Exercises: Unit 4

 SHORT ANSWER QUESTIONS, EXERCISES, AND PROBLEMS

Questions

➢Which events during an accounting period trigger the recording of normal journal entries?

➢  Which event triggers the making of adjusting entries?

➢  Describe the difference between the cash basis and accrual basis of accounting.

➢  Why are adjusting entries necessary? Why not treat every cash disbursement as an expense and every cash receipt as a revenue when the cash changes hands?

➢ “Adjusting entries would not be necessary if the ‘pure’ cash basis of accounting were followed (assuming no mistakes were made in recording cash transactions as they occurred). Under the cash basis, receipts that are of a revenue nature are considered revenue when received, and expenditures that are of an expense nature are considered expenses when paid. It is the use of the accrual basis of accounting, where an effort is made to match expenses incurred against the revenues they create, that makes adjusting entries necessary.” Do you agree with this statement? Why?

➢  Why do accountants not keep all the accounts at their proper balances continuously throughout the period so that adjusting entries would not have to be made before financial statements are prepared?

➢  What is the fundamental difference between deferred items and accrued items?

➢  Identify the types of adjusting entries included in each of the two major classes of adjusting entries.

➢  Give an example of a journal entry for each of the following:

  • Equal growth of an expense and a liability.
  • Earning of revenue that was previously recorded as unearned revenue.
  • Equal growth of an asset and a revenue.
  • Increase in an expense and decrease in an asset.

➢  A fellow student makes the following statement: “You can easily tell whether a company is using the cash or accrual basis of accounting. When an amount is paid for future rent or insurance services, a firm that is using the cash basis debits an expense account while a firm that is using the accrual basis debits an asset account.” Is the student correct?

➢  You notice that the Supplies on Hand account has a debit balance of $ 2,700 at the end of the accounting period. How would you determine the extent to which this account needs adjustment?

➢  Some assets are converted into expenses as they expire and some liabilities become revenues as they are earned. Give examples of asset and liability accounts for which this statement is true. Give examples of asset and liability accounts to which the statement does not apply.

➢  Give the depreciation formula to compute straight-line depreciation for a one-year period.

➢  What does the term accrued liability mean?

➢  What is meant by the term service potential?

➢  When assets are received before they are earned, what type of an account is credited? As the amounts are earned, what type of account is credited?

➢  What does the word accrued mean? Is there a conceptual difference between interest payable and accrued interest payable?

➢  Matching expenses incurred with revenues earned is more difficult than matching expenses paid with revenues received. Do you think the effort is worthwhile?

➢  Why are the financial statements prepared before the adjusting and closing entries are journalized and posted?

➢  You have taken over a set of accounting books for a small business as a part-time job. At the end of the first accounting period, you have partially completed the trial balance by entering the proper ledger accounts and balances in the unadjusted Trial Balance. You turn to the manager and ask, “Where is the list of additional information I can use in entering the adjusting entries?” The manager indicates there is no such list. (In all the text problems you have done, you have always been given this information.) How would you obtain the information for this real-life situation? What are the consequences of not making all of the required adjustments at the end of the accounting period?

➢  How is the statement of retained earnings prepared?

➢  What is the purpose of closing entries? What accounts are not affected by closing entries?

➢  Is it possible to prepare monthly financial statements without journalizing and posting adjusting and closing entries? How?

➢  What is the purpose of a post-closing trial balance?

➢  Define an accounting system.

➢  How is a classified balance sheet different than an unclassified balance sheet?

➢  Real world question Find financial statements of a company on the web. What company did you choose? Approximately what percentage of the depreciable assets under property, plant, and equipment has been depreciated as of the end of the most recent year shown?

➢  Real world question Find financial statements of a company on the web. What company did you choose? Identify the classifications (or categories) of assets and liabilities used by the company in its balance sheet.

Exercises

Exercise A List the steps in the accounting cycle. Would the system still work if any of the steps were performed out of order?

