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 income……… $100,000 $ 50,000
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.
(15-20 min.) E 3-36B Req. 1
Adjusting Entries
DATE ACCOUNT TITLES DEBIT CREDIT
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 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 revenue……….. $ 1,300 Service revenue………... 900
Total understatement……… $ (2,200)
Net income overstated by omission of:
Insurance expense……… $ 700 Depreciation expense……….. 4,400 Salary expense……….. 10,200 Income tax expense………... 6,500
Total overstatement………... 21,800 Overall effect — net income overstated by………. $19,600
(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 account for 2,000 1,700 2,600 1,500 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 Expense……… 1,400
Supplies………... 1,400
Req. 1
Adjusting Entries
DATE ACCOUNT TITLES DEBIT 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)
(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
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, 2011….. $4,600
Add: Net income ………. 4,200
8,800
Less: Dividends……… (1,400)
Retained earnings, December 31, 2012….. $7,400
(continued) E 3-40B Honeybee Hams, Inc.
Balance Sheet December 31, 2012
Thousands
ASSETS LIABILITIES
Cash………. $ 3,400 Accounts payable………. $ 7,700 Accounts receivable………… 1,900 Income tax payable…….. 600 Inventories………. 1,700 Other liabilities………….. 2,400 Prepaid expenses……… 1,700 Total liabilities…………... 10,700
Prop., plant, equip. $ 6,700 STOCKHOLDERS’
Less: Accum. EQUITY
deprec……. (2,500) 4,200 Common stock………….. 4,500 Other assets……….. 9,700 Retained earnings……… 7,400 Total stockholders’ equity 11,900 Total liabilities and Total assets……… $22,600 stockholders’ equity... $22,600
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
Payment 470 Insurance expense 430
End. bal. 200
Accrued Liabilities Payable
Beg. bal. 640
Payments 4,200
Other operating
expenses 4,290
End. bal. 730
(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:
Unearned Service Revenue
Beg. bal. 75
Earned revenue 360 Collected cash 380
End. bal. 95
Req. 1
Journal
DATE ACCOUNT TITLES DEBIT CREDIT
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 Expenses 22,500
Dec. 31, 2011 2,200
Dividends 400 Revenues 24,500
Dec. 31, 2012 3,800
(15-25 min.) E 3-44B Journal
DATE ACCOUNT TITLES DEBIT CREDIT
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
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 Total liabilities and stockholders’ equity ... $54,800
* Net income = $9,900 ($19,600 − $5,600 − $2,300 − $600 - $1,200)
(continued) E 3-45B Req. 2
Current Year
Prior Year Net working
capital
= Total current assets - current liabilities =
$14,900 - $8,900
= $6,000 $7,000
Current ratio =
Total current assets
= $14,900
= 1.67 1.70 Total current liabilities $8,900
Both net working capital and the current ratio have decreased indicating that the ability to pay current liabilities with current assets has deteriorated.
Debt ratio = Total liabilities
= $25,900
= 0.47 0.40 Total assets $54,800
The overall ability to pay total liabilities deteriorated a little.
a. Current ratio = $60
= 1.03 Debt ratio = $70 + $8
= 0.80
$50 + $8 $90 + $8
The purchase of equipment on account hurts both ratios.
b. Current ratio = $60 − $5
= 1.10 Debt ratio = $70 − $5
= 0.76
$50 $90 − $5
The payment of long-term debt hurts the current ratio and improves the debt ratio.
c. Current ratio = $60 + $4
= 1.19 Debt ratio = $70 + $4
= 0.79
$50 +$4 $90 + $4
Collecting cash in advance hurts both ratios.
d. Current ratio = $60
= 1.11 Debt ratio = $70 + $4
= 0.82
$50 + $4 $90
Accruing an expense hurts both ratios.
e. Current ratio = $60 + $8
= 1.36 Debt ratio = $70
= 0.71
$50 $90 + $8
A cash sale improves both ratios.
Serial Exercise
(3 hours) E 3-47
Reqs. 1, 2, 5, and 7
Cash Accounts Receivable
Jan. 2 11,000 Jan. 2 700 Jan. 18 1,500 Jan. 28 1,500
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
Bal. 4,700
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 11,000 Clo. 1,743 Clo. 5,300 Bal. 11,000 Clo. 1,200
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
Salary Expense
Depreciation Expense – Equipment
Adj. 500 Clo. 500 Adj. 65 Clo. 65
Depreciation Expense –
Furniture Supplies Expense
Adj. 78 Clo. 78 Adj. 200 Clo. 200
(continued) E 3-47 Req. 1