Solution manual financial accounting 4e by wild chapter03

Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and po

2 The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis Also, the accrual basis increases the comparability of financial statements from one period to the next Thus, business decision makers generally prefer the accrual basis

3 Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year

4 A prepaid expense is an item paid for in advance of receiving its benefits As such, it

is reported as an asset on the balance sheet

5 Long-term tangible plant assets such as equipment, buildings, and machinery lead

to adjustments for depreciation Generally, land is the only long-term tangible plant asset that does not require depreciation

6 The Accumulated Depreciation contra account is used for depreciation It provides financial statement users with additional information about the relative age of the assets Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement

7 Unearned revenue refers to cash received in advance of providing products and services Another name for an unearned revenue is deferred revenue It is reported

as a liability on the balance sheet

8 An accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period Therefore, end-of-period adjustments are made to record accrued revenue Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed

9. A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries

10 For Best Buy, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts If the adjusting entries are not made, net income would

be overstated Note: Students might also correctly identify accounts receivable,

goodwill, and tradename as needing adjustment

11 Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly other assets and liabilities such as Receivables for bad debts (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.)

12 The accrued Wages Expense would be reported as part of ―Accrued Expenses‖ on Apple’s balance sheet.

13 Closing entries at the end of the current period prepare the revenues (and gains), expenses (and losses), and dividends accounts for the next period by giving them zero balances Closing entries also update the retained earnings account for the events of the year just finished Closing entries do not affect the asset and liability accounts

14 (i) Closing entries prepare the temporary accounts—revenue and expense (and gain and loss) accounts and dividends—for the next period by giving them zero balances (ii) Closing entries also update the retained earnings account for the events of the period just completed

15 The four-step closing entry process is: (i) close the revenue (and gain) accounts to the Income Summary account, (ii) close the expense (and loss) accounts to the Income Summary account, (iii) close the Income Summary account to the Retained Earnings account, and (iv) close the Dividends account to the Retained Earnings account

16 The Income Summary account is used to summarize the period’s revenues and expenses As a result, it temporarily has a balance equal to the net income (or net

loss) for the period (Instructor note: Closing can be accomplished without the

Income Summary account by closing revenue and expense accounts directly to the retained earnings account.)

17 Yes, an error would have occurred because a post-closing trial balance should only include permanent accounts, and Depreciation Expense is a temporary account that should have been closed If an expense appears on the post-closing trial balance,

20 A company’s operating cycle is the normal time between paying cash for merchandise inventory or for employee salaries in providing customer services and the receipt of cash from customers in exchange for those products or services

21 Assets on a typical classified balance sheet include current assets and noncurrent assets—where noncurrent assets usually include long-term investments, plant assets, and intangible assets Liabilities are typically classified as current and noncurrent Note that the terms short-term and long-term are sometimes used for current and noncurrent

22 Unearned revenue is reported as a liability—usually a current liability

23 Plant assets (also called property, plant and equipment or long-lived assets) are tangible long-lived assets used to produce or sell goods or services

24. C Reversing entries simplify subsequent entries for accrued expenses and accrued revenues by eliminating the need to record the removal of the accrued liability or accrued receivable when the accrual is settled

25. C The following reversing entry could be made as of the first day of the next accounting period, after the post-closing trial balance is completed and financial statements are prepared

28 The closing entry recorded on September 25, 2004, to transfer the company’s net income to its Retained Earnings account would likely have been (in millions):

Income Summary 276

Retained Earnings 276

e PE Prepaid expenses (Depreciation)

Quick Study 3-2 (15 minutes)

Accounts Debited and Credited Financial Statement

c Debit Accounts Receivable Balance Sheet

d Debit Insurance Expense Income Statement

Credit Prepaid Insurance Balance Sheet

e Debit Depreciation Expense Income Statement

Credit Accumulated Depreciation Balance Sheet

Quick Study 3-3 (15 minutes)

a Insurance Expense 1,200

Prepaid Insurance 1,200

Quick Study 3-4 (10 minutes)

a Depreciation Expense—Equipment 3,600

Accumulated Depreciation—Equipment 3,600

To record depreciation expense for the year

($20,000 - $2,000) / 5 years = $3,600

b No depreciation adjustment is made for land as it is

expected to last indefinitely

Quick Study 3-5 (10 minutes)