Exercise B A one-year insurance policy was purchased on August 1 for $2,400, and the following entry was made at that time:

Prepaid Insurance 2,400  
Cash   2,400

What adjusting entry is necessary at December 31, the end of the accounting year? Show how the T-accounts for Prepaid Insurance and Insurance Expense would appear after the entries are posted.

Exercise C Assume that rent of $ 12,000 was paid on September 1, to cover a one-year period from that date. Prepaid Rent was debited. If financial statements are prepared only on December 31 of each year, what adjusting entry is necessary on December 31 of the first year, to bring the accounts involved to their proper balances?

Exercise D Supplies were purchased for cash on May 2 for $ 8,000. Show how this purchase would be recorded. Then show the adjusting entry that would be necessary, assuming that  $ 2,500 of the supplies remained at the end of the year and the beginning balance for supplies was $500.

Exercise E Assume that a company acquired a building on  January 1, at a cost of $1,000,000. The building has an estimated useful life of 40 years and an estimated residual value of $200,000. What adjusting entry is needed on December 31 to record the depreciation for the entire year?

Exercise F On  September 1, Professional Golfer Journal, Inc., received a total of  $120,000 as payment in advance for one-year subscriptions to a monthly magazine. A liability account was credited to record this cash receipt. By the end of the year, one-third of the magazines paid for in advance had been delivered. Give the entries to record the receipt of the subscription fees and to adjust the accounts at December 31, assuming annual financial statements are prepared at year-end.

Exercise G On April 15, Rialto Theater sold $ 90,000 in tickets for the summer musicals to be performed (one per month) during June, July, and August. On July 15, Rialto Theater discovered that the group that was to perform the July and August musicals could not do so. It was too late to find another group qualified to perform the musicals. A decision was made to refund the remaining unearned ticket revenue to its ticket holders, and this was done on July 20. Show the appropriate journal entries to be made on April 15, June 30, and July 20. Rialto has a June 30th year-end.

Exercise H Guilty & Innocent, a law firm, performed legal services in late December for clients. The $30,000 of services would be billed to the clients in January of next year. Give the adjusting entry that is necessary on December 31, if financial statements are prepared at the end of each month.

Exercise I A firm borrowed $30,000 on November 1. By December 31, $300 of interest had been incurred. Prepare the adjusting entry required on December 31.

Exercise J Convenient Mailing Services, Inc., incurs salaries at the rate of $ 3,000 per day. The last payday in January is Friday, January 27. Salaries for Monday and Tuesday of the next week have not been recorded or paid as of January 31. Financial statements are prepared monthly. Give the necessary adjusting entry on January 31.

Exercise K The Trial Balance of the Printer Repair Company at December 31, contains the following account balances listed in alphabetical order to increase your skill in sorting amounts to the proper order.  Assume each account balance follows the normal balance rules.

Printer Repair Company

Account Balances  
December 31  
Accounts Payable $ 41,000
Accounts Receivable 92,000
Accumulated Depreciation—Buildings 25,000
Accumulated Depreciation—Equipment 9,000
Buildings 140,000
Capital Stock 65,000
Cash 60,000
Equipment 36,000
Prepaid Insurance 3,600
Retained Earnings, January 1 4,800
Salaries Expense 96,000
Service Revenue 290,000
Supplies on Hand 4,000
Utilities Expense 3,200

Using these account balances and the following additional information, prepare the adjusting journal entries for Printer Repair Company.  Post the entries and prepare the Adjusted Trial Balance in the proper order.

  • Supplies on hand at December 31, have a cost of $ 2,400.
  • The balance in the Prepaid Insurance account represents the cost of a two-year insurance policy covering the period from January 1 this year, through December 31 of next  year.
  • The estimated lives of depreciable assets are buildings, 40 years, and equipment, 20 years. No salvage values are anticipated.

Exercise L Refer to the adjusted trial balance prepared in the Printer Repair Company exercise (Ex K). Prepare the closing journal entries.

Exercise MRubino Company reported net income of  $100,000 for the current year. Examination of the financial data indicates that the following items were ignored:

  • Accrued salaries were $ 6,000 at December 31.
  • Depreciation on equipment acquired on July 1 amounted to  $ 4,000.

