Weygandt, Kimmel, KiesoAccounting Principles, 13th Edition test bank by TBtutors

Type:

Test Bank

Resource:

Accounting Principles

Edition:

13th Edition

Author(s):

Jerry J. Weygandt Paul D. Kimmel Donald E. Kieso

CHAPTER 1 Accounting in Action ASSIGNMENT CLASSIFICATION TABLE Brief Exercises

Questions

Identify the activities and users associated with accounting.

1, 2, 3, 4, 5

1, 2

Explain the building blocks of accounting: ethics, principles, and assumptions.

6, 7, 8, 9, 10

3, 4

State the accounting equation, and define its components.

11, 12, 13, 22

1, 2, 3, 4, 5, 6,

Analyze the effects of business transactions on the accounting equation.

14, 15, 16, 18

7, 8, 9

6, 7, 8

1A, 2A, 4A, 5A

Describe the four financial statements and how they are prepared.

17, 19, 20, 21

10, 11

9, 10, 11, 12, 13, 14, 15, 16, 17, 18

2A, 3A, 4A, 5A

Explain the career Opportunities in accounting.

Do It!

Exercises

A Problems

Learning Objectives

1-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

1-2

Description

Difficulty Level

Time Allotted (min.)

Analyze transactions and compute net income.

Moderate

40–50

Analyze transactions and prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

Prepare income statement, owner’s equity statement, and balance sheet.

Moderate

50–60

Analyze transactions and prepare financial statements.

Moderate

40–50

Determine financial statement amounts and prepare owner’s equity statement.

Moderate

40–50

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

Yes, this is correct. Virtually every organization and person in our society uses accounting information. Businesses, investors, creditors, government agencies, and not-for-profit organizations must use accounting information to operate effectively.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Accounting is the process of identifying, recording, and communicating the economic events of an organization to interested users of the information. The first step of the accounting process is therefore to identify economic events that are relevant to a particular business. Once identified and measured, the events are recorded to provide a history of the financial activities of the organization. Recording consists of keeping a chronological diary of these measured events in an orderly and systematic manner. The information is communicated through the preparation and distribution of accounting reports, the most common of which are called financial statements. A vital element in the communication process is the accountant’s ability and responsibility to analyze and interpret the reported information.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

(a) Internal users are those who plan, organize, and run the business and therefore are officers and other decision makers. (b) To assist management, managerial accounting provides internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, and forecasts of cash needs for the next year.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

(a) Investors (owners) use accounting information to make decisions to buy, hold, or sell ownership shares of a company. (b) Creditors use accounting information to evaluate the risks of granting credit or lending money.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

No, this is incorrect. Bookkeeping usually involves only the recording of economic events and therefore is just one part of the entire accounting process. Accounting, on the other hand, involves the entire process of identifying, recording, and communicating economic events.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

Benton Travel Agency should report the land at $90,000 on its December 31, 2020 balance sheet. This is true not only at the time the land is purchased, but also over the time the land is held. In determining which measurement principle to use (cost or fair value) companies weigh the factual nature of cost figures versus the relevance of fair value. In general, companies use cost. Only in situations where assets are actively traded do companies apply the fair value principle. An important concept that accountants follow is the historical cost principle.

LO2 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

The monetary unit assumption requires that only transaction data that can be expressed in terms of money be included in the accounting records. This assumption enables accounting to quantify (measure) economic events.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owners and all other economic entities.

LO2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

1-3

Questions Chapter 1 (Continued) 9.

The three basic forms of business organizations are: (1) proprietorship, (2) partnership, and (3) corporation.

LO2 BT: K Difficulty: Easy TOT:1 min. AACSB: None AICPA FC: Reporting

10.

One of the advantages Helen Rupp would enjoy is that ownership of a corporation is represented by transferable shares of stock. This would allow Helen to raise money easily by selling a part of her ownership in the company. Another advantage is that because holders of the shares (stockholders) enjoy limited liability; they are not personally liable for the debts of the corporate entity. Also, because ownership can be transferred without dissolving the corporation, the corporation enjoys an unlimited life.

LO2 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

11.

The basic accounting equation is Assets = Liabilities + Owner’s Equity.

LO3 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

12.

(a) Assets are resources owned by a business. Liabilities are claims against assets. Put more simply, liabilities are existing debts and obligations. Owner’s equity is the ownership claim on total assets. (b) Owner’s equity is affected by owner’s investments, drawings, revenues, and expenses.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

13.

The liabilities are: (b) Accounts payable and (g) Salaries and wages payable.

LO3 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

14.

Yes, a business can enter into a transaction in which only the left side of the accounting equation is affected. An example would be a transaction where an increase in one asset is offset by a decrease in another asset. An increase in the Equipment account which is offset by a decrease in the Cash account is a specific example.

LO4 BT: C Difficulty: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

15.

Business transactions are the economic events of the enterprise recorded by accountants because they affect the basic accounting equation. (a) The death of the owner of the company is not a business transaction as it does not affect the basic accounting equation. (b) Supplies purchased on account is a business transaction as it affects the basic accounting equation. (c) An employee being fired is not a business transaction as it does not affect the basic accounting equation. (d) A withdrawal of cash from the business is a business transaction as it affects the basic accounting equation.

LO4 BT: C Difficulty: Moderate TOT: 4 min. AACSB: None AICPA FC: Reporting

16.

(a) (b) (c) (d)

Decrease assets and decrease owner’s equity. Increase assets and decrease assets. Increase assets and increase owner’s equity. Decrease assets and decrease liabilities.

LO4 BT: C Difficulty: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

1-4

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 1 (Continued) 17.

(a) Income statement. (b) Balance sheet. (c) Income statement.

(d) Balance sheet. (e) Balance sheet and owner’s equity statement. (f) Balance sheet.

LO5 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

18.

No, this treatment is not proper. While the transaction does involve a receipt of cash, it does not represent revenues. Revenues are the gross increase in owner’s equity resulting from business activities entered into for the purpose of earning income. This transaction is simply an additional investment made by the owner in the business.

LO4 BT: C Difficulty: Moderate TOT: 3 min. AACSB: None AICPA FC: Reporting

19.

Yes. Net income does appear on the income statement—it is the result of subtracting expenses from revenues. In addition, net income appears in the owner’s equity statement—it is shown as an addition to the beginning-of-period capital. Indirectly, the net income of a company is also included in the balance sheet. It is included in the capital account which appears in the owner’s equity section of the balance sheet.

LO5 BT: C Difficulty: Moderate TOT: 4 min. AACSB: None AICPA FC: Reporting

20.

(a) Ending capital balance ..................................................................................... Less: Beginning capital balance ....................................................................... Net income.......................................................................................................

$189,000 186,000 $ 3,000

($189,000 – $186,000 = $3,000) (End. cap. bal. – Beg. cap. bal. = Net inc.)

(b) Ending capital balance ..................................................................................... Less: Beginning capital balance ....................................................................... Deduct: Investment ......................................................................................... Net loss............................................................................................................

$189,000 186,000 3,000 13,000 $ (10,000)

($189,000 – $186,000 – $13,000 = ($10,000)) (End. cap. bal. – Beg. cap. bal. – Invest. = Net. Loss) LO5 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

21.

(a) Total revenues ($20,000 + $70,000) ................................................................