Salaries Expense 400

Salaries Payable 400

To record salaries incurred but not yet paid

[The one student earns $100 x 4 days M–R]

Quick Study 3-6 (15 minutes)

a Unearned Revenue 7,500

Legal Revenue 7,500

To recognize revenue earned ($10,000 x 3/4)

b Unearned Subscription Revenue 1,200

Subscription Revenue 1,200

To recognize subscription revenue earned

[100 x ($24 / 12 month) x 6 months]

Quick Study 3-7 (15 minutes)

2 Adjust the Unearned Services Revenue account

to recognize earned revenue

3 Record the earning of services revenue for which

cash will be received the following period

Quick Study 3-8 (10 minutes)

The answer is b

Explanation:

The debit balance in Prepaid Insurance was reduced by $400, implying a

$400 debit to Insurance Expense The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense

Quick Study 3-9 (20 minutes)

Cash Accounting

Revenues (cash receipts) $37,000 Expenses (cash payments: $25,500 - $5,250 + $6,750) 27,000 Net income (cash-basis) $10,000 Accrual Accounting

Revenues (earned) $45,000 Expenses (incurred) 25,500 Net income (accrual-basis) $19,500

Quick Study 3-10 (15 minutes)

The answer is 2

Explanation:

Insurance premium error

Understates expenses (and overstates assets) by $1,600 Accrued salaries error

Understates expenses (and understates liabilities) by 1,000 Combination of errors

Understates expenses by $2,600

Quick Study 3-11 (20 minutes)

Income Summary balance after closing revenues and expenses:

Revenues: $45,000 + $6,000 = $51,000 Cr

Expenses: $29,000 + $9,000 + $3,000 = - 41,000 Dr

Credit balance (equal to net income) = $10,000 Cr

Retained Earnings balance after all closing entries:

Beginning balance $28,000

Plus net income 10,000

38,000 Less dividends 7,200

Ending balance $30,800

Quick Study 3-12 (5 minutes)

1 (e) Analyzing transactions and events

2 (h) Journalizing transactions and events

3 (a) Posting the journal entries

4 (g) Preparing the unadjusted trial balance

5 (b) Journalizing and posting adjusting entries

6 (c) Preparing the adjusted trial balance

7 (f) Preparing the financial statements

8 (d) Journalizing and posting closing entries

9 (i) Preparing the post-closing trial balance

Quick Study 3-13 (10 minutes)

Quick Study 3-14 (15 minutes)

Dec 31 Services Revenue 13,000

Income Summary 13,000

To close the revenue account

31 Income Summary 10,000

Wages Expense 8,400 Rent Expense 1,600

To close the expense accounts

To close the dividends account

Quick Study 3-15 (5 minutes)

The only account from QS 3-15 that would appear in a post-closing trial balance is Retained Earnings

Quick Study 3-16 (10 minutes)

Profit margin = $48,152 / $425,000 = 11.3%

Interpretation: For every one dollar that Sidone Company records as revenue, it earns 11.3 cents in net income Sidone’s 11.3% is markedly lower than its competitors’ average profit margin of 15% Accordingly, Sidone should focus on improving its profit margin to at least be competitive.

Quick Study 3-17 (10 minutes)

Unearned services revenue 3,000

Total current liabilities $14,000

Quick Study 3-20 B (20 minutes)

CLAUDELL COMPANY Work Sheet Unadjusted

Trial Balance Adjustments

Adjusted Trial Balance

Income Statement Balance Sheet

Quick Study 3-21 C (15 minutes)

2007 Not required

Dec 31 Accounts Receivable 12,000

Management Fees Earned 12,000

To record accrued revenue

Management Fees Earned 26,700

To record collection of management fees

To record office supplies used ($700 + $3,480 - $298)

d Unearned Fee Revenue 10,000

To record depreciation expense for the year

d Office Supplies Expense 4,992

To record accrued and current wages

Wages expense = 5 workers x 3 days x $250

Cash = 5 workers x 4 days x $250

Exercise 3-4 (25 minutes)

a

Apr 30 Legal Fees Expense 3,500

Legal Fees Payable 3,500

To record accrued legal fees

May 12 Legal Fees Payable 3,500

Exercise 3-4 (concluded)

c

Apr 30 Salaries Expense 4,000

Salaries Payable 4,000

To record accrued salaries ($10,000 x 2/5 week)