Based on this information, (a) what adjusting journal entries should have been made at December 31, and (b) what is the correct net income?

Exercise N After adjustment, these selected account balances of Cold Stream Campground are:

Debits Credits
Retained earnings $540,000.00
Rental revenue 960000
Salaries expense $336,000.00
Depreciated expense – Buildings 64000
Utilities expense 208000
Dividends 32000

Prepare the journal entries to close the books for the period.  What would be the ending balance in Retained Earnings?

Exercise O The following account balances appeared in the Adjusted Trial Balance prepared for Liu Company for the year ended December 31:

Account Titles Trial Balance

 

 

 Debit Credit
Service Revenue   330,000
Advertising Expense 1,350  
Salaries Expense 130,000  
Utilities Expense 2,250  
Insurance Expense 900  
Rent Expense 6,750  
Supplies Expense 2,250  
Depreciation Expense—Equipment 4,500  
Interest Expense 562  
Interest Revenue   1,125

Prepare the closing journal entries.

Exercise P Which of the following accounts are likely to appear in the post-closing trial balance for the Blake Company?

  • Accounts Receivable
  • Cash
  • Service Revenue
  • Buildings
  • Salaries Expense
  • Capital Stock
  • Dividends
  • Accounts Payable
  • Income Summary
  • Unearned Subscription Fees

Exercise Q Using the legend at the right, determine the category (number) into which you would place each of these items.

  Item   Legend
a. Land. 1. Current assets.
b. Marketable securities. 2. Long-term investments.
c. Notes payable, due in three years. 3. Property, plant, and equipment.
d. Taxes withheld from employees. 4. Intangible assets.
e. Patents. 5. Current liabilities.
f. Retained earnings. 6. Long-term liabilities.
g. Unearned subscription fees. 7. Stockholders’ equity.
h. Bonds of another corporation (a 20-year investment).    
i. Notes payable, due in six months.    
j. Accumulated depreciation.    

Exercise R The following data are from the 2001 annual report of The Procter & Gamble Company and its subsidiaries. This company markets a broad range of laundry, cleaning, paper, beauty care, health care, food, and beverage products in more than 140 countries around the world. Leading brands include Ariel, Crest, Pampers, Pantene, Crisco, Vicks, and Max Factor. The dollar amounts are in millions.

  June 30
  2001 2000
Current assets $10,889 $10,146
Current liabilities 9,846 10,141

Calculate the current ratios for the two years. Comment on whether the trend is favorable or unfavorable.

Problems

Problem A Among other items, the trial balance of Filmblaster, Inc., a movie rental company, at December 31 of the current year includes the following account balances:

Debits
Prepaid Insurance $ 10,000
Prepaid Rent $ 14,400
Supplies on Hand $ 2,800

Examination of the records shows that adjustments should be made for the following items:

  1. Of the prepaid insurance in the trial balance, $ 4,000 is for coverage during the months after December 31 of the current year.
  2. The balance in the Prepaid Rent account is for a 12-month period that started October 1 of the current year.
  3. $ 300 of interest has been earned but not received.
  4. Supplies used during the year amount to $ 1,800.

Prepare the annual year-end adjusting journal entries at December 31.

Problem B Marathon Magazine, Inc., has the following account balances, among others, in its trial balance at December 31 of the current year:

  Debits Credits
Supplies on Hand……………… $3,720  
Prepaid Rent ……………………. 7,200  
Unearned Subscription Fees …   $15,000
Subscriptions Revenue………..   261,000
Salaries Expense ………………. 123,000  
  • The inventory of supplies on hand at December 31 amounts to $ 720.
  • The balance in the Prepaid Rent account is for a one-year period starting October 1 of the current year.
  • One-third of the $ 15,000 balance in Unearned Subscription Fees has been earned.
  • Since the last payday, the employees of the company have earned additional salaries in the amount of $ 5,430.
  1. Prepare the year-end adjusting journal entries at December 31.
  2. Open ledger accounts for each of the accounts involved, enter the balances as shown in the trial balance, post the adjusting journal entries, and calculate year-end balances.