$90,000

($20,000 + $70,000 = $90,000) (Cash rev. + Rev. on acct. = Tot. rev.)

(b) Total expenses ($26,000 + $40,000) ................................................................

$66,000

($26,000 + $40,000 = $66,000) (Cash exp. + Exp. on acct. = Tot. exp.)

(c)

Total revenues ................................................................................................. Total expenses ................................................................................................ Net income.......................................................................................................

$90,000 66,000 $24,000

($90,000 – $66,000 = $24,000) (Tot. rev. – Tot. exp. = Net inc.) LO5 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

22.

Apple’s accounting equation (in millions) at September 26, 2015 was $290,479 = $171,124 + $119,355.

($290,479= $171,124+ $119,355) (Tot. assets = Tot. liabl. + Tot. stkhldrs. equity) LO3 BT: AP Difficulty: Moderate TOT: 3 min. AACSB: Analytic AICPA FC: Measurement

1-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 1-1 (a) $90,000 – $50,000 = $40,000 (Owner’s Equity). ($90,000 - $50,000 = $40,000) (Assets – Liabl. = Owner’s equity)

(b) $44,000 + $70,000 = $114,000 (Assets). ($44,000 + $70,000 = $114,000) (Liabl. + Owner’s equity = Assets)

(c) $94,000 – $53,000 = $41,000 (Liabilities). ($94,000 - $53,000 = $41,000) (Assets – Owner’s equity = Liabl.) LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 1-2 (a) $120,000 + $230,000 = $350,000 (Total assets). ($120,000 + $230,000 = $350,000) (Liabl. + Owner’s equity = Assets)

(b) $190,000 – $89,000 = $101,000 (Total liabilities). ($190,000 - $89,000 = $101,000) (Assets – Owner’s equity = Liabl.)

(c) $900,000 – 0.5($900,000) = $450,000 (Owner’s equity). [$900,000 – ($900,000 x .5) = $450,000] [Assets – (Assets x .5) = Owner’s equity] LO3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 1-3 (a) ($800,000 + $150,000) – ($300,000 – $60,000) = $710,000 (Owner’s equity). [($800,000 + $150,000) – ($300,000 - $60,000) = $710,000] [(Beg. assets + Incr. in assets) – (Beg. liabl. – Decr. in liabl) = End. owner’s equity]

(b) ($300,000 + $100,000) + ($800,000 – $300,000 – $70,000) = $830,000 (Assets). [($300,000 + $100,000) + ($800,000 - $300,000 - $70,000) = $830,000] [(Beg. liabl. + Incr. in liabl.) + (Beg. assets – Beg. liabl. – Decr. in owner’s equity) = End. assets]

(c) ($800,000 – $80,000) – ($800,000 – $300,000 + $120,000) = $100,000 (Liabilities). [($800,000 - $80,000) – ($800,000 - $300,000 + $120,000) = $100,000] [(Beg. assets – Decr. in assets) – (Beg. assets – Beg. liabl. + Incr. in owner’s equity) = End. liabl.] LO3 BT: AP Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Measurement 1-6

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 1-4 Owner’s Equity

(a)

Assets

Liabilities

X X X

= $90,000 = $90,000 = $310,000

Owner’s Capital

+ $150,000 + $220,000

Owner’s – Drawings + Revenues – Expenses –

$40,000 + $450,000 – $340,000

(Assets = $90,000 + $150,000 - $40,000 + $450,000 - $340,000) (Assets = Liabl. + Owner’s cap. – Owner’s draw. + Rev. – Exp.)

(b)

$57,000 $57,000 X

= X + $35,000 = X + $45,000 = $12,000 ($57,000 – $45,000)

– $7,000

$52,000 – $35,000

($57,000 = Liabl. + $35,000 - $7,000 + $52,000 - $35,000) (Assets = Liabl. + Owner’s cap. – Owner’s draw. + Rev. – Exp.)

(c)

$660,000 = ($660,000 x 2/3) + X (Owner’s equity) $660,000 = $440,000 + X X = $220,000

[$660,000 = ($660,000 x 2/3) + Owner’s equity] [Assets = (Assets x 2/3) + Owner’s equity] LO3 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 1-5 A L A

(a) Accounts receivable (b) Salaries and wages payable (c) Equipment

A (d) Supplies OE (e) Owner’s capital L (f) Notes payable

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

BRIEF EXERCISE 1-6 E R E E

(a) (b) (c) (d)

Advertising expense Service revenue Insurance expense Salaries and wages expense

D R E

(e) Owner’s drawings (f) Rent revenue (g) Utilities expense

LO3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

1-7

BRIEF EXERCISE 1-7

(a) (b) (c)

Assets + + –

Liabilities + NE NE

Owner’s Equity NE + –

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 1-8

(a) (b) (c)

Assets + – NE

Liabilities NE NE NE

Owner’s Equity + – NE

LO4 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 1-9 R NOE E

(a) Received cash for services performed (b) Paid cash to purchase equipment (c) Paid employee salaries

LO4 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Reporting

1-8

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 1-10 SMYTH COMPANY Balance Sheet December 31, 2020 Assets Cash ............................................................................................... Accounts receivable ..................................................................... Total assets ............................................................................

$ 49,000 62,500 $111,500

Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................. Owner’s equity Owner’s capital ...................................................................... Total liabilities and owner’s equity ...............................

$ 90,000 21,500 $111,500

[($49,000 + $62,500) = $90,000 + $21,500] [(Cash + Accts. rec.) = Accts. pay. + Owner’s cap.] LO5 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

BRIEF EXERCISE 1-11 BS IS OE, BS BS IS

(a) (b) (c) (d) (e)

Notes payable Advertising expense Owner’s capital Cash Service revenue

LO5 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Reporting

SOLUTIONS FOR DO IT! EXERCISES DO IT! 1-1 1. 2. 3. 4. 5.

False. The three steps in the accounting process are identification, recording, and communication. True. False. Financial accounting provides reports to help investors and creditors evaluate a company. True. True.

LO1 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

1-9

DO IT! 1-2 1. 2. 3. 4. 5.

False. Congress passed the Sarbanes-Oxley Act to reduce unethical behavior and decrease the likelihood of future corporate scandals. False. The standards of conduct by which actions are judged as right or wrong, honest or dishonest, fair or not fair, are ethics. False. The primary accounting standard-setting body in the United States is the Financial Accounting Standards Board (FASB). True. True.

LO2 BT: K Difficulty: Easy TOT: 4 min. ACSB: None AICPA FC: Measurement

DO IT! 1-3 1. 2. 3. 4.

Drawings is owner’s drawings (D); it decreases owner’s equity. Rent Revenue is revenue (R); it increases owner’s equity. Advertising Expense is an expense (E); it decreases owner’s equity. When the owner puts personal assets into the business, it is investment by owner (I); it increases owner’s equity.

LO3 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 1-4 Assets Cash (1) (2) +$20,000 (3) (4) –$ 2,500

Owner’s Equity

= Liabilities +

Accounts Accounts + Receivable = Payable +

Owner’s Capital

–

Owner’s Drawings

+$20,000 –$20,000

+ Revenues – Expenses +$20,000 –$3,200

+$3,200 –$2,500

LO4 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

1-10

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

DO IT! 1-5 (a) The total assets are $49,000, comprised of Cash $6,500, Accounts Receivable $13,500, and Equipment $29,000. ($6,500 + $13,500 + $29,000 = $49,000) (Cash + Accts. rec. + Equip. = Tot. assets)

(b) Net income is $20,500, computed as follows: Revenues Service revenue.................................................. Expenses Salaries and wages expense ............................. Rent expense ...................................................... Advertising expense .......................................... Total expenses ........................................... Net income .................................................................

