Solution manual accounting 21e by warreni ch 04

1 The first entry closes all income statement accounts with credit balances by transferring the total to the credit side of Income Summary.. 2 The second entry closes all income statemen

COMPLETING THE ACCOUNTING CYCLE

CLASS DISCUSSION QUESTIONS

1 a The financial statements are the most

important output of the accounting

cycle.

b Yes, all companies have an accounting

cycle that begins with analyzing and

journalizing transactions and ends with

a post-closing trial balance However,

companies may differ in how they

implement the steps in the accounting

cycle For example, while most

companies use computerized

accounting systems, some companies

may use manual systems.

2 No The work sheet is a device used by the

accountant to facilitate the preparation of

statements and the recording of adjusting

and closing entries.

3 Net loss The expenses exceed the

revenues.

4 Net income The revenues exceed the

expenses by $68,500.

5 a Current assets are composed of cash

and other assets that may reasonably

be expected to be realized in cash or

sold or consumed in the near future

through the normal operations of the

business.

b Property, plant, and equipment is

composed of assets used in the

business that are of a permanent or

relatively fixed nature.

6 Current liabilities are liabilities that will be

due within a short time (usually one year or

less) and that are to be paid out of current

assets Liabilities that will not be due for a

comparatively long time (usually more than

one year) are called long-term liabilities.

7 Revenue, expense, and drawing accounts

are generally referred to as temporary

accounts.

8 Closing entries are necessary at the end of

an accounting period (1) to transfer the

balances in temporary accounts to

permanent accounts and (2) to prepare the

temporary accounts for use in

accumulating data for the following

accounting period.

9 Adjusting entries bring the accounts up to

date, while closing entries reduce the

revenue, expense, and drawing accounts to zero balances for use in accumulating data for the following accounting period.

10 (1) The first entry closes all income

statement accounts with credit balances by transferring the total to the credit side of Income Summary.

(2) The second entry closes all income

statement accounts with debit balances

by transferring the total to the debit side of Income Summary.

(3) The third entry closes Income

Summary by transferring its balance, the net income or net loss for the year,

to the owner’s capital account.

(4) The fourth entry closes the drawing

account by transferring its balance to the owner’s capital account.

11 The purpose of the post-closing trial

balance is to make sure that the ledger is in balance at the beginning of the next period.

12 The natural business year is the fiscal year

that ends when business activities have reached the lowest point in the annual operating cycle.

13 January is more likely to have a lower level

of business activity than is December for a department store Therefore, the additional work to adjust and close the accounts and prepare the financial statements can more easily be performed at the end of January than at the end of December.

14 All the companies listed are general

merchandisers whose busiest time of the year is during the holiday season, which extends through most of December Traditionally, the lowest point of business activity for general merchandisers will be near the end of January and the beginning

of February Thus, these companies have chosen their natural business year for their fiscal years.

15 Yes If a company has positive working

capital, then its current assets must exceed its current liabilities Thus, the current ratio will always be greater than one.

133

ITHACA SERVICES CO.

Work Sheet For the Year Ended January 31, 2006

Adjusted Trial Balance Adjustments Trial Balance

ITHACA SERVICES CO.

Work Sheet For the Year Ended January 31, 2006

Trial Balance Statement Sheet

Income Statement For the Year Ended January 31, 2006

Fees earned $67

Expenses: Wages expense $17

Rent expense 8

Insurance expense 6

Utilities expense 6

Depreciation expense 5

Supplies expense 5

Miscellaneous expense 2

Total expenses 49

Net income $18

ITHACA SERVICES CO Statement of Owner’s Equity For the Year Ended January 31, 2006 Terry Dagley, capital, February 1, 2005 $112

Net income for the year $18

Less withdrawals 8

Increase in owner’s equity 10

Terry Dagley, capital, January 31, 2006 $122

ITHACA SERVICES CO Balance Sheet January 31, 2006 Assets Liabilities Current assets: Current liabilities: Cash $ 8 Accounts payable $26