Problem C The following adjusted trial balance is for Jasper Appliance Repair Company:

JASPER APPLIANCE REPAIR COMPANY 
Adjusted Trial Balance  
June 30  
  Debits Credits
Cash $ 63,000  
Accounts Receivable 42,000  
Trucks 110,000  
Accumulated Depreciation—Trucks   $ 30,000
Accounts Payable   10,800
Notes Payable   20,000
Capital Stock   50,000
Retained Earnings   5,500
Dividends 10,000  
Service Revenue   230,000
Rent Expense 12,000  
Advertising Expense 5,000  
Salaries Expense 90,000  
Supplies Expense 1,500  
Insurance Expense 1,200  
Depreciation Expense—Trucks 10,000  
Interest Expense 1,000  
Miscellaneous Expense 600  
  $346,300 $346,300

Prepare the closing journal entries at the end of the fiscal year, June 30 and the post closing trial balance.

Problem D The adjusted trial balance for Denver Architects , Inc., follows:

DENVER ARCHITECTS, INC.  
Adjusted Trial Balance  
December 31  
  Debits Credits
Cash $ 90,000  
Accounts Receivable 20,000  
Interest Receivable 200  
Notes Receivable 4,000  
Prepaid Insurance 960  
Prepaid Rent 2,400  
Supplies on Hand 600  
Equipment 60,000  
Accumulated Depreciation—Equipment   $ 12,500
Buildings 140,000  
Accumulated Depreciation—Buildings   15,000
Land 56,240  
Accounts Payable   60,000
Notes Payable   10,000
Interest Payable   750
Salaries Payable   7,000
Capital Stock   100,000
Retained Earnings, January 1   20,200
Dividends 40,000  
Service Revenue   360,000
Insurance Expense 1,920  
Rent Expense 9,600  
Advertising Expense 1,200  
Depreciation Expense—Equipment 2,500  
Depreciation Expense—Buildings 3,000  
Supplies Expense 2,280  
Salaries Expense 150,000  
Interest Expense 750  
Interest Revenue   200
  $ 585,650 $ 585,650
  1. Prepare an income statement.
  2. Prepare a statement of retained earnings.
  3. Prepare a classified balance sheet.

Problem E The following trial balance and additional data are for Sure Sale Reality Company

SURE SALE REALTY COMPANY  
Trial Balance  
 December 31  
  Debits Credits
Cash $ 62,800  
Accounts Receivable 117,120  
Prepaid Rent 46,080  
Equipment 173,760  
Accumulated Depreciation—Equipment   $ 21,120
Accounts Payable   62,400
Capital Stock   96,000
Retained Earnings, 2010 January 1   49,920
Dividends 46,080  
Commissions Revenue   653,200
Salaries Expense 321,600  
Travel Expense 96,480  
Miscellaneous Expense 18,720  
  $ 882,640 $ 882,640

The prepaid rent is for the 12 months beginning July 1.

The equipment has an expected life of 10 years with no salvage value.

Accrued salaries are $ 11,520.

Travel expenses accrued but unreimbursed to sales staff at December 31 were $ 17,280

  1. Prepare adjusting journal entries and post
  2. Prepare an adjusted trial balance.
  3. Prepare closing journal entries.

Problem F The following trial balance and additional data are for South Sea Tours, Inc.:

SOUTH SEA TOURS, INC.  
Trial Balance  
December 31  
  Debits Credits
Cash $109,050  
Accounts Receivable 133,750  
Prepaid Insurance 4,350  
Prepaid Advertising 18,000  
Notes Receivable 11,250  
Land 90,000  
Buildings 165,000  
Accumulated Depreciation—Buildings   $ 49,500
Office Equipment 83,400  
Accumulated Depreciation—Office Equipment   16,680
Accounts Payable   56,850
Notes Payable   75,000
Capital Stock   240,000
Retained Earnings, January 1   47,820
Dividends 30,000  
Service Revenue   368,350
Salaries Expense 96,000  
Travel Expense 111,000  
Interest Revenue   600
Interest Expense 3,000  
  $854,800 $854,800

The company consistently followed the policy of initially debiting all prepaid items to asset accounts.