$53,500 $16,500 10,500 6,000 33,000 $20,500

[$53,500 – ($16,500 + $10,500 + $6,000) = $20,500] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Advert. exp) = Net inc.]

(c) The ending owner’s equity balance of Kirby Company is $21,000. By rewriting the accounting equation, we can compute Owner’s Equity as Assets minus Liabilities, as follows: Total assets [as computed in (a)] ............................. Less: Liabilities Notes payable ..................................................... Accounts payable .............................................. Owner’s equity ...........................................................

$49,000 $25,000 3,000

28,000 $21,000

Note that it is not possible to determine the company’s owner’s equity in any other way, because the beginning balance for owner’s equity is not provided. [$49,000 – ($25,000 + $3,000) = $21,000] [Tot. assets – (Notes pay. + Accts. pay.) = Owner’s equity] LO 5 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement, Reporting

1-11

SOLUTIONS TO EXERCISES EXERCISE 1-1 C R C R R C C I R

Analyzing and interpreting information. Classifying economic events. Explaining uses, meaning, and limitations of data. Keeping a systematic chronological diary of events. Measuring events in dollars and cents. Preparing accounting reports. Reporting information in a standard format. Selecting economic activities relevant to the company. Summarizing economic events.

LO1 BT: C Difficulty: Moderate TOT: 6 min. AACSB: None AICPA FC: Measurement

EXERCISE 1-2 (a)

Internal users Marketing manager Production supervisor Store manager Vice-president of finance External users Customers Internal Revenue Service Labor unions Securities and Exchange Commission Suppliers

(b)

I E I E I I E

Can we afford to give our employees a pay raise? Did the company earn a satisfactory income? Do we need to borrow in the near future? How does the company’s profitability compare to other companies? What does it cost us to manufacture each unit produced? Which product should we emphasize? Will the company be able to pay its short-term debts?

LO1 BT: C Difficulty: Simple TOT: 6 min. AACSB: None AICPA FC: Reporting

1-12

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1-3 Angela Duffy, president of Duffy Company, instructed Jana Barth, the head of the accounting department, to report the company’s land in its accounting reports at its fair value of $170,000 instead of its cost of $100,000, in an effort to make the company appear to be a better investment. The historical cost principle requires that assets be recorded and reported at their cost, because cost is faithfully representative and can be objectively measured and verified. In this case, the historical cost principle should be used and Land reported at $100,000, not $170,000. The stakeholders include stockholders and creditors of Duffy Company, potential stockholders and creditors, other users of Duffy’s accounting reports, Angela Duffy, and Jana Barth. All users of Duffy’s accounting reports could be harmed by relying on information that may be unreliable. Angela Duffy could benefit if the company is able to attract more investors, but would be harmed if the inappropriate reporting is discovered. Similarly, Jana Barth could benefit by pleasing her boss, but would be harmed if the inappropriate reporting is discovered. Jana’s alternatives are to report the land at $100,000 or to report it at $170,000. Reporting the land at $170,000 is not appropriate since it may mislead many people who rely on Duffy’s accounting reports to make financial decisions. Jana should report the land at its cost of $100,000. She should try to convince Angela Duffy that this is the appropriate course of action, but be prepared to resign her position if Duffy insists. LO2 BT: C Difficulty: Moderate TOT: 8 min. AACSB: None AICPA FC: Measurement, Reporting

EXERCISE 1-4 1.

Incorrect. The historical cost principle requires that assets (such as buildings) be recorded and reported at their cost.

Correct. The monetary unit assumption requires that companies include in the accounting records only transaction data that can be expressed in terms of money.

Incorrect. The economic entity assumption requires that the activities of the entity be kept separate and distinct from the activities of its owner and all other economic entities.

LO2 BT: C Difficulty: Moderate TOT: 6 min. AACSB: None AICPA FC: Measurement

1-13

EXERCISE 1-5 Asset Cash Equipment Supplies Accounts receivable

Liability Accounts payable Notes payable Salaries and wages payable

Owner’s Equity Owner’s capital

LO3 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting

EXERCISE 1-6 1. 2. 3. 4. 5. 6. 7. 8. 9.

Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and increase in liabilities. Increase in assets and increase in owner’s equity. Decrease in assets and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in liabilities and decrease in owner’s equity. Increase in assets and decrease in assets. Increase in assets and increase in owner’s equity.

LO4 BT: C Difficulty: Easy TOT: 7 min. AACSB: None AICPA FC: Measurement

EXERCISE 1-7 1. 2. 3. 4.

5. 6. 7. 8.

(d) (b) (e) (f)

LO4 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement

EXERCISE 1-8 (a) 1. 2. 3. 4. 5.

1-14

Owner invested $15,000 cash in the business. Purchased equipment for $5,000, paying $2,000 in cash and the balance of $3,000 on account. Paid $750 cash for supplies. Performed $8,500 of services, receiving $4,000 cash and $4,500 on account. Paid $1,500 cash on accounts payable.

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1-8 (Continued) 6. 7. 8. 9. 10.

Owner withdrew $2,000 cash for personal use. Paid $560 cash for rent. Collected $450 cash from customers on account. Paid salaries and wages of $4,800. Incurred $400 of utilities expense on account.

(b) Investment............................................................................... Service revenue ...................................................................... Drawings ................................................................................. Rent expense .......................................................................... Salaries and wages expense ................................................. Utilities expense ..................................................................... Increase in owner’s equity .....................................................

$15,000 8,500 (2,000) (560) (4,800) (400) $15,740

($15,000 + $8,500 - $2,000 - $560 - $4,800 - $400 = $15,740) (Invest. + Serv. rev. – Owner’s draw. – Rent exp. – Sal. & wages exp. – Util. exp. = Incr. in owner’s equity)

(c) Service revenue ...................................................................... Rent expense .......................................................................... Salaries and wages expense ................................................. Utilities expense ..................................................................... Net income ..............................................................................

$8,500 (560) (4,800) (400) $2,740

[$8,500 – ($560 + $4,800 + $400) = $2,740] [Serv. rev. – (Rent exp. + Sal. & wages exp. + Util. exp.) = Net inc.] LO4 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 1-9 PEAT DELOITTE & CO. Income Statement For the Month Ended August 31, 2020 Revenues Service revenue ......................................................... Expenses Salaries and wages expense .................................... Rent expense ............................................................. Utilities expense ........................................................ Total expenses ................................................... Net income .........................................................................

$8,500 $4,800 560 400 5,760 $2,740

1-15

EXERCISE 1-9 (Continued) [$8,500 – ($560 + $4,800 + $400) = $2,740] [Serv. rev. – (Rent exp. + Sal. & wages exp. + Util. exp.) = Net inc.]

PEAT DELOITTE & CO. Owner’s Equity Statement For the Month Ended August 31, 2020 Owner’s capital, August 1 ............................................ Add: Investments ....................................................... Net income.........................................................

