on. However, based on Almonds lack of
integrity, the money may be destined for her own use.
Regardless of its use, the money is obtained under false
pretenses and cannot be headed for a good outcome.

3-146 Financial Accounting 9/e Solutions Manual


The bank is harmed by Almonds and Lails actions.
Lending money to Almond under false pretenses may lead
the bank to charge an unrealistically low interest rate that
robs the banks owners of interest revenue. In the extreme,
the public is robbed if taxpayers wind up financing the
bailout of a failed institution.
3. Personal advice will vary from student to student. The
purpose of asking this question is to challenge students to
take the high road of ethical conduct by having nothing to do
with Almonds scheme. The authors would advise Lail, the
accountant, to take these actions, in order:
a. Refuse to take any part in Almonds scheme, explaining
that the result is overstatement of reported income. This
is both illegal and unethical, and will ultimately have a
negative economic impact on the company, as well.
Accountants are bound to standards of ethical conduct
that these actions violate. The can go to prison when
caught falsifying financial statements.
b. To remain ethical, the accountant must be willing to lose
his/her job. It is better to protect ones reputation even if
that causes a short-term hardship.

Chapter 3 Accrual Accounting and 3-147


Income
Focus on Financials: Amazon.com, Inc.

(15-20 min.)

Req. 1

Accrued expenses are expenses that have been incurred but


that have not yet been paid as of the balance sheet date. The
accrual and matching concepts require that all expenses be
recognized (recorded) during the period in which they are
incurred in order to earn revenue, regardless of when they are
paid.

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

Accrued expenses and other


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

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(continued) Focus on Financials: Amazon.com, Inc.

Req. 3 (amounts in millions)

Journal
DATE ACCOUNT TITLES DEBIT CREDIT

a. Accrued expenses and other. 1,759


Cash.. 1,759

b. Operating expenses.. 6,237


Cash..... 3,916
Accrued expenses and other 2,321

The balance of Accrued Expenses and Other agrees with the


financial statements at December 31, 2010.

Chapter 3 Accrual Accounting and 3-149


Income
(continued) Focus on Financials: Amazon.com, Inc.

Req. 5

Current ratio:
2010 2009
(Dollar amounts in millions)
Total current assets $13,747 $9,797
1.3
Total current = $10,372 = 1.33 $7,364 =
3
liabilities

Working Capital:
2010 2009
Current Assets $13,747- $3,37 $9,797 - $2,43
= = =
Current liabilities $10,372 5 $7,364 3

Debt ratio:
2010 2009
Total liabilities $11,933* $8,556**
= = 0.64 = 0.62
Total assets $18,797 $13,813
*10,372 + 1,561
**7,364 + 1,192

The current ratio did not change, working capital increased


substantially, and the debt ratio slightly worsened during 2010.
This reveals slightly weakening leverage but with sustained
liquidity. Also, the size of the firm overall has increased
(indicated by total assets) and its working capital has
increased as well to support Amazon.com now that it is a
larger firm.

3-150 Financial Accounting 9/e Solutions Manual


Focus on Analysis: RadioShack, Corp.

(15-20 min.)

Req. 1

The beginning balance of Accounts Receivable, $322.5 million


represents revenue earned in fiscal 2009 but not received until
fiscal 2010 The ending balance of Accounts Receivable, $377.5
million, represents revenue earned in fiscal 2010 but not
received until fiscal 2011.

According to footnote 3, the receivables are due from vendors,


trade accounts receivables, and other receivables. The
amount due from vendors likely represents deposits made by
RadioShack whereas the trade accounts receivables are likely
due from customers.

Req. 2
Since Deferred Income Taxes is a current asset, it is most likely similar to a
prepaid asset, meaning taxes have been paid but will be expensed sometime
in the future. When the taxes are expensed in the future, the asset, Deferred
Income Taxes will decrease as in the following entry:
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Income Tax Expense... 8
Deferred Income Taxes.... 8
Chapter 3 Accrual Accounting and 3-151
Income
Req. 3
Since depreciation expense increases Accumulated
Depreciation $70 million, a decrease of $49 million ($799 + $70
- $820) must have occurred

(continued) Focus on Analysis

as well. The decrease is most likely from the sale of property,


plant, and equipment.

Req. 4
Accrued Advertising Payable represents an accrued liability
account. When the company incurs advertising expense, this
current liability account is credited. When the company pays
the advertising company, these amounts are debited to
Accrued Advertising Payable.

The expense relating to this accrued advertising was recorded


in the year the expense was incurredwhen the advertising
first takes place (Note 2) Accordingly, the $26.9 million
accrued advertising represents advertising incurred in fiscal
2010 but not paid until fiscal 2011.

3-152 Financial Accounting 9/e Solutions Manual


From 2009 to 2010, RadioShack, Corp.s advertising expense
increased from $193 million to $206 million.(Note 2). By
reconstructing the accrued liability account, the amount
RadioShack paid for advertising during fiscal 2010 can be
derived.

Accrued Advertising Expense (Payable)


Beg. Bal. $31.4
Adv. Paid $211.6 Adv. Exp. 206.1
End. Bal. 26.9

Chapter 3 Accrual Accounting and 3-153


Income
Group Project

(45 min.)

Req. 1

Trozo Lawn Service, Inc.


Income Statement
Four Months Ended August 31
Service revenue ($5,600 + $600) $6,200
Expenses:
Wage expense ($1,900 + $200) $2,100
Rent expense ($600 4/6) 400
Supplies expense ($400 $50) 350
Repair expense 300
Depreciation expense ($300 1/3) 100
Total expenses 3,250
Net income $2,950

3-154 Financial Accounting 9/e Solutions Manual


(continued) Group Project

Req. 2

Trozo Lawn Service, Inc.


Balance Sheet
August 31
ASSETS LIABILITIES
Current: Current:
Cash $2,640 Wages payable $
200
Accounts receivable 600 Total current liabilities
200
Receivable from
Ludwig
(or Prepaid rent) 200
Supplies 50 STOCKHOLDERS
Total current assets 2,890 EQUITY
Long-term: Common stock 1,060
Trailer $300 Retained earnings
Less ($2,950 $460) 2,49
accum. 0
deprec. (100) 200 Total stockholders 2,890
equity
Total liabilities and

Total assets $3,690 stockholders $3,69


equity 0

Chapter 3 Accrual Accounting and 3-155


Income
(continued) Group Project

Req. 3

Trozo Lawn Service, Inc.


Statement of Cash Flows
Four Months Ended August 31
Cash flows from operating activities:
Collections from $ 5,600
customers
Payments:
For supplies...................................... $ 400
To employees.................................... 1,900
For rent............................................. 600
For repairs........................................ 300 3,200
Net cash provided by operating activities 2,400

Cash flows from investing activities:


Purchase of trailer............................ $(300)
Net cash used for investing activities (300)

Cash flows from financing activities:


Issued note payable to father.......... $ 1,500
Repayment of loan to father (1,500)
Payment of dividends....................... (460)
Issuance of common stock.............. 1,000
Net cash used for financing 540
activities...................................................
Net increase in cash... $ 2,640
Cash balance, beginning.. -0-
Cash balance, ending $ 2,640

3-156 Financial Accounting 9/e Solutions Manual


Req. 4

Matt was successful because his lawn service was profitable


and had a positive cash flow from operating activities. Matt
was also able to pay off his loan and pay a dividend.

Chapter 3 Accrual Accounting and 3-157


Income