Solution manual accounting 25th editon warren chapter 03

EVA'S LAUNDRY Adjusted Trial Balance May 31, 2014 Debit Balances Credit Balances... DICKENS COMPANY Adjusted Trial Balance October 31, 2014 Debit Balances Credit Balances... Adjusted Tri

CHAPTER 3 THE ADJUSTING PROCESS

DISCUSSION QUESTIONS

1 a Under cash-basis accounting, revenues are reported in the period in which cash is received and

expenses are reported in the period in which cash is paid

b Under accrual-basis accounting, revenues are reported in the period in which they are earned and

expenses are reported in the same period as the revenues to which they relate

2 The matching concept is related to the accrual basis of accounting.

3 Adjusting entries are necessary at the end of an accounting period to bring the ledger up to date.

4 Adjusting entries bring the ledger up to date as a normal part of the accounting cycle Correcting

entries correct errors in the ledger

5 Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned

revenues (deferred revenues), accrued expenses (accrued liabilities), and accrued revenues (accrued assets)

6 Statement (a): Increases the balance of a revenue account.

7 Statement (b): Increases the balance of an expense account.

8 Yes, because every adjusting entry affects expenses or revenues.

9 a.

b.

The rights acquired represent an asset

The justification for debiting Rent Expense is that when the ledger is summarized in a trialbalance at the end of the month and statements are prepared, the rent will have become an expense Hence, no adjusting entry will be necessary

10 a. The portion of the cost of a fixed asset deducted from revenue of the period is debited to

Depreciation Expense It is the expired cost for the period The reduction in the fixed asset account is recorded by a credit to Accumulated Depreciation rather than to the fixed asset account The use of the contra asset account facilitates the presentation of original cost and accumulated depreciation on the balance sheet

b Depreciation Expense—debit balance; Accumulated Depreciation—credit balance.

c. No, it is not customary for the balances of the two accounts to be equal in amount

d Depreciation Expense appears on the income statement; Accumulated Depreciation appears on

the balance sheet

3-1

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PE 3–2B

Rent earned [($18,900 ÷ 12 months) × 7 months].

CHAPTER 3 The Adjusting Process

PE 3–8A

a Revenues were understated by $44,500.

b Expenses were understated by $13,100 ($5,800 + $7,300).

c Net income was understated by $31,400 ($44,500 – $13,100).

PE 3–8B

a Revenues were understated by $6,600.

b Expenses were understated by $10,400 ($1,400 + $9,000)

c Net income was overstated by $3,800 ($10,400 – $6,600).

PE 3–9A

a The totals are unequal The debit total is higher by $900 ($9,800 – $8,900)

b The totals are equal, since the adjusting entry was omitted.

PE 3–10A

a.

b An unfavorable trend of increasing operating expenses and decreasing

operating income is indicated.

Ex 3–1

Ex 3–2

Accounts Receivable Normally requires adjustment (AR)

Cash Does not normally require adjustment.

Interest Expense Normally requires adjustment (AE)

Interest Receivable Normally requires adjustment (AR)

Johann Atkins, Capital Does not normally require adjustment

Land Does not normally require adjustment.

Office Equipment Does not normally require adjustment.

Prepaid Rent Normally requires adjustment (PE)

Supplies Normally requires adjustment (PE)

Unearned Fees Normally requires adjustment (UR)

Wages Expense Normally requires adjustment (AE).

b Unearned rent (liabilities) will be overstated Owner’s equity at the end of the

period will be understated.

Ex 3–10

a.

b No If the cash basis of accounting is used, revenues are recognized only

when the cash is received Therefore, earned but unbilled revenues would not

be recognized in the accounts, and no adjusting entry would be necessary.

Ex 3–11

a.

b.

Ex 3–12

a Fees earned (or revenues) will be understated Net income will be understated.

b Accounts (fees) receivable (or assets) will be understated Owner’s equity will

a Salary expense (or expenses) will be overstated Net income will be understated.

b The balance sheet will be correct This is because salaries payable has been

satisfied, and the net income errors have offset each other Thus, owner’s

b No Depreciation is an allocation of the cost of the equipment to the periods

benefiting from its use It does not necessarily relate to value or loss of value.

Ex 3–20

a $7,630 million ($16,259 – $8,629)

b No Depreciation is an allocation method, not a valuation method That is,

depreciation allocates the cost of a fixed asset over its useful life Depreciation does not attempt to measure market values, which may vary significantly from year to year.

Ex 3–23

Over- stated

Under- stated

Over- stated

Under- stated

(2) Accumulated depreciation would be understated, and total assets would

be overstated Owner’s equity would be overstated.