$ $15,000 2,740

Less: Drawings ............................................................ Owner’s capital, August 31 ..........................................

17,740 17,740 2,000 $15,740

[$0 + ($15,000 + $2,740) - $2,000 = $15,740] [Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draw. = End. owner’s cap.]

PEAT DELOITTE & CO. Balance Sheet August 31, 2020 Assets Cash ............................................................................................... Accounts receivable...................................................................... Supplies ......................................................................................... Equipment ...................................................................................... Total assets ............................................................................

$ 7,840 4,050 750 5,000 $17,640

$ 1,900 15,740 $17,640

[($7,840 + $4,050 + $750 + $5,000) = ($1,900 + $15,740)] [(Cash + Accts. rec. + Supp. + Equip.) = Accts. pay. + Owner’s cap.] LO5 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

1-16

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1-10 (a) Owner’s equity—12/31/19 ($400,000 – $250,000) ................. Less: Owner’s equity—1/1/19 ............................................... Increase in owner’s equity .................................................... Add: Drawings ..................................................................... Net income for 2019...............................................................

$150,000 100,000 50,000 12,000 $ 62,000

[($400,000 - $250,000) - $100,000 + $12,000 = $62,000] [(End. assets – End. liabl.) – Beg. owner’s equity + Owner’s draw. = Net inc.]

(b) Owner’s equity—12/31/20 ($460,000 – $300,000) ............... Less: Owner’s equity—1/1/20—see (a)............................... Increase in owner’s equity .................................................. Less: Additional investment .............................................. Net loss for 2020 ..................................................................

$160,000 150,000 10,000 34,000 $ (24,000)

[($460,000 - $300,000) - $150,000 - $34,000 = $(24,000) [(End. assets – End. liabl.) – Beg. owner’s equity – Addl. Invest. = Net loss]

(c) Owner’s equity—12/31/21 ($590,000 – $400,000) ............... Less: Owner’s equity—1/1/21—see (b) .............................. Increase in owner’s equity .................................................. Less: Additional investment .............................................. Add: Drawings ................................................................... Net income for 2021.............................................................

$190,000 160,000 30,000 12,000 18,000 25,000 $ 43,000

[($590,000 - $400,000) - $160,000 - $12,000 + $25,000 = $43,000] [(End. assets – End. liabl.) – Addl. Invest. + Owner’s draw. = Net inc.] LO5 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-11 (a) Total assets (beginning of year) ......................................... Less: Total liabilities (beginning of year) ........................... Total owner’s equity (beginning of year) ...........................

$110,000 85,000 $ 25,000

($110,000 - $85,000 = $25,000) (Beg. tot. assets – Beg. tot. liabl. = Beg. owner’s equity)

(b) Total owner’s equity (end of year) ...................................... Less: Total owner’s equity (beginning of year) ................. Increase in owner’s equity ..................................................

$ 40,000 25,000 $ 15,000

1-17

EXERCISE 1-11 (Continued) Total revenues ..................................................................... Total expenses ..................................................................... Net income ...........................................................................

$220,000 175,000 $ 45,000

Increase in owner’s equity ............................. Less: Net income ........................................... Add: Drawings .............................................. Additional investment ....................................

$ 15,000 $45,000 37,000)

(8,000) $ 7,000

($40,000 - $25,000 = $15,000); ($220,000 - $175,000 = $45,000); [$15,000 – ($45,000 - $37,000) = $7,000] (End. tot. owner’s equity – Beg. tot. owner’s equity = Incr. in owner’s equity); (Tot. rev. – Tot. exp. = Net inc.); [Incr. in owner’s equity – (Net inc. – Owner’s draw.) = Addl. Invest.]

(c) Total assets (beginning of year) ......................................... Less: Total owner’s equity (beginning of year) ................. Total liabilities (beginning of year) .....................................

$129,000 80,000 $ 49,000

($129,000 - $80,000 = $49,000) (Beg. tot. assets – Beg. tot. owner’s equity = Beg. tot. liabl.)

(d) Total owner’s equity (end of year) ...................................... Less: Total owner’s equity (beginning of year) ................. Increase in owner’s equity ..................................................

$130,000 80,000 $ 50,000

Total revenues ..................................................................... Total expenses ..................................................................... Net income ...........................................................................

$100,000 60,000 $ 40,000

Increase in owner’s equity ............................. Less: Net income ........................................... Additional investment ......................... Drawings .........................................................

$ 50,000 $(40,000) (25,000)

(65,000) $ 15,000

($130,000 - $80,000 = $50,000); ($100,000 - $60,000 = $40,000); [$50,000 – ($40,000 + $25,000) = $15,000] (End. owner’s equity – Beg. owner’s equity = Incr. in owner’s equity); (Tot. rev. – Tot. exp. = Net inc.); (Incr. in owner’s equity – (Net inc. + Addl. Invest.) = Owner’s draw.] LO5 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

1-18

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1-12 FLEETE CO. Income Statement For the Year Ended December 31, 2020 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Utilities expense ................................................... Advertising expense ............................................. Total expenses .............................................. Net income ....................................................................

$63,600 $30,200 10,400 3,100 1,800 45,500 $18,100

[$63,600 – ($30,200 + $10,400 + $3,100 + $1,800) = $18,100] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Util. exp. + Advert. exp.) = Net inc.]

FLEETE CO. Owner’s Equity Statement For the Year Ended December 31, 2020 Owner’s capital, January 1 ............................................................. Add: Net income ........................................................................... Less: Drawings ............................................................................... Owner’s capital, December 31 ........................................................

$42,000 18,100 60,100 6,000 $54,100

($42,000 + $18,100 - $6,000 = $54,100) (Beg. owner’s cap. + Net inc. – Owner’s draw. = End. owner’s cap.) LO5 BT: AP Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-13 CHENG COMPANY Balance Sheet December 31, 2020 Assets Cash ............................................................................................... Accounts receivable ..................................................................... Supplies ......................................................................................... Equipment...................................................................................... Total assets ............................................................................

$15,000 6,500 8,000 46,000 $75,500

1-19

EXERCISE 1-13 (Continued) Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................. Owner’s equity Owner’s capital ($67,500 – $13,000) ..................................... Total liabilities and owner’s equity ...............................

$21,000 54,500 $75,500

[($15,000 + $6,500 + $8,000 + $46,000) = $21,000 + ($67,500 - $13,000)} [(Cash + Accts. rec. + Supp. + Equip.) = Accts. pay. + (Owner’s cap. – Owner’s draw.)] LO5 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-14 (a) Camping fee revenues ........................................................... General store revenues ......................................................... Total revenue .................................................................. Expenses ................................................................................ Net income .............................................................................

$140,000 65,000 205,000 160,000 $ 45,000

[($140,000 + $65,000) - $160,000 = $45,000] [(Camp. Fee rev. + Gen. store rev.) – Exp. = Net inc.]

(b)

BUENA VISTA PARK Balance Sheet December 31, 2020 Assets Cash ........................................................................................ Accounts Receivable ............................................................. Equipment .............................................................................. Total assets .................................................................... Liabilities and Owner’s Equity Liabilities Notes payable ................................................................. Accounts payable........................................................... Total liabilities ......................................................... Owner’s equity Owner’s capital ($156,000 – $71,000) ............................ Total liabilities and owner’s equity ........................