May 3 Salaries Payable 4,000

Cash Basis

Basis **

Cash Basis

Accrual insurance expense equals months covered in the year x $500 per month

Months Covered Expense

To close the expense accounts

Debit Credit Cash $19,000

Supplies 13,000

Prepaid insurance 3,000

Equipment 24,000

Exercise 3-7 (20 minutes)

WILSON TRUCKING COMPANY

Income Statement For Year Ended December 31, 2008 Trucking fees earned $130,000 Expenses

WILSON TRUCKING COMPANY Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007 $ 75,000 Plus: Net income 25,500

100,500 Less: Dividends (20,000) Retained earnings, December 31, 2008 $ 80,500

Exercise 3-8 (20 minutes)

WILSON TRUCKING COMPANY

Balance Sheet December 31, 2008 Assets

Current assets

Cash $ 8,000 Accounts receivable 17,500 Office supplies 3,000 Total current assets 28,500 Plant assets

Trucks $172,000

Accumulated depreciation-Trucks (36,000) 136,000 Land 85,000 Total plant assets 221,000 Total assets $249,500

Liabilities Current liabilities

Accounts payable $ 12,000 Interest payable 4,000 Total current liabilities 16,000 Long-term notes payable 53,000 Total liabilities 69,000

Equity Common stock 100,000 Retained earnings * 80,500

Exercise 3-9 (10 minutes)

Note: Net income and revenues are from Exercise 3-7

Profit margin = $25,500 / $130,000 = 19.6%

Interpretation: Wilson Trucking Company’s profit margin exceeds the

industry average of 15%, so they are performing better than competitors on this dimension Wilson’s profit margin implies that they earn 19.6 cents for each dollar of sales recorded compared to the industry average of only 15 cents for each dollar of sales recorded

of the current ratio, we see that current assets consist primarily of cash and accounts receivable The existence of these more liquid assets is a positive attribute for liquidity purposes

$28,500

$16,000

Exercise 3-12 (15 minutes)

Current Assets

Current Liabilities

Current Ratio Case 1 $ 79,000 / $ 32,000 = 2.47

Analysis: Company 1 is in the strongest liquidity position It has about $2.47

of current assets for each $1 of current liabilities The only potential concern for Company 1 is that it may be carrying too much in current assets that could

be better spent on more productive assets (note that its remaining competitors’ current ratios range from 1.39 to 0.61)

Remodeling Fees Earned 13,000

Received fees for work to be done

d

Dec 28 Cash 3,700

Remodeling Fees Earned 3,700

Received fees for work to be done

Dec 31 Remodeling Fees Earned 11,130

Unearned Remodeling Fees 11,130

Adjusted revenues for unfinished

projects ($13,000 + 3,700 - $5,570)

Exercise 3-15 B (30 minutes) Part 1.

DYLAN DELIVERY COMPANY

Work Sheet For Year Ended December 31, 2008 Unadjusted

Trial Balance Adjustments

Adjusted Trial Balance

Income Statement Balance Sheet

Delivery fees earned 263,000 263,000 263,000

Depreciation expense —Trucks 40,000 (a) 40,000 80,000 80,000

To close the expense accounts

To close the dividends account

Retained Earnings on the balance sheet

Retained earnings, beginning balance $202,000 Add: Net income 39,000 241,000 Less: Dividends (34,000) Retained earnings, ending balance $207,000

To record accrued rent income

2 Subsequent entries without reversing entries

Nov 5 Rent Payable 2,800

To record collection of 2 months’ rent

3 Subsequent entries with reversing entries

Nov 1 Rent Payable 2,800

Exercise 3-17 C (10 minutes)

Reversing entries are appropriate for accounting adjustments (a) and (e)

Sept 1 Service Fees Earned 6,000

PROBLEM SET A

Problem 3-1A (35 minutes)

Part 1

Adjustment (a) Dec 31 Office Supplies Expense 14,846

To record annual insurance coverage cost

Policy Cost per Month

Months Active in 2008

2008 Cost

To record the amount of rent earned for

November and December (2 x $2,800)

Problem 3-1A (Continued)

To record payment of accrued and

current salaries *(3 days x $1,960)

Cash Payment for (e)

15 Cash 6,000

Rent Receivable 3,000 Rent Earned

3,000

To record past due rent for two months

Problem 3-2A (90 minutes)