Accounts receivable 57 Wages payable 1

Supplies 3 Total liabilities $ 27

Prepaid insurance 6

Total current assets $ 74

Property, plant, and Owner’s Equity equipment: Terry Dagley, capital 122

Land $50

Equipment $32

Less accum depr 7 25

Total property, plant, and equipment 75 Total liabilities and Total assets $149 owner’s equity $149

138

Jan 31 Accounts Receivable 7

Fees Earned 7

31 Supplies Expense 5

Supplies 5

31 Insurance Expense 6

Prepaid Insurance 6

31 Depreciation Expense 5

Accumulated Depreciation—Equipment 5

31 Wages Expense 1

Wages Payable 1

Ex 4–9 2006 Jan 31 Fees Earned 67

Income Summary 67

31 Income Summary 49

Wages Expense 17

Rent Expense 8

Insurance Expense 6

Utilities Expense 6

Depreciation Expense 5

Supplies Expense 5

Miscellaneous Expense 2

31 Income Summary 18

Terry Dagley, Capital 18

31 Terry Dagley, Capital 8

Terry Dagley, Drawing 8

139

LARYNX MESSENGER SERVICE

Income Statement For the Year Ended June 30, 2006 Fees earned $273,700 Operating expenses:

FEDEX CORPORATION Income Statement For the Year Ended May 31, 2002

(in millions) Revenues $ 15,327 Operating expenses:

Salaries and employee benefits $6,467

Rentals and landing fees 1,524

Fuel 1,009

Maintenance and repairs 980

Depreciation and amortization 806

Purchased transportation 562

Other operating expenses 3,168 Total operating expenses 14,516 Income from operations $ 811

Interest expense $ 56

Other expenses 52 108

Net income before income tax $ 703

Less provision for income taxes 260

Net income $ 443

b The income statements are very similar The actual statement includes some additional information (i.e., earnings per share).

Ex 4–13

SYNTHESIS SYSTEMS CO.

Statement of Owner’s Equity For the Year Ended October 31, 2006 Suzanne Jacob, capital, November 1, 2005 $173,750 Net income for year $44,250

Less withdrawals 12,000

Increase in owner’s equity 32,250 Suzanne Jacob, capital, October 31, 2006 $206,000

141

BOBCAT SPORTS Statement of Owner’s Equity For the Year Ended August 31, 2006 John Kramer, capital, September 1, 2005 $210,300 Net loss for year $49,650

142

TUDOR CO.

Balance Sheet April 30, 2006

Cash $ 31,500 Accounts payable $9,500

Supplies 1,800 Unearned fees 1,200

Prepaid rent 4,800

Equipment $80,600

Less accumulated depreciation 21,100 59,500 Total liabilities and

Total assets $126,650 owner’s equity $126,650

1 The date of the statement should be "May 31, 2006" and not "For the Year Ended May 31, 2006."

2 Accounts payable should be a current liability.

3 Land should be classified as property, plant, and equipment.

4 "Accumulated depreciation" should be deducted from the related fixed asset.

5 An adding error was made in determining the amount of the total property, plant, and equipment.

6 Accounts receivable should be a current asset.

7 Net loss should be reported on the income statement.

8 Wages payable should be a current liability.

A corrected balance sheet would be as follows:

WARBURG SERVICES CO.

Balance Sheet May 31, 2006

Cash $ 4,170 Accounts payable $7,250

Accounts receivable 12,500 Wages payable 1,500

Supplies 1,650 Total liabilities $ 8,750 Prepaid insurance 2,400

Property, plant, and equipment:

Building $55,500 Erin Gentry, capital 131,750 Less accum depreciation 23,000 32,500

Equipment $28,280

Less accum depreciation 16,000 12,280

Total property, plant, and

equipment 119,780 Total liabilities and

Total assets $140,500 owner’s equity $140,500

Accounts Receivable 4,100

Fees Earned 4,100 Supplies Expense 1,300

Supplies 1,300 Insurance Expense 2,000

Prepaid Insurance 2,000 Depreciation Expense 2,800

Wages Expense 1,000

Wages Payable 1,000 Unearned Rent 2,500

Mar 31 Fees Earned 180,700

Income Summary 180,700

31 Income Summary 285,200

Wages Expense 180,000 Rent Expense 75,000 Supplies Expense 24,000 Miscellaneous Expense 6,200

31 Emil Carr, Capital 104,500

Income Summary 104,500

31 Emil Carr, Capital 50,000

Emil Carr, Drawing 50,000

RHOMBIC REPAIRS CO.