$ 23,000 17,500 115,500 $156,000 $ 60,000 11,000 71,000 85,000 $156,000

[($23,000 + $17,500 + $115,500) = ($60,000 + $11,000) + ($156,000 - $71,000)] [(Cash + Accts. rec. + Equip.) = (Notes pay. + Accts. pay.) + Owner’s cap.)] LO5 BT: AP Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

1-20

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 1-15 SEA LEGS CRUISE COMPANY Income Statement For the Year Ended December 31, 2020 Revenues Ticket revenue .................................................. Expenses Salaries and wages expense ........................... Maintenance and repairs expense ................... Advertising expense ......................................... Utilities expense ............................................... Total expenses .......................................... Net income ................................................................

$410,000 $142,000 95,000 24,500 13,000 274,500 $135,500

[$410,000 – ($142,000 + $95,000 + $24,500 + $13,000) = $135,500] [Ticket rev. – (Sal. & wages exp. + Maint. & repairs exp. + Advert. exp. + Util. exp.) = Net inc.] LO5 BT: AP Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-16 HELEN ARCHER, ATTORNEY Owner’s Equity Statement For the Year Ended December 31, 2020 Owner’s capital, January 1 .................................................... Add: Net income .................................................................. Less: Drawings ...................................................................... Owner’s capital, December 31 ...............................................

$ 36,000 (a) 119,000 (b) 155,000 87,000 $ 68,000 (c)

Supporting Computations (a) Assets, January 1, 2020 ........................................................ Liabilities, January 1, 2020.................................................... Capital, January 1, 2020 ........................................................

$ 98,000 62,000 $ 36,000

(b) Legal service revenue ........................................................... Total expenses ....................................................................... Net income .............................................................................

$330,000 211,000 $119,000

1-21

EXERCISE 1-16 (Continued) (c) Assets, December 31, 2020 ................................................... Liabilities, December 31, 2020 .............................................. Capital, December 31, 2020 ...................................................

$168,000 100,000 $ 68,000

[($96,000 - $62,000) + ($335,000 - $211,000) - $90,000 = $68,000] [(Beg. assets – Beg. liabl.) + (Legal serv. rev. – Tot. exp.) – Owner’s draw. = End. owner’s cap.] LO5 BT: AP Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Reporting

EXERCISE 1-17 PAULO COMPANY Statement of Cash Flows For the Year Ended December 31, 2020 Cash flows from operating activities Cash receipts from revenues .......................... Cash payments for expenses………. .............. Net cash provided by operating activities ..... Cash flows investing activities Purchase of equipment ................................... Cash flows from financing activities……………… Investment by owner ....................................... Drawings by owner .......................................... Net increase in cash ................................................ Cash at the beginning of the period ....................... End of the period .....................................................

$600,000 (430,000) 170,000 (115,000) $280,000 (18,000)

262,000 317,000 30,000 $347,000

LO5 BT: AP Difficulty: Moderate TOT: 6 min. AACSB: Analytic AICPA FC: Reporting, IMA: Reporting

EXERCISE 1-18 Transactions 4, 5, and 7 are operating activities. Transaction 3 is an investing activity. Transactions 1, 2, and 6 are financing activities. LO5 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Reporting, IMA: Reporting

1-22

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

1-23

SPENGEL’S TRAVEL AGENCY

(a)

Owner’s Equity Accounts Accounts Cash + Receivable + Supplies + Equipment = Payable + .

1. +$15,000

Owner’s –

Drawings +

Revenues –

Expenses

+$15,000

+ 15,000 2. +

Owner’s Capital

+ 15,000

–600

+ 14,400

–$600

+ 15,000

–600

+$3,000

+000,000

+ 11,400

+ + 3,000 =

+ 15,000

–600

4. +000,000

+00,000

–700

+ 15,000

–1,300

+ 11,400 5. +

+ + 3,000 = + 700 +

–900

+$900

+ 10,500 6. – +3,000

+$700

+00,000

+0000

+ + 900 + + 3,000 = + 700 + +$7,000

+0000

+00,000

+0000

+ 13,500 + + 7,000 + + 900 + + 3,000 = + 700 + 7. +

–600

+ 0,000

+0000

+00,000

+0000

+ 12,900 + + 7,000 + + 900 + + 3,000 = + 700 + 8. +

–500

+ 0,000

+0000

+00,000

+ 12,400 + + 7,000 + + 900 + + 3,000 = 9. + –2,500

+ 0,000

+0000

+00,000

+ 9,900 + + 7,000 + + 900 + + 3,000 = 10. – +4,000

+–4,000

–1,300

+ 15,000 –

+$10,000

+ 15,000

10,000

–1,300

–$600

+ 15,000

–600

10,000

–1,300

–600

10,000

–1,300

+–500

+000,000

200

+ 15,000

–2,500

+0000 200

–600

+ 15,000

10,000

–3,800

$10,000 –

$3,800

+$13,900 + +$3,000 + +$900 + +$3,000 = +$200 + $20,800

+000,000

+$15,000

–

$600 $20,800

PROBLEM 1-1A

3. + –3,000

PROBLEM 1-1A (Continued) (b) Service revenue ..................................................... Expenses Salaries and wages ........................................ Rent ................................................................. Advertising ..................................................... Net income ..............................................

$10,000 $2,500 600 700

3,800 $ 6,200

[$10,000 – ($2,500 + $600 + $700) = $6,200] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Advert. exp.) = Net inc. LO 3, 4 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement, Reporting

1-24

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

1-25 SONYA JARED, ATTORNEY AT LAW Owner’s Equity Accounts Notes Accounts Owner’s Owner’s Cash + Receivable + Supplies + Equipment = Payable + Payable + Capital – Drawings + Revenues – Expenses Bal. $5,000 +

$1,500

–1,200

+1,200 6,200 +

–2,800 3,400 +

Weygandt, Accounting Principles, 12/e, Solutions Manual

300

+4,000

+3,500

7,400 +

3,800

–400

00,000

7,000 +

3,800

0000 +

00,000 300

$500

500

6,000

8,000

+ $8,800

00,000

000,000 +

–2,800 =

1,400

8,800 000,000

8,800

00,000 =

1,400

+2,000 +

$4,200

4,200

00,000

0000 +

6,000 00,000

0000 +

00,000

0000 +

$6,000

+$7,500 +

+1,600 =

3,000

8,800

7,500

000,000 +

8,800

7,500

–4,100

–$2,800 –900 00,000

2,900 +

3,800

–700

00,000

2,200 +

3,800

+2,000

00,000

4,200 +

3,800

0000 +

500

00,000 +

0000 +

500

3,000

00,000 +

0000 +

8,000

–400

00,000 +

3,000

00,000

+$2,000

00,000

8,000

= + 2,000 +

3,000

7,500

–4,100

–700

7,500

–4,100

–700

7,500

–4,100

–$700

00,000 =

8,800

8,800 000,000

8,800

–270

+270

(For Instructor Use Only)

$4,200 +

$3,800

$500

$16,500

$8,000

= +$2,000 +

$3,270

+ $8,800

–

$700

$16,500

$7,500

–

$4,370

PROBLEM 1-2A

(a)

PROBLEM 1-2A (Continued) (b)

SONYA JARED, ATTORNEY AT LAW Income Statement For the Month Ended August 31, 2020 Revenues Service revenue ............................................. Expenses Salaries and wages expense ........................ Rent expense ................................................. Advertising expense ..................................... Utilities expense ............................................ Total expenses ....................................... Net income ............................................................