The buildings have an expected life of 50 years with no salvage value.

The office equipment has an expected life of 10 years with no salvage value.

Accrued interest on notes receivable is $ 450.

Accrued interest on the notes payable is $ 1,000.

Accrued salaries are $ 2,100.

Expired prepaid insurance is $ 3,750.

Expired prepaid advertising is $ 16,500.

  1. Prepare the required adjusting journal entries and post.
  2. Prepare an adjusted trial balance.

Problem G The following trial balance and additional data are for Florida Time-Share Property Management Company:

FLORIDA TIME-SHARE PROPERTY MANAGEMENT COMPANY
Trial Balance  
December 31  
  Debits Credits
Cash $424,000  
Prepaid Rent 28,800  
Prepaid Insurance 7,680  
Supplies on Hand 2,400  
Office Equipment 24,000  
Accumulated Depreciation—Office Equipment   $ 5,760
Automobiles 64,000  
Accumulated Depreciation—Automobiles   16,000
Accounts Payable   2,880
Unearned Management Fees   12,480
Capital Stock   360,000
Retained Earnings,  January 1   120,640
Dividends 28,000  
Commissions Revenue   260,000
Management Fee Revenue   19,200
Salaries Expense 199,840  
Advertising Expense 2,400  
Gas and Oil Expense 14,240  
Miscellaneous Expense 1,600  
  $796,960 $796,960

Insurance expense for the year, $ 3,840.

Rent expense for the year, $ 19,200.

Depreciation expense: office equipment, $ 2,880; and automobiles, $ 12,800.

Salaries earned but unpaid at December 31, $ 26,640.

Supplies on hand at December 31, $ 1,000.

The unearned management fees were received and recorded on November 1. The advance payment covered six months’ management of an apartment building.

  1. Prepare the adjusting journal entries and post.
  2. Prepare the adjusted trial balance.
  3. Prepare an income statement.
  4. Prepare a statement of retained earnings.
  5. Prepare a classified balance sheet.
  6. Prepare closing entries and post.
  7. Prepare a post closing trial balance.

Alternate problems

Alternate problem A The trial balance of Caribbean Vacation Tours, Inc., at December 31 of the current year includes, among other items, the following account balances:

     
  Debits Credits
Prepaid Insurance …………………………………. $24,000  
Prepaid Rent ………………………………………… 24,000  
Buildings……………………………………………… 188,000  
Accumulated Depreciation—Buildings………….   $31,600
Salaries Expense …………………………………… 200,000  

The balance in the Prepaid Insurance account is the advance premium for one year from September 1 of the current year.

The buildings are expected to last 25 years, with an expected residual value of $ 30,000.

Salaries incurred but not paid as of December 31 amount to $ 8,400.

The balance in Prepaid Rent is for a one-year period that started March 1 of the current year.

Prepare the annual year-end adjusting journal entries at December 31.

Alternate problem B Among the account balances shown in the trial balance of Dunwoody Mail Station, Inc., at December 31 of the current year are the following:

Debits Credits
Supplies on hand $10,000
Prepaid insurance 6,000
Buildings 168,000
Accumulated deprecation and buildings $ 39,000

The inventory of supplies on hand at December 31 amounts to $ 3,000.

The balance in the Prepaid Insurance account is for a two-year policy taken out June 1 of the current year.

Depreciation for the buildings is based on the cost shown in the Buildings account, less residual value estimated at USD18,000. When acquired, the lives of the buildings were estimated at 50 years each.

  1. Prepare the year-end adjusting journal entries at December 31.
  2. Open ledger accounts for each of the accounts involved, enter the balances as shown in the trial balance, post the adjusting journal entries, and calculate year-end balances.