Post-Closing Trial Balance March 31, 2006 Cash 9,225

Accounts Receivable 33,300

Supplies 1,980

Equipment 63,000

Accumulated Depreciation—Equipment 19,980 Accounts Payable 11,250 Salaries Payable 2,700 Unearned Rent 5,400 Angie Hammill, Capital 68,175

It appears, however, that Home Depot’s 2003 working capital and current ratio are adequate.

a (1) Sales Salaries Expense 6,480

Salaries Payable 6,480 (2) Accounts Receivable 10,250

a (1) Payment (last payday in year)

(2) Adjusting (accrual of wages at end of year)

Wages Payable 18,000 (3) Income Summary 1,120,800

Wages Expense 1,120,800 (4) Wages Payable 18,000

Wages Expense 18,000 (5) Wages Expense 43,000

Cash 43,000

Prob 4–1A

Work Sheet For the Year Ended July 31, 2006

Account Title Dr Cr Dr Cr Dr Cr Dr Cr Dr Cr 1 Cash 2,900 2,900 2,900 1

2 Laundry Supplies 7,500 (c) 5,750 1,750 1,750 2

3 Prepaid Insurance 4,800 (d) 2,400 2,400 2,400 3

4 Laundry Equipment 109,050 109,050 109,050 4

5 Accum Depreciation 41,100 (b) 6,800 47,900 47,900 5 6 Accounts Payable 6,100 6,100 6,100 6 7 David Duffy, Capital 37,800 37,800 37,800 7 8 David Duffy, Drawing 2,000 2,000 2,000 8

9 Laundry Revenue 165,000 165,000 165,000 9

10 Wages Expense 71,400 (a) 1,200 72,600 72,600 10

11 Rent Expense 36,000 36,000 36,000 11

12 Utilities Expense 13,650 13,650 13,650 12

13 Misc Expense 2,700 2,700 2,700 13

14 250,000 250,000 14 15 Wages Payable (a) 1,200 1,200 1,200 15 16 Depreciation Expense (b) 6,800 6,800 6,800 16

17 Laundry Supp Expense (c) 5,750 5,750 5,750 17

18 Insurance Expense (d) 2,400 2,400 2,400 18

2 DYNAMITE LAUNDRY

Income Statement For the Year Ended July 31, 2006 Laundry revenue $165,000 Operating expenses:

Less withdrawals 2,000

Increase in owner’s equity 23,100 David Duffy, capital, July 31, 2006 $ 60,900

DYNAMITE LAUNDRY Balance Sheet July 31, 2006

Cash $ 2,900 Accounts payable $6,100

Prepaid insurance 2,400 Total liabilities $ 7,300

Property, plant, and

Less accum depr 47,900 61,150 Total liabilities and

Total assets $ 68,200 owner’s equity $ 68,200

Adjusting Entries 2006

July 31 Wages Expense 1,200

Closing Entries 2006

July 31 Laundry Revenue 165,000

Income Summary 165,000

31 Income Summary 139,900

Wages Expense 72,600 Rent Expense 36,000 Utilities Expense 13,650 Miscellaneous Expense 2,700 Depreciation Expense 6,800

Insurance Expense 2,400

31 Income Summary 25,100

David Duffy, Capital 25,100

31 David Duffy, Capital 2,000

David Duffy, Drawing 2,000

Taxes Expense 4,150 Insurance Expense 1,000 Miscellaneous Expense 1,700

31 Income Summary 60,500

Kim Bosworth, Capital 60,500

31 Kim Bosworth, Capital 10,000

Kim Bosworth, Drawing 10,000 2.