Depreciation on equipment.

Ex 3–27

1 The accountant debited Accounts Receivable for $5,000 but did not credit

Laundry Revenue This adjusting entry represents accrued laundry revenue.

2 The accountant debited rather than credited Laundry Supplies for $3,000.

3 The accountant credited the prepaid insurance account for $3,600, but debited the insurance expense account for only $600.

4 The accountant credited Laundry Equipment for the depreciation expense of

$13,000, instead of crediting the accumulated depreciation account.

5 The accountant did not debit Wages Expense for $1,000

The corrected adjusted trial balance is shown below.

EVA'S LAUNDRY Adjusted Trial Balance May 31, 2014

Debit Balances

Credit Balances

c Hewlett-Packard (HP) is more profitable than Dell Specifically, HP’s cost of goods sold of 76.2% is 5.3% (81.5% – 76.2%) less than Dell’s cost of goods sold This is partially offset by HP’s higher operating expenses of 14.7% as compared to Dell's operating expenses of 12.9% The net result is that HP generates an operating

income of 9.1% of sales, while Dell generates operating income of 5.6% of sales Dell must improve its operations if it is to remain competitive with HP.

PROBLEMSProb 3–1A

2 Adjusting entries are a planned part of the accounting process to update the

accounts Correcting entries are not planned, but arise only when necessary

2 Fees Earned would be understated by $9,150; Wages Expense would be

understated by $3,100; and net income would be understated by $6,050

($9,150 – $3,100).

3 Accounts Receivable would be understated by $9,150; total assets would be

understated by $9,150; Wages Payable would be understated by $3,100;

total liabilities would be understated by $3,100; owner’s capital would be

understated by $6,050 ($9,150 – $3,100); and total liabilities and owner’s

equity would be understated by $9,150 ($3,100 + $6,050).

4 There is no effect on the “Net increase or decrease in cash” on the statement

of cash flows, since adjusting entries do not affect cash.

3 Revenues……… $419,900 ($393,000 + $12,700 + $14,200)

Expenses……… 327,725 ($301,800 + $17,425 + $7,400 + $1,100) Net Income……… $ 92,175

4 The effect of the adjusting entries on Amy Wolf, Capital is the difference in net income in (2) and (3) of $975 ($92,175 – $91,200), which increases Amy Wolf, Capital.

Automobile depreciation ($62,050 – $54,750).

Service fees earned ($18,000 – $9,000, or

$742,800 – $733,800).

Rent revenue earned ($6,750 – $1,350).

Accrued salaries and wages.

Accrued fees earned.

Prob 3–5A (Concluded)

2.

DICKENS COMPANY Adjusted Trial Balance October 31, 2014

Debit Balances

Credit Balances

Income Assets = Liabilities + Equity

–1,800

0

0 +1,400 –1,400 –1,800 Corrected amounts $137,750 $769,150 $301,400 $467,750

2 Adjusting entries are a planned part of the accounting process to update the

accounts Correcting entries are not planned, but arise only when necessary to correct errors.

2 Fees Earned would be understated by $6,000; Depreciation Expense would

be understated by $1,675; and net income would be understated by $4,325

($6,000 – $1,675).

3 Accumulated Depreciation—Equipment would be understated by $1,675; total assets would be overstated by $1,675; Unearned Fees would be overstated by $6,000; total liabilities would be overstated by $6,000; owner’s capital would be understated by

$4,325 ($6,000 – $1,675); and total liabilities and owner’s equity would be

overstated by $1,675 ($6,000 – $4,325).

4 There is no effect on the “Net increase or decrease in cash” on the statement

of cash flows, since adjusting entries do not affect cash.

3 Revenues……… $323,840 ($305,800 + $3,900 + $14,140)

Expenses……… 273,095 ($261,800 + $5,820 + $3,000 + $2,475) Net Income……… $ 50,745

4 The effect of the adjusting entries on Diana Keck, Capital is the difference

in net income in (3) and (2) of $6,745 ($50,745 – $44,000), which would increase Diana Keck, Capital.

Service fees earned ($10,500 – $3,850, or

$169,330 – $162,680).

Accrued salaries and wages.

Prob 3–5B (Concluded)

2.

REECE FINANCIAL SERVICES CO.

Adjusted Trial Balance July 31, 2014

Debit Balances

Credit Balances

Total Liabilities +

Total Owner's Equity

0 –3,000

+5,200

0

–5,200 –3,000

CONTINUING PROBLEM1.

Office equipment depreciation.

Continuing Problem (Continued)

Date Item

Post.