$7,500 $2,800 900 400 270 4,370 $3,130

[$7,500 – ($2,800 + $900 + $400 + $270) = $3,130] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Advert. exp. + Util. exp.) = Net inc.]

SONYA JARED, ATTORNEY AT LAW Owner’s Equity Statement For the Month Ended August 31, 2020 Owner’s capital, August 1 ...................................................... Add: Net income ................................................................... Less: Drawings ...................................................................... Owner’s capital, August 31 .................................................... ($8,800 + $3,130 - $700 = $11,230) (Beg. owner’s cap. + Net inc. – owner’s draw. = End. owner’s cap.)

1-26

$ 8,800 3,130 11,930 700 $11,230

PROBLEM 1-2A (Continued) SONYA JARED, ATTORNEY AT LAW Balance Sheet August 31, 2020 Assets Cash......................................................................................... Accounts receivable ............................................................... Supplies .................................................................................. Equipment ............................................................................... Total assets .....................................................................

$ 4,200 3,800 500 8,000 $16,500

$ 2,000 3,270 5,270 11,230 $16,500

[($4,200 + $3,800 + $500 + $8,000) = ($2,000 + $3,270) + $11,230] [(Cash + Accts. rec. + Supp. + Equip.) = (Notes pay. + Accts. pay) + Owner’s cap.] LO 4, 5 BT: AP Difficulty: Moderate TOT: 55 min. AACSB: Analytic AICPA FC: Measurement, Reporting

1-27

PROBLEM 1-3A

(a)

DIVINE DESIGNS CO. Income Statement For the Month Ended June 30, 2020 Revenues Service revenue ........................................... Expenses Rent expense ............................................... Advertising expense ................................... Gasoline expense ........................................ Utilities expense .......................................... Total expenses ..................................... Net income ..........................................................

$6,500 $1,600 500 200 150 2,450 $4,050

[$6,500 – ($1,600 + $500 + $200 + $150) = $4,050] [Serv. rev. – (Rent exp. + Advert. exp. + Gas. Exp. + Util. exp.) = Net inc.]

DIVINE DESIGNS CO. Owner’s Equity Statement For the Month Ended June 30, 2020 Owner’s capital, June 1 ...................................... Add: Investments.............................................. Net income ............................................... Less: Drawings .................................................. Owner’s capital, June 30 .................................... [$0 + ($12,000 + $4,050) – $1,300 = $14,750] [Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draw. = End. owner’s cap.]

1-28

$ $12,000 4,050

16,050 16,050 1,300 $14,750

PROBLEM 1-3A (Continued) DIVINE DESIGNS CO. Balance Sheet June 30, 2020 Assets Cash......................................................................................... Accounts receivable ............................................................... Supplies .................................................................................. Equipment ............................................................................... Total assets .....................................................................

$10,150 2,800 2,000 10,000 $24,950

$ 9,000 1,200 10,200 14,750 $24,950

[($10,150 + $2,800 + $2,000 + $10,000) = ($9,000 + $1,200) + $14,750] [(Cash + Accts. rec. + Supp. + Equip.) = (Notes pay. + Accts. pay.) + Owner’s cap.]

(b)

DIVINE DESIGNS CO. Income Statement For the Month Ended June 30, 2020 Revenues Service revenue ($6,500 + $900) ................. Expenses Rent expense................................................ Advertising expense .................................... Gasoline expense ($200 + $150) ................. Utilities expense ........................................... Total expenses...................................... Net income ...........................................................

$7,400 $1,600 500 350 150 2,600 $4,800

[($6,500 + $900) – ($1,600 + $500 + ($200 + $150) + $150) = $4,800] [Serv. rev. – (Rent exp. + Advert. exp. + Gas. exp. + Util. exp.) = Net inc.]

1-29

PROBLEM 1-3A (Continued) DIVINE DESIGNS CO. Owner’s Equity Statement For the Month Ended June 30, 2020 Owner’s capital, June 1 ...................................... Add: Investments.............................................. Net income ...............................................

$ $12,000 4,800

Less: Drawings .................................................. Owner’s capital, June 30 .................................... [$0 + ($12,000 + $4,800) - $1,300 = $15,500] [Beg. owner;s cap. + (Invest. + Net inc.) – Owner’s draw. = End. owner’s cap.] LO5 BT: AP Difficulty: Moderate TOT: 55 min. AACSB: Analytic AICPA FC: Reporting

1-30

16,800 16,800 1,300 $15,500

1-31 .

(a)

MAGUS CONSULTING Assets

Date

Cash

Liabilities

Accounts Notes Accounts + Receivable + Supplies + Equipment = Payable + Payable +

Owner’s Capital

–

Owner’s Drawings

+ Revenues – Expenses

$7,000) ($ 900) $800

($ 800) -125 $ 4,000 -1,000

($6,400)

6,400 -2,500 -600

-4,000 $5,000 $4,200 ($2,400)

$800

$4,200

(4,200) = $5,000 + ($4,400) +

$7,000)

–

$1,000

+ $10,400

–

-275 $3,800

PROBLEM 1-4A

May 1 ($ 7,000) 2 -900 3 5 -125 9 (4,000) 12 -1,000 15 17 -2,500 20 -600 23 (4,000) 26 (5,000) 29 30 (275) ($14,600)+

Owner’s Equity

PROBLEM 1-4A (Continued) (b)

MAGUS CONSULTING Income Statement For the Month Ended May 31, 2020 Revenues Service revenue ($4,000 + $6,400) ................ Expenses Salaries and wages expense ........................ Rent expense ................................................. Utilities expense ............................................ Advertising expense ..................................... Total expenses ....................................... Net income ............................................................

$10,400 $2,500 900 275 125 3,800 $6,600

[$10,400 – ($2,500 + $900 + $275 + $125) = $6,600] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Util. exp. + Advert. exp.) = Net inc.]

(c)

MAGUS CONSULTING Balance Sheet May 31, 2020 Assets Cash ......................................................................................... Accounts receivable ............................................................... Supplies ................................................................................... Equipment ............................................................................... Total assets .....................................................................