THE XAVIER COMPANY Statement of Owner’s Equity For the Year Ended August 31, 2006 Kim Bosworth, capital, September 1, 2005 $113,500 Net income for the year $60,500

Work Sheet For the Month Ended March 31, 2006

LITHIUM SERVICES CO.

Income Statement For the Month Ended March 31, 2006 Revenues:

Service revenue $43,484

Rent revenue 100

Total revenues $43,584 Operating expenses:

LITHIUM SERVICES CO.

Statement of Owner’s Equity For the Month Ended March 31, 2006 Natasha Morrow, capital, March 1, 2006 $52,825 Additional investment during the month 5,000 Total $57,825 Net income for the month $18,017

Less withdrawals 2,000

Increase in owner’s equity 16,017 Natasha Morrow, capital, March 31, 2006 $ 73,842

LITHIUM SERVICES CO.

Balance Sheet March 31, 2006

Cash $ 4,509 Accounts payable $5,141

Supplies 300 Unearned rent 2,100

Prepaid insurance 1,650 Total liabilities $ 7,742

Property, plant, and equipment:

Building $55,500 Natasha Morrow, capital 73,842 Less accumulated depreciation 24,025 31,475

Equipment $30,000

Less accumulated depreciation 10,400 19,600

Total property, plant, and

equipment 71,075 Total liabilities and

Total assets $ 81,584 owner’s equity $81,584

Natasha Morrow, Capital 31 18,017

31 Natasha Marrow, Capital 31 2,000

LITHIUM SERVICES CO.

Post-Closing Trial Balance March 31, 2006 Cash 4,509

Accumulated Depreciation—Equipment 10,400 Accounts Payable 5,141 Wages Payable 501 Unearned Rent 2,100 Natasha Morrow, Capital 73,842

116,009 116,009

Work Sheet For the Year Ended April 30, 2006

Accounts Receivable 2,800

Fees Revenue 2,800 Insurance Expense 450

Prepaid Insurance 450 Supplies Expense 700

Supplies 700 Depreciation Expense—Building 1,620

Depreciation Expense—Equipment 3,500

Salaries and Wages Expense 1,800

Salaries and Wages Payable 1,800 Unearned Rent 1,500

Rent Revenue 1,500

HERITAGE COMPANY Adjusted Trial Balance April 30, 2006 Cash 3,200 Accounts Receivable 13,300 Prepaid Insurance 1,350 Supplies 650 Land 50,000 Building 136,500 Accumulated Depreciation—Building 52,320 Equipment 92,700 Accumulated Depreciation—Equipment 39,800 Accounts Payable 6,500 Unearned Rent 1,500 Salaries and Wages Payable 1,800 Shelby Powers, Capital 212,500 Shelby Powers, Drawing 10,000 Fees Revenue 193,800 Rent Revenue 1,500 Salaries and Wages Expense 98,000 Advertising Expense 63,200 Utilities Expense 18,000 Repairs Expense 12,500 Depreciation Expense—Equipment 3,500 Insurance Expense 450 Supplies Expense 700 Depreciation Expense—Building 1,620 Miscellaneous Expense 4,050

HERITAGE COMPANY Income Statement For the Year Ended April 30, 2006 Revenues:

Fees revenue $193,800

Rent revenue 1,500

Total revenues $195,300 Operating expenses:

Salaries and wages expense $ 98,000

Add withdrawals 10,000

Decrease in owner’s equity 16,720 Shelby Powers, capital, April 30, 2006 $195,780

HERITAGE COMPANY Balance Sheet April 30, 2006

Cash $ 3,200 Accounts payable $6,500

Prepaid insurance 1,350 payable 1,800

Supplies 650 Unearned rent 1,500

Property, plant, and equipment:

Building $136,500 Shelby Powers, capital 195,780 Less accum depreciation 52,320 84,180

Equipment $ 92,700

Less accum depreciation 39,800 52,900

Total property, plant, and

equipment 187,080 Total liabilities and

Total assets $205,580 owner’s equity $205,580

7 $195,300 ÷ $205,580 = 95%

2 PABLO REPAIRS

Work Sheet For the Year Ended December 31, 2006