Balance Debit Credit 2014

Continuing Problem (Continued)

Date Item

Post.

Balance Debit Credit 2014

Account: Peyton Smith, Drawing

Account: Income Summary

(This account is not used in Chapter 3.)

Post.

Balance Debit Credit 2014

CHAPTER 3 The Adjusting Process

Continuing Problem (Continued)

Date Item

Post.

Balance Debit Credit 2014

Account: Office Rent Expense

Account: Equipment Rent Expense

CHAPTER 3 The Adjusting Process

Continuing Problem (Continued)

Continuing Problem (Continued)

Post.

Balance Debit Credit 2014

Account: Insurance Expense

Account: Depreciation Expense

CHAPTER 3 The Adjusting Process

Continuing Problem (Concluded)

Adjusted Trial Balance July 31, 2014

Debit Balances

Credit Balances

CASES & PROJECTS

CP 3–1

It is acceptable for Daryl to prepare the financial statements for Squid Realty Co on

an accrual basis The revision of the financial statements to include the accrual of the

$30,000 commission as of December 28, 2013, would not be appropriate Most real estate contracts include contingencies that can void the contract Such

contingencies include obtaining a loan, appraisals, environmental studies, and inspection results In other words, Daryl can only be sure of earning the commission

on January 5, 2014, when the attorney formally records the transfer of the property

to the buyer, and Daryl may disclose the pending sale and related commission

in a note to the financial statements Indicating on the loan application to Free Spirit Bank that Squid Realty Co has not been rejected previously for credit is unethical and unprofessional, and intentionally filing false loan documents is illegal.

CP 3–2

The cost of the warranty repairs, $1,650, should be recognized as an expense of

2014 in order to properly match revenues from the sale of the truck with the related expenses Since the cost of the actual repairs will not be known at the time of sale (2014), Ford Motor Company would estimate warranty costs and expenses at the end

of 2014 using its past warranty (repair) history with the Ford 350F This estimate would be recorded in the accounts through use of an adjusting entry The adjusting entry would debit Warranty Expense and credit Estimated Warranty Payable, a liability account.

CP 3–3

Revenue is normally recorded when the services are provided or when the

goods are delivered (title passes) to the buyer By waiting until after the services are provided, the expenses of providing the services can be more accurately measured and matched against the related revenues Also, at this point, the provider of the services has a right to demand payment for the services if

payment hasn’t already been received.

Airlines, such as Delta Air Lines, normally record revenue from ticket sales after completing a flight At this point, the boarding passes, which have been

collected from the passengers, represent revenue to the airline In addition, the expenses related to each flight, such as landing fees and fuel, would have been incurred and would be accurately measured.

Note to Instructors: The following points might also be worth discussing:

(1) The receipt of revenue from customers in advance of a flight represents unearned revenues to the airline For example, the purchase of discount tickets, which often requires prepayment months in advance of the actual flight, is unearned revenue to the airline.

(2) At the end of the airline’s accounting period, it would have adjusting entries related to such items as the following:

● Accrued wages for employees

● Depreciation on airplanes, terminal buildings, etc.

● Unearned revenues (described above)

● Accrued income from transporting freight, etc.

● Accrued income from other airlines

(When a flight is delayed or canceled, airlines often accept passengers from other airlines and then later collect the revenue from the other airline.)

● Prepaid expenses related to insurance, etc.

b Likely accounts requiring adjustment include:

1 Accumulated Depreciation—Truck for depreciation expense.

2 Supplies (paid) expense for supplies on hand.

3 Insurance (paid) expense for unexpired insurance.

4 Wages accrued.

5 Utilities accrued.

CP 3–5

Note to Instructors: The purpose of this activity is to familiarize students with

behaviors that are common in codes of conduct In addition, this activity

addresses an actual ethical dilemma for students related to doing their

homework Consider asking students to look up your school’s Student Code

of Conduct and discuss its implications for the behaviors described in this case.

An excerpt from one such Honor Code is shown below.

Students must share the responsibility for creating and maintaining an atmosphere of honesty and integrity Students should be aware that personal experience in

completing assigned work is essential to learning Permitting others to prepare their work, using published or unpublished summaries as a substitute for studying required materials, or giving or receiving unauthorized assistance in the preparation of work to

be submitted are directly contrary to the honest process of learning Students who are aware that others in a course are cheating or otherwise acting dishonestly have the responsibility to inform the professor and/or bring an accusation to the Honor

Council.

http://smu.edu/studentlife/studenthandbook/pcl_05_hc.asp

Southern Methodist University, The Honor Code, http://smu.edu/studentlife/studenthandbook.