Solution manual financial accounting 8th by harrison CH03

S 3-4The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Acme or Harris.. Not required but helpful: Unearned Service Revenue

Chapter 3

Accrual Accounting & Income

Short Exercises

(10 min.) S 3-1

Millions

Sales revenue……… 960

Cost of goods sold……… (270)

All other expenses……… (300)

Net income……… $ 390

Beginning cash……… $ 105

Collections ($700 − $30)……… 935

Payments for: inventory……… (370)

everything else……… (285)

Ending cash……… $ 385

(10 min.) S 3-2

Statement Reports (Amounts in millions)

Income statement Interest expense……… $1.8

($3.9 + $2.3 − $2.0)………… $4.2 Interest payable……… 0.1

(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 in the month may not have been recorded

The accrued salaries, which are owed to the employees yet have not been paid, are an expense related to the current

period The salaries that are owed to the employees but are unpaid 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 and net income will be overstated In addition,

liabilities will be understated

(10 min.) S 3-4The large auto manufacturer should record sales revenue when the revenue is earned by delivering automobiles to Acme

or Harris The large auto manufacturer should not record any

revenue prior to delivery of the vehicles because the large auto manufacturer hasn’t 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 matching principle tells when to record expenses

a The Matching Principle

b The Time Period Concept

c The Revenue Principle

d The Revenue Principle

e The Matching Principle

(10 min.) S 3-7

a

Mar 31 Rent Expense ($4,800 × 1/6)…… 800

To record rent expense

Mar 1 4,800 Mar 31 800 Mar 31 800

b

Dec 31 Supplies Expense ($900 − $700)… 200

To record supplies expense

Dec 1 900 Mar 31 200 Marc

31

200

(10 min.) S 3-8

Req 1

(a) Jan 1 Computer Equipment……….… 80,000

Purchased computer equipment

(b) Dec 31 Depreciation Expense −

Computer Equipment ($80,000 / 4)… 20,000 Accumulated Depreciation −

Depreciation Expense − Computer Equipment Jan 1 80,000 Dec 31 20,000 Dec 31 20,000 Bal 80,000 Bal 20,000 Bal 20,000

Req 3

Less Accumulated depreciation……… (20,000)

(10 min.) S 3-9(Amounts in millions)

Salary expense ($38.3 + $2.8)… $41.1

(10 min.) S 3-10

Req 1

Oct 31 Interest Expense……… 500

To accrue interest expense for October

To accrue interest expense for November

Dec 31 Interest Expense……… 500

Req 3

Dec 31 Interest Payable……… 1,500

To pay interest

(10 min.) S 3-11

Req 1

Oct 31 Interest Receivable……… 500

To accrue interest revenue for October

Nov 30 Interest Receivable……… 500

To accrue interest revenue for November

Dec 31 Interest Receivable……… 500

To accrue interest revenue for December

Req 2

Interest Receivable Oct 31 500

(5-10 min.) S 3-12Unearned revenues are liabilities because The Globe and Trail has received cash from subscribers in advance of providing them with newspapers Receiving the cash in advance creates

an obligation (a liability) for The Globe and Trail As The Globe and Trail delivers newspapers to subscribers, The Globe and Trail earns the revenue, and the dollar amount of the unearned revenue then goes into the revenue account

Received cash for revenue in advance

To record the earning of subscription

revenue that was collected in advance

Unearned Service Revenue……… 3,500

(15-30 min.) S 3-15

Vulture Sporting Goods Company

Income Statement Year Ended March 31, 2010

Thousands

Vulture Sporting Goods Company Statement of Retained Earnings Year Ended March 31, 2010

Thousands

Retained earnings, March 31, 2009… $2,000

Retained earnings, March 31, 2010.… $13,200

(continued) S 3-15

Vulture Sporting Goods Company

Balance Sheet March 31, 2010

Other current assets……… 5,200

Total current assets……… 71,700

Property and equipment, net……… 6,000 Other assets……… 28,000 Total assets……… $105,700

Total liabilities and stockholders’ equity $105,700

(5 min.) S 3-17

Req 1

(Dollars in thousands)

Current ratio = Total current assets = $71,700 = 1.35

Total current liabilities $53,000

2 Cash basis would report only the cash collections of

$4,900 from customers and the payment of operating

expenses ($1,400) Their balance sheet should have

included neither accounts receivable nor accounts

f Income Tax Expense ($22,000 × 25)…… … 5,500

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

Missing amounts in italics

Beginning Supplies $ 100 $600 $ 1,400 $ 900 Add: Payments for

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

Delicious Hams, Inc

Income Statement Year Ended December 31, 2010

Thousands

Revenues:

Expenses:

Cost of goods sold………… $25,100

Selling, administrative, and

general expense………… 10,700

Delicious Hams, Inc

Statement of Retained Earnings Year Ended December 31, 2010

Thousands

Retained earnings, December 31, 2009… $4,700

8,000 Less: Dividends……… (1,500)

Retained earnings, December 31, 2010… $6,500

(continued) E 3-26A

Delicious Hams, Inc

Balance Sheet December 31, 2010

Thousands

Cash……… $ 3,800 Accounts payable……… $ 7,600 Accounts receivable………… 1,500 Income tax payable…… 600 Inventories……… 1,100 Other liabilities………… 2,200 Prepaid expenses……… 1,700 Total liabilities………… 10,400 Prop., plant, equip $ 6,500 STOCKHOLDERS’

deprec…… (2,300) 4,200 Common stock………… 4,700 Other assets……… 9,300 Retained earnings……… 6,500

Total stockholders’ equity 11,200 Total liabilities and Total assets……… $21,600 stockholders’ equity $21,600

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

(10 min.) E 3-28A

Req 1

Mother Meghan’s income statement:

Service revenue ($6,000 × 1/2)……… $3,000

Mother Meghan’s balance sheet:

Unearned service revenue ($6,000 × 1/2)……… $3,000

Req 2

Boston’s income statement:

Medical expense ($6,000 × 1/2)……… $3,000 Boston’s balance sheet:

Prepaid medical expense ($6,000 × 1/2)………… $3,000

Unearned service revenue……… £110

Service revenue is greater in (2) because Nanofone began the year owing more phone service to customers With collections for the year and the amount of the ending liability unchanged, Nanofone must have earned more revenue in situation 2 than in situation 1

Not required but helpful:

Unearned Service Revenue

Earned revenue 405 Collected cash 460

(10-20 min.) E 3-30A

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Closing Entries Dec 31 Service Revenue……… 24,000

(15-25 min.) E 3-31A

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Adjusting Entries Dec 31 Unearned Service Revenue……… 6,500

31 Income Tax Expense ($1,000 − $0)……… 1,000

(20-30 min.) E 3-32A

Req 1

Draper Production Company

Balance Sheet December 31, 2009 ASSETS

5,100

Unearned service revenue ($9,300 − $6,500) 2,800

1,000

STOCKHOLDERS’ EQUITY

Retained earnings

($14,100+$20,100−$5,100−$1,300−$400

25,100

Total liabilities and stockholders’ equity… $56,00

0

(continued) E 3-32A

Req 2

Current Year

Prior Year Current ratio = Total current assets = $15,500 = 1.65 1.70

Total current liabilities $9,400

The ability to pay current liabilities with current assets deteriorated

Debt ratio = Total liabilities = $22,400 = 0.40 0.30

Total assets $56,000

The overall ability to pay total liabilities deteriorated a little

The payment of long-term debit hurts the current ratio and improves

the debt ratio

c Current ratio = $30 + $6 = 1.38 Debt ratio = $30 + $6 = 0.55

Collecting cash in advance hurts both ratios

d Current ratio = $30 = 1.30 Debt ratio = $30 + $3 = 0.55

Accruing an expense hurts both ratios

e Current ratio = $30 + $11 = 2.05 Debt ratio = $30 = 42

A cash sale improves both ratios

2 Cash basis would report only the cash collections of

$4,900 from customers and the payment of operating

expenses ($1,100).The balance sheet would include

neither accounts receivable nor accounts payable

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

(10-15 min.) E 3-38B

Missing amounts in italics

Beginning Supplies $ 100 $400 $ 1,200 $ 800 Add: Payments for

(20-30 min.) E 3-41B

Holiday Hams, Inc

Income Statement Year Ended December 31, 2010

Holiday Hams, Inc

Statement of Retained Earnings Year Ended December 31, 2010

Thousands

Retained earnings, December 31, 2009… $4,700

6,400 Less: Dividends……… (1,200)

Retained earnings, December 31, 2010… $5,200

(continued) E 3-41B

Holiday Hams, Inc

Balance Sheet December 31, 2010

Thousands

Cash……… $ 3,500 Accounts payable……… $ 7,900 Accounts receivable………… 1,700 Income tax payable…… 900 Inventories……… 1,200 Other liabilities………… 2,700 Prepaid expenses……… 1,600 Total liabilities………… 11,500 Prop., plant, equip $ 6,700 STOCKHOLDERS’

deprec…… (2,700) 4,000 Common stock………… 4,800 Other assets……… 9,500 Retained earnings……… 5,200

Total stockholders’ equity 10,000 Total liabilities and Total assets……… $21,500 stockholders’ equity $21,500