Alternate problem C The following adjusted trial balance is for Dream Home Realty Company:

DREAM HOME REALTY COMPANY  
Adjusted Trial Balance     
June 30   
    Debits Credits
Cash  $ 98,000  
Accounts Receivable   40,000  
Office Equipment   35,000  
Accumulated Depreciation—Office Equipment     $ 14,000
Automobiles   40,000  
Accumulated Depreciation—Automobiles     20,000
Accounts Payable     63,000
Capital Stock     75,000
Retained Earnings, beginning     54,700
Dividends   5,000  
Commissions Revenue     170,000
Salaries Expense   25,000  
Commissions Expense   120,000  
Gas and Oil Expense   4,000  
Rent Expense   14,800  
Supplies Expense   1,400  
Utilities Expense   2,000  
Depreciation Expense—Office Equipment   3,500  
Depreciation Expense—Automobiles   8,000  
  $ 396,700 $396,700

Prepare the closing journal entries at the end of the June 30 fiscal year.

Alternate problem D The adjusted trial balance for Penrod Insurance Consultants, Inc., follows:

 Penrod Insurance Consultants, Inc. 
 Adjusted Trial Balance  
 December 31  
  Debits Credits
Cash $ 107,200  
Accounts Receivable 68,000  
Interest Receivable 400  
Notes Receivable 20,000  
Prepaid Insurance 2,400  
Supplies on Hand 1,800  
Land 32,000  
Buildings 190,000  
Accumulated Depreciation—Buildings   $ 40,000
Office Equipment 28,000  
Accumulated Depreciation—Office Equipment   8,000
Accounts Payable   48,000
Salaries Payable   8,500
Interest Payable   900
Notes Payable (due next year)   64,000
Capital Stock   120,000
Retained Earnings, January 1   42,800
Dividends 40,000  
Commissions Revenue   392,520
Advertising Expense 24,000  
Commissions Expense 75,440  
Travel Expense 12,880  
Depreciation Expense—Buildings 8,500  
Salaries Expense 98,400  
Depreciation Expense—Office Equipment 2,800  
Supplies Expense 3,800  
Insurance Expense 3,600  
Repairs Expense 1,900  
Utilities Expense 3,400  
Interest Expense 1,800  
Interest Revenue   1,600
  $726,320 $726,320
  1. Prepare an income statement for the year ended December 31.
  2. Prepare a statement of retained earnings.
  3. Prepare a classified balance sheet.

Alternate problem E The following trial balance and additional data are for Ramon Data Processing Company:

RAMON DATA PROCESSING COMPANY 
Trial Balance  
December 31  
  Debits Credits
Cash $ 76,000  
Accounts Receivable 98,000  
Prepaid Rent 7,200  
Prepaid Insurance 2,400  
Equipment 80,000  
Accumulated Depreciation—Equipment   $ 40,000
Accounts Payable   30,000
Capital Stock   100,000
Retained Earnings, 2010 January 1   65,600
Dividends 24,000  
Service Revenue   370,000
Commissions Expense 270,000  
Travel Expense 36,000  
Miscellaneous Expense 12,000  
  $ 605,600 $ 605,600

The prepaid rent is for the 2- year period beginning January 1 of this year.

The equipment is expected to last 10 years with no salvage value.

The prepaid insurance was for the 12-month period beginning April 1

Accrued commissions payable total $ 3,000 at December 31.

  1. Prepare the adjusting journal entries and post.
  2. Prepare the adjusted trial balance.

Alternate problem F The following trial balance and additional data are for Best-Friend Pet Hospital, Inc.

BEST-FRIEND PET HOSPITAL, INC.  
Trial Balance    
December 31   Debits Credits
Cash $ 16,490  
Accounts Receivable   54,390  
Supplies on Hand   900  
Prepaid Fire Insurance   1,800  
Prepaid Rent   21,600  
Equipment   125,000  
Accumulated Depreciation —Equipment     $ 25,000
Accounts Payable     29,550
Notes Payable     9,000
Capital Stock     150,000
Retained Earnings, January 1     20,685
Service Revenue     179,010
Interest Expense   225  
Salaries Expense   142,200  
Advertising Expense   29,250  
Supplies Expense   2,135  
Miscellaneous Expense   3,705  
Legal and Accounting Expense   13,750  
Utilities Expense   1,800  
  $ 413,245 $ 413,245

The company consistently followed the policy of initially debiting all prepaid items to asset accounts.