Teaching Supplies Accounts Payable

Professional Library Dividends

(d) 7,200

Problem 3-2A (Continued)

Tuition Fees Earned Rent Expense

Unadj Bal 123,900 Unadj Bal 33,000 (f) 7,500 (h) 3,000

Adj Bal 131,400 Adj Bal 36,000

Training Fees Earned Teaching Supplies Expense

Unadj Bal 40,000 Unadj Bal 0 (e) 5,000 (b) 5,200

Adj Bal 45,000 Adj Bal 5,200

Depreciation Expense—

Professional Library Advertising Expense

(d) 7,200

Depreciation Expense—

Equipment Utilities Expense

(a) 2,400

Adj Bal 2,400

Problem 3-2A (Continued)

Part 2

Adjustment (a) Dec 31 Insurance Expense 2,400

31 Depreciation Expense—Profess Library 7,200

A ccumul Depreciation—Profess Library 7,200

To record professional library depreciation

Adjustment (e)

31 Unearned Training Fees 5,000

Training Fees Earned 5,000

To record 2 months’ training fees earned that

were collected in advance

Adjustment (f)

31 Accounts Receivable 7,500

Tuition Fees Earned 7,500

To record tuition earned ($3,000 x 2 1/2 months)

Problem 3-2A (Continued)

Part 3

WELLS TECHNICAL INSTITUTE Adjusted Trial Balance December 31, 2008

Tuition fees earned 131,400 Training fees earned 45,000 Depreciation expense—Professional library 7,200

Problem 3-2A (Continued)

Tuition fees earned $131,400

Training fees earned 45,000

Total revenues $176,400 Expenses

Depreciation expense—Professional library 7,200

WELLS TECHNICAL INSTITUTE Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, December 31, 2007 $ 10,000 Plus: Net income 49,600 59,600 Less: Dividends 50,000 Retained earnings, December 31, 2008 $ 9,600

Problem 3-2A (Concluded)

WELLS TECHNICAL INSTITUTE

Balance Sheet December 31, 2008 Assets

Cash $ 34,000 Accounts receivable 7,500 Teaching supplies 2,800 Prepaid insurance 9,600 Professional library $35,000

Accumulated depreciation—Professional library (17,200) 17,800 Equipment 80,000

Accumulated depreciation—Equipment (28,200) 51,800 Total assets $123,500

Liabilities Accounts payable $ 26,000 Salaries payable 400 Unearned training fees 7,500 Total liabilities 33,900

Equity Common stock 80,000 Retained earnings 9,600 Total liabilities and equity $123,500

Problem 3-3A (90 minutes)

Part 1

LING REPAIRS Income Statement For Year Ended December 31, 2008 Repair fees earned $90,950 Expenses

LING REPAIRS Statement of Retained Earnings For Year Ended December 31, 2008 Retained earnings, Dec 31, 2007 $20,000 Add: Net income 30,750

50,750 Less: Dividends (16,000) Retained earnings, Dec 31, 2008 $34,750

Problem 3-3A (Continued)

LING REPAIRS Balance Sheet December 31, 2008 Assets

Liabilities Current liabilities

Accounts payable $14,000 Wages payable 600 Total current liabilities 14,600

Equity Retained earnings 34,750 Common stock 13,000 Total liabilities and equity $62,350

Problem 3-3A (Continued)

Parts 2 and 3

LING REPAIRS For Year Ended December 31, 2008

Adjusted Trial Balance Closing Entries

Post-Closing Trial Balance

Closing entries (all dated December 31, 2008)

(1) Repair Fees Earned 90,950

Income Summary 90,950

To close the revenue account

Problem 3-3A (Continued)

(2) Income Summary 60,200

Depreciation Expense, Equipment 5,000 Wages Expense 37,500 Insurance Expense 800 Rent Expense 10,600 Office Supplies Expense 3,600 Utilities Expense 2,700

To close the expense accounts

(b) If there were no earned and unpaid wages (meaning Wages Payable equals zero), wages expense would be $600 less and net income would

be $600 more

Financial Statement Changes

The income statement would reflect the following:

Problem 3-4A (90 minutes)

INSTRUCTOR NOTE: Ledger accounts are shown at the end of Part 7 as they would appear after

all entries are posted

Part 2 — Transactions for April

Problem 3-4A (Continued)

Part 3

ADVENTURE TRAVEL Unadjusted Trial Balance