(10-20 min.) E 3-42BOne 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

(10 min.) E 3-43B

Req 1

Mother Elizabeth’s income statement:

Service revenue ($9,600 × 1/2)……… $4,800

Mother Elizabeth’s balance sheet:

Unearned service revenue ($9,600 × 1/2)……… $4,800

Req 2

Portland’s income statement:

Medical expense ($9,600 × 1/2)……… $4,800 Boston’s balance sheet:

Prepaid medical expense ($9,600 × 1/2)………… $4,800

Unearned service revenue……… £105

Service revenue is greater in (2) because Direct began the year owing more phone service to customers With collections for the year and the amount of the ending liability unchanged, Direct must have earned more revenue in situation 2 than in situation 1

Not required but helpful:

Unearned Service Revenue

Earned revenue 390 Collected cash 400

(10-20 min.) E 3-45B

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Closing Entries Dec 31 Service Revenue……… 24,100

Dec 31, 2010 3,600

(15-25 min.) E 3-46B

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Adjusting Entries Dec 31 Unearned Service Revenue……… 6,500

31 Income Tax Expense ($1,700 − $0)……… 1,700

(20-30 min.) E 3-47B

Req 1

Wallace Production Company

Balance Sheet December 31, 2009 ASSETS

Current:

0 Prepaid rent ($1,100 − $500)……… 600

4,400 Salary payable ($4,900 − $4,500)……… … 400 Unearned service revenue

1,700 Total current liabilities……… 8,500

STOCKHOLDERS’ EQUITY

(continued) E 3-47B

Req 2

Current Year

Prior Year Current ratio = Total current assets = $14,200 = 1.67 1.45

Total current liabilities $8,500

The ability to pay current liabilities with current assets improved

Debt ratio = Total liabilities = $18,500 = 0.32 0.35

Total assets $58,000

The overall ability to pay total liabilities improved a little

The payment of long-term debit hurts the current ratio and improves

the debt ratio

c Current ratio = $40 + $8 = 1.26 Debt ratio = $30 + $8 = 0.56

Collecting cash in advance hurts both ratios

d Current ratio = $40 = 1.08 Debt ratio = $30 + $7 = 0.62

Accruing an expense hurts both ratios

e Current ratio = $40 + $11 = 1.7 Debt ratio = $30 = 0.42

A cash sale improves both ratios

Serial Exercises

(3 hours) E 3-49

Reqs 1, 3, 6, and 8

Mar 2 7,000 Mar 2 600 Mar 18 2,100 Jan 28 2,100

Adj 125 Mar 26 500 Mar 4 7,500

(continued) E 3-49

Reqs 1, 3, 6, and 8

Adj 600 Adj 600 Mar 21 1,800

Mar 2 7,000 Clo 2,065 Clo 5,500

(continued) E 3-49

Req 2

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

21 No entry; no transaction yet

(continued) E 3-49

Reqs 4 and 5

Jerome Smith, Certified Public Accountant, P.C

Adjusted Trial Balance March 31, 2009 TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT

Supplies expense (c) 400 400

(continued) E 3-49

Req 6

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Adjusting Entries (a) Mar 31 Accounts Receivable……… 1,600

(d1) 31 Depreciation Expense – Equipment… 40

Accumulated Depreciation – Equip 40

(d2) 31 Depreciation Expense – Furniture… 125

Accumulated Depreciation – Furn 125

(continued) E 3-49

Req 7

Jerome Smith, Certified Public Accountant, P.C

Income Statement Month Ended March 31, 2009 Revenues:

Depreciation expense – furniture 40

Depreciation expense – equipment 125

Jerome Smith, Certified Public Accountant, P.C

Statement of Retained Earnings Month Ended March 31, 2009 Retained earnings, March 1, 2010 $ 0

3,435

Retained earnings, March 31, 2010 $ 2,035

(continued) E 3-49

Req 7

Jerome Smith, Certified Public Accountant, P.C

Balance Sheet March 31, 2009

Current assets: Current liabilities:

Accounts receivable 1,600 Salary payable 600 Supplies 100 Unearned service

Total current assets 8,600 revenue 1,200 Plant assets: Total current liabilities 9,300 Equipment $2,400

depr (40) 2,360 Common stock 7,000 Furniture $7,500 Retained earnings 2,035 Less accum Total stockholders’ equity 9,035 depr (125) 7,375 Total liabilities and Total assets $18,335 stockholders' equity $18,335

(continued) E 3-49

Req 8

Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT

Closing Entries Mar 31 Service Revenue……… 5,500

Depreciation Expense – Furniture… 125

31 Retained Earnings……… 1,400