Prepaid fire insurance is $ 600 as of the end of the year.

Supplies on hand are $ 638 as of the end of the year.

Prepaid rent is $ 2,625 as of the end of the year.

The equipment is expected to last 10 years with no salvage value.

Accrued salaries are $ 2,625.

  1. Prepare the adjusting entries for December 31 and post.
  2. Prepare an adjusted trial balance.
  3. Prepare the December 31 closing entries and post.
  4. Prepare a post-closing trial balance.

Alternate problem G The following trial balance and additional data are for Roswell Interior Decorators, Inc.:

ROSWELL INTERIOR DECORATORS, INC 
Trial Balance  
2010 December 31  
  Debits Credits
Cash $ 85,400  
Accounts Receivable 81,600  
Supplies on Hand 4,000  
Prepaid Rent 12,240  
Prepaid Advertising 2,880  
Prepaid Insurance 4,400  
Office Equipment 7,600  
Accumulated Depreciation—Office Equipment   $ 2,760
Office Furniture 29,200  
Accumulated Depreciation—Office Furniture   8,280
Accounts Payable   25,200
Notes Payable (due next year)   4,000
Capital Stock   100,000
Retained Earnings,  January 1   22,400
Dividends 45,520  
Service Revenue   250,000
Salaries Expense 98,800  
Utilities Expense 20,000  
Miscellaneous Expense 24,000  
  $ 412,640 $ 412,640

Supplies on hand at December 31, are $ 1,000.

Rent expense for the year is $ 10,000.

Advertising expense for the year is $ 2,304.

Insurance expense for the year is $ 2,400.

Depreciation expense is office equipment, $ 912, and office furniture, $ 3,000.

Accrued interest on notes payable is $ 150.

Accrued salaries are $ 4,200.

  1. Prepare the adjusting journal entries and post.
  2. Prepare an adjusted trial balance.
  3. Prepare an income statement.
  4. Prepare a statement of retained earnings.
  5. Prepare a classified balance sheet.
  6. Prepare closing entries.
  7. Prepare a post-closing trial balance.

Alternate Problem H Jupiter Publishing Company began operations on 2010 December 1. The company’s bookkeeper intended to use the cash basis of accounting. Consequently, the bookkeeper recorded all cash receipts and disbursements for items relating to operations in revenue and expense accounts. No adjusting entries were made prior to preparing the financial statements for December.

Dec. 1 Issued capital stock for $ 300,000 cash.

3    Received $ 144,000 for magazine subscriptions to run for two years from this date. The magazine is published monthly on the 23rd.

4    Paid for advertising to be run in a national periodical for six months (starting this month). The cost was $ 36,000.

7    Purchased for cash an insurance policy to cover a two-year period beginning December 15, $ 24,000.

12  Paid the annual rent on the building, $ 36,000, effective through 2011 November 30.

15  Received $ 216,000 cash for two-year subscriptions starting with the December       issue.

15  Salaries for the period December 1–15 amounted to $ 48,000. Beginning as of this date, salaries will be paid on the 5th and 20th of each month for the preceding two-week period.

20 Salaries for the period December 1–15 were paid.

23  Supplies purchased for cash, $ 21,600. (Only $ 1,800 of these were subsequently used in 2010.)

27  Printing costs applicable equally to the next six issues beginning with the December issue were paid in cash, $ 144,000.

31  Cash sales of the December issue, $ 84,000.

31  Unpaid salaries for the period December 16–31 amounted to $ 22,000.

31  Sales on account of December issue, $ 14,000.

  1. Prepare journal entries for the transactions as the bookkeeper prepared them.
  2. Prepare journal entries as they would have been prepared under the accrual basis. Where the entry is the same as under the cash basis, merely indicate “same”. Where possible, record the original transaction so that no adjusting entry would be       necessary at the end of the month. Ignore explanations.

Beyond the numbers—Critical thinking

Business decision case A Heather and Dan Holt met while both were employed in the interior trim and upholstery department of an auto manufacturer. After their marriage, they decided to earn some extra income by doing small jobs involving canvas, vinyl, and upholstered products. Their work was considered excellent, and at the urging of their customers, they decided to go into business for themselves, operating out of the basement of the house they owned. To do this, they invested $ 120,000 cash in their business. They spent $ 10,500 for a sewing machine (expected life, 10 years) and $ 12,000 for other miscellaneous tools and equipment (expected life, 5 years). They undertook only custom work, with the customers purchasing the required materials, to avoid stocking any inventory other than supplies. Generally, they required an advance deposit on all jobs.

The business seemed successful from the start, as the Holts received orders from many customers. But they felt something was wrong. They worked hard and charged competitive prices. Yet there seemed to be barely enough cash available from the business to cover immediate personal needs. Summarized, the checkbook of the business for 2010, their second year of operations, showed:

Balance, 2010 January 1     $ 99,200
Cash received from customers:        
For work done in 2009 $ 36,000    
For work done in 2010   200,000    
For work to be done in 2011   48,000   284,000
      $ 383,200
Cash paid out:        
Two-year insurance policy dated 2010 January 1 $ 19,200    
Utilities   48,000    
Supplies   104,000    
Other Expenses   72,000    
Taxes, including sales taxes   26,400    
Dividends   40,000   309,600
Balance, 2010 December 31     $ 73,600

Considering how much they worked, the Holts were concerned that the cash balance decreased by $ 25,600 even though they only received dividends of $ 40,000. Their combined income from the auto manufacturer had been $ 45,000. They were seriously considering giving up their business and going back to work for the auto manufacturer. They turned to you for advice. You discovered the following:

Of the supplies purchased in 2010, $ 24,000 were used on jobs billed to customers in 2010; no supplies were used for any other work.

Work completed in 2010 and billed to customers for which cash had not yet been received by year-end amounted to $ 40,000.

Prepare a written report for the Holts, responding to their belief that their business is not sufficiently profitable. (Hint: Prepare an income statement for 2010 and include it in your report.)

Annual report analysis B Using the Annual report appendix, calculate the current ratios for the two years shown for The Limited, Inc. Write a summary of the results of your calculations. Also, look at some of the other data provided by the company in preparing your comments. For instance, look at the net income for the last three years.

Broader perspective – Writing experience C Read the “A broader perspective: Skills for the long haul”. Write a description of a career in public accounting broader perspective at each level within the firm. Discuss the skills needed and how you could develop these skills.

Group project D In teams of two or three students, interview a management accountant. Management accountants may have the title of chief financial officer (CFO), controller, or some other accounting title within a company. Seek information on the advantages and disadvantages of working as a management accountant. Also inquire about the nature of the work and any training programs offered by the company. As a team, write a memorandum to the instructor summarizing the results of the interview. The heading of the memorandum should contain the date, to whom it is written, from whom, and the subject matter.

Group project E With a small group of students, obtain an annual report of a company in which you have some interest. You may obtain the annual report from your instructor, the library, the Internet, or the company. Describe the nature of each item on the classified balance sheet. You may have to do library research on some of the items. Also, calculate the current ratio for the most recent two years and comment. Write a report to your instructor summarizing the results of the project.

Group project F With a small group of students and using library sources, write a paper comparing the features of three different accounting software packages (such as Peachtree Complete, Quikbooks Pro, DacEasy, MYOB Business Essentials, NetSuite Small Businee and Cougar Mountain ). Give the strengths and weaknesses of each. Cite sources for the information and treat direct quotes properly.

Using the Internet—A view of the real world

Visit the following Internet site:

Merck | Home

Pursue choices you are offered on the screen under Investor Relations until you locate the most recent consolidated balance sheet. In a short report to your instructor, describe how you got to the balance sheet and identify the major headings used in the balance sheet. For instance, the first such heading is Assets. Also, calculate the current ratio.

Visit the following Internet site:

http://www.kodak.com

Type in “Annual report” in the search box to locate the most recent annual report and then find the consolidated  statement of financial position. Identify the major headings within the balance sheet and calculate the current ratio for the most recent year. Write a memo to your instructor summarizing your findings.