$14,600 2,400 800 4,200 $22,000

Liabilities and Owner’s Equity Liabilities Notes payable .................................................................. Accounts payable............................................................ Total liabilities .......................................................... Owner’s equity Owner’s capital ................................................................ Total liabilities and owner’s equity ......................... *($7,000 + $6,600 – $1,000) [($14,600 + $2,400 +$800 + $4,200) = ($5,000 + $4,400) + ($7,000 + $6,600 - $1,000)] [(Cash + Accts. rec. + Supp. + Equip.) = (Notes pay. + Accts. pay.) + Owner’s cap.] LO4, 5 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Reporting

1-32

$ 5,000 4,400 9,400 12,600* $22,000

PROBLEM 1-5A

(a)

Alpha Company (a) $ 39,000 (b) 110,000 (c) 9,000

Beta Company (d) $50,000 (e) 40,000 (f) 33,000

Psi Company (g) $129,000 (h) 88,000 (i) 385,000

Omega Company (j) $ 60,000 (k) 251,000 (l) 444,000

(a) ($80,000 - $41,000 = $39,000); (1/1/20 Assets – 1/1/20 Liabl. = 1/1/20 Owner’s equity) (b) ($60,000 + $50,000 = $110,000); (12/31/20 Liabl. + 12/31/20 Owner’s equity = 12/31/20 Assets) (c) [$50,000 – ($39,000 + ($350,000 - $333,000) - $15,000) = $9,000]; [End. owner’s equity – (Beg. owner’s equity + (Rev. – Exp.) – Draw. = Add’l. invest.] (d) ($90,000 - $40,000 = $50,000); (1/1/20 Assets – 1/1/20 Owner’s equity = 1/1/20 Liabl.) (e) ($112,000 - $72,000 = $40,000); (12/31/20 Assets – 12/31/20 Liabl. = 12/31/20 Owner’s equity) (f) [$40,000 – ($40,000 + ($410,000 - $385,000) + $8,000) = $33,000]; [12/31/20 Owner’s equity – (Beg. owner’s equity + (Rev. – Exp.) + Invest.) = Draw.] (g) ($80,000 + $49,000 = $129,000); (1/1/20 Liabl. + 1/1/20 Owner’s equity = 1/1/20 Assets) (h) ($170,000 - $82,000 = $88,000); (12/31/20 Assets – 12/31/20 Owner’s equity = 12/31/20 Liabl.) (i) [($82,000 - $49,000) + $350,000 - $10,000 + $12,000 = $385,000]; [(12/31/20 Owner’s equity – 1/1/20 Owner’s equity) + Exp. – Add’l. invest. + Draw. = Rev.] (j) ($150,000 - $90,000 = $60,000); (1/1/20 Assets – 1/1/20 Owner’s equity = 1/1/20 Liabl.) (k) ($100,000 + $151,000 = $251,000); (12/31/20 Liabl. + 12/31/20 Owner’s equity = 12/31/20 Assets) (l) ($90,000 - $151,000 + $15,000 - $10,000 + $500,000 = $444,000); (1/1/20 Owner’s equity – 12/31/20 Owner’s equity + Add’l. invest. – Draw. + Rev. = Exp.)

(b)

ALPHA COMPANY Owner’s Equity Statement For the Year Ended December 31, 2020 Owner’s capital, January 1.................................. Add: Investment ................................................ Net income ................................................ Less: Drawings ................................................... Owner’s capital, December 31 ............................

$39,000 $ 9,000 17,000

26,000 65,000 15,000 $50,000

[$39,000 + ($9,000 + $17,000) - $15,000 = $50,000] [Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draw. = End. owner’s cap.]

1-33

PROBLEM 1-5A (Continued) (c) TO: FROM: Student The sequence of preparing financial statements is income statement, owner’s equity statement, and balance sheet. The interrelationship of the owner’s equity statement to the other financial statements results from the fact that net income from the income statement is reported in the owner’s equity statement and ending capital reported in the owner’s equity statement is the amount reported for owner’s equity on the balance sheet. LO4, 5 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication

1-34

CC1

(a)

CONTINUING COOKIE CHRONICLE

Natalie has a choice between a sole proprietorship and a corporation. A partnership is not an option since she is the sole owner of the business. A proprietorship is the easiest to create and operate because there are no formal procedures involved in creating the proprietorship. However, if she operates the business as a proprietorship she will personally have unlimited liability for the debts of the business. Operating the business as a corporation would limit her liability to her investment in the business. Natalie will in all likelihood require the services of a lawyer to incorporate. Costs to incorporate as well as additional ongoing costs to administrate and operate the business as a corporation may be costly. My recommendation is that Natalie choose the proprietorship form of business organization. This is a very small business where the cost of incorporating outweighs the benefits of incorporating at this point in time. Furthermore, it will be easier to stop operating the business if Natalie decides not to continue with it once she has finished college.

(b) Yes, Natalie will need accounting information to help her operate her business. She will need information on her cash balance on a daily or weekly basis to help her determine if she can pay her bills. She will need to know the cost of her services so she can establish her prices. She will need to know revenue and expenses so she can report her net income for personal income tax purposes, on an annual basis. If she borrows money, she will need financial statements so lenders can assess the liquidity, solvency, and profitability of the business. Natalie would also find financial statements useful to better understand her business and identify any financial issues as early as possible. Monthly financial statements would be best because they are more timely, but they are also more work to prepare.

1-35

CC1 (Continued) (c)

Assets: Cash, Accounts Receivable, Supplies, Equipment, Prepaid Insurance Liabilities: Accounts Payable, Unearned Service Revenue, Notes Payable Owner’s Equity: Owner’s Capital, Owner’s Drawings Revenue: Service Revenue Expenses: Advertising Expense, Rent Expense, Utilities Expense

(d) Natalie should have a separate bank account. This will make it easier to prepare financial statements for her business. The business is a separate entity from Natalie and must be accounted for separately. LO1 BT: C Difficulty: Moderate TOT: 45 min. AACSB: None AICPA FC: Measurement, Reporting AICPA PC: Communication

1-36

EC1

ETHICS CASE

(a) The students should identify all of the stakeholders in the case; that is, all the parties that are affected, either beneficially or negatively, by the action or decision described in the case. The list of stakeholders in this case are:  Travis Chase, interviewee.  Both Baltimore firms.  Great Northern College. (b) The students should identify the ethical issues, dilemmas, or other considerations pertinent to the situation described in the case. In this case the ethical issues are:  Is it proper that Travis charged both firms for the total travel costs rather than split the actual amount of $296 between the two firms?  Is collecting $592 as reimbursement for total costs of $296 ethical behavior?  Did Travis deceive both firms or neither firm? (c) Each student must answer the question for himself/herself. Would you want to start your first job having deceived your employer before your first day of work? Would you be embarrassed if either firm found out that you double-charged? Would your school be embarrassed if your act was uncovered? Would you be proud to tell your professor that you collected your expenses twice? LO2 BT: E Difficulty: Easy TOT: 12 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Reporting, Professional Demeanor

1-37

CT 1-1

FINANCIAL REPORTING PROBLEM

(a) Apple’s total assets at September 26, 2015 were $290,479 million and at September 27, 2014 were $231,839 million. (b) Apple had $21,120 million of cash and cash equivalents at September 26, 2015. (c) Apple had accounts payable totaling $35,490 million on September 26, 2015 and $30,196 million on September 27, 2014. (d) Apple reports net sales for three consecutive years as follows: 2013 2014 2015

$170,910 million $182,795 million $233,715 million

(e) From 2014 to 2015, Apple’s net income increased $13,884 million from $39,510 million to $53,394 million. LO5 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Reporting

1-38

CT 1-2

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. Total assets 2. Accounts receivable (net) 3. Net revenues 4. Net income

PepsiCo $69,667 $6,437 $63,056 $5,501

Coca-Cola $90,093 $ 3,941 $44,294 $ 7,366

(b) Coca-Cola’s total assets were approximately 29% greater than PepsiCo’s total assets, but PepsiCo’s net revenues were 42% greater than CocaCola’s net sales. PepsiCo’s accounts receivable were 63% greater than Coca-Cola’s and represent 10% of its net revenues. Coca-Cola’s accounts receivable amount to 9% of its net revenues. Both PepsiCo’s and Coca-Cola’s accounts receivable are at satisfactory levels. Coca-Cola’s net income is 34% greater than PepsiCo’s. It appears that these two companies’ operations are comparable in some ways, with Coca-Cola’s operations significantly more profitable. LO5 BT: E Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication

1-39

CT 1-3

(a)

COMPARATIVE ANALYSIS PROBLEM

(in millions) 1. Total assets 2. Accounts receivable (net) 3. Net sales 4. Net income (loss)

Amazon $65,444 $6,423 $79,268 $596

Wal-Mart $199,581 $5,624 $478,614 $15,080

(b) Wal-Mart’s total assets were approximately 205% greater than Amazon’s total assets, and Wal-Mart’s net sales were over 6 times greater than Amazon’s net sales. Wal-Mart’s accounts receivable were 12% less than Amazon’s and represent 1% of its net sales. Amazon’s accounts receivable amount to approximately 8% of its net sales. Both Amazon’s and Wal-Mart’s accounts receivable are at satisfactory levels. It appears that these two companies’ operations are comparable in some ways, but Wal-Mart’s operations are substantially more profitable. LO5 BT: E Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting AICPA PC: Communication

1-40

CT 1-4

REAL-WORLD FOCUS

(a) The four skill sets are: Strong leadership, Communication skills, Tech know-how, and Business savvy. (b) These skill sets are useful for the following reasons: Strong leadership: Being a good leader is a major plus in the business world. After all, strong leadership is critical to the success of any organization, whether it is a football team, movie production company, international accounting firm or locally owned restaurant. Communication skills: In business and accounting there’s demand for employees who don’t just have technical skills, but strong people skills too. Speaking and listening abilities go a long way in a business career. Tech know-how: Nearly every industry is computerized in some way, and computers are probably second nature to you. As a CPA, you’ll need to know about existing and emerging technologies in business environments and understand how to use them effectively. Business savvy: Being business savvy means mastering your creative problem-solving skills. You should know how to examine information, interpret it and find creative solutions. Innovative answers are what will get you respect in the business world – and so will responsibility, ethics and honesty. LO6 BT: C Difficulty: Easy TOT: 20 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

1-41

CT 1-5

DECISION MAKING ACROSS THE ORGANIZATION

(a) The estimate of the $6,100 loss was based on the difference between the $25,000 invested in the driving range and the bank balance of $18,900 at March 31. This is not a valid basis for determining income because it only shows the change in cash between two points in time. (b) The balance sheet at March 31 is as follows: CHIP-SHOT DRIVING RANGE Balance Sheet March 31, 2020 Assets Cash ......................................................................................... Buildings ................................................................................. Equipment ............................................................................... Total assets .....................................................................

$18,900 8,000 800 $27,700

Liabilities and Owner’s Equity Liabilities Accounts payable ($100 + $120) .................................... Owner’s equity Owner’s capital ($27,700 – $220) .................................... Total liabilities and owner’s equity .........................

220

27,480 $27,700

[($18,900 + $8,000 + $800) = ($100 + $120) + ($27,700 - $220)] [(Cash + Bldgs. + Equip.) = Accts. pay. + Owner’s cap.]

As shown in the balance sheet, the owner’s capital at March 31 is $27,480. The estimate of $2,480 of net income is the difference between the initial investment of $25,000 and $27,480. This was not a valid basis for determining net income because changes in owner’s equity between two points in time may have been caused by factors unrelated to net income. For example, there may be drawings and/or additional capital investments by the owner(s).

1-42

CT 1-5 (Continued) (c) Actual net income for March can be determined by adding owner’s drawings to the change in owner’s capital during the month as shown below: Owner’s capital, March 31, per balance sheet ...................... Less: Owner’s capital, March 1.............................................. Increase in owner’s capital .................................................... Add: Drawings ...................................................................... Net income ..............................................................................

$27,480 25,000 2,480 1,000 $ 3,480

($27,480 - $25,000 + $1,000 = $3,480) (End. owner’s cap. – Beg. owner’s cap. + Owner’s draw. = Net inc.)

Alternatively, net income can be found by determining the revenues earned [described in (d) below] and subtracting expenses. (d) Revenues earned can be determined by adding expenses incurred during the month to net income. March expenses were Rent, $1,000; Wages, $500; Advertising, $750; and Utilities, $120 for a total of $2,370. Revenues earned, therefore, were $5,850 ($2,370 + $3,480). Alternatively, since all revenues are received in cash, revenues earned can be computed from an analysis of the changes in cash as follows: Beginning cash balance ........................................ Less: Cash payments Caddy shack ......................................... Golf balls and clubs ............................. Rent ....................................................... Advertising............................................ Wages.................................................... Drawings ............................................... Cash balance before revenues ............................. Cash balance, March 31 ........................................ Revenues earned ...................................................

$25,000 $8,000 800 1,000 650 500 1,000

11,950 13,050 18,900 $ 5,850

[$25,000 – ($8,000 + $800 + $1,000 + $650 + $500 + $1,000) = $13,050]; ($18,900 - $13,050 = $5,850) [Beg. cash bal. – (Caddy shack + Golf balls & clubs + Rent + Advert. + Wages + Drawings) = Cash bal. before rev.]; (End. cash bal. – Cash bal. before rev. = Rev. earned) LO4 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

1-43

CT 1-6

To: From:

COMMUNICATION ACTIVITY

Amy Sawyer Student

I have received the balance sheet of New Hampshire Company as of December 31, 2020. A number of items in this balance sheet are not properly reported. They are: 1.

The balance sheet should be dated as of a specific date, not for a period of time. Therefore, it should be dated “December 31, 2020.”

Equipment should be shown as an asset and reported below Supplies on the balance sheet.

Accounts receivable should be shown as an asset, not a liability, and reported between Cash and Supplies on the balance sheet.

Accounts payable should be shown as a liability, not an asset. The note payable is also a liability and should be reported in the liability section.

Liabilities and owner’s equity should be shown on the balance sheet. Owner’s capital and Owner’s drawings are not liabilities.

Owner’s capital and Owner’s drawings are part of owner’s equity. The drawings account is not reported on the balance sheet but is subtracted from Owner’s capital to arrive at owner’s equity at the end of the period.

1-44

CT 1-6 (Continued) A correct balance sheet is as follows: NEW HAMPSHIRE COMPANY Balance Sheet December 31, 2020 Assets Cash ................................................................................................ Accounts receivable ...................................................................... Supplies .......................................................................................... Equipment.......................................................................................

$ 9,000 5,000 3,000 25,500 $42,500

Liabilities and Owner’s Equity Liabilities Notes payable ......................................................................... Accounts payable ................................................................... Total liabilities ................................................................. Owner’s equity Owner’s capital ($26,000 – $2,000) ........................................ Total liabilities and owner’s equity ................................

$10,500 8,000 18,500 24,000 $42,500

[($9,000 + $5,000 + $3,000 + $25,500) = ($10,500 + $8,000) + ($26,000 - $2,000)] [(Cash + Accts. rec. + Supp. + Equip.) = (Notes pay. + Accts. pay) + Owner’s cap.] LO5 BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Reporting, Communication AICPA FC: Reporting AICPA PC: Communication

1-45

CT 1-7 (a)

ALL ABOUT YOU

Answers to the following will vary depending on students’ opinions. (1) This does not represent the hiding of assets, but rather a choice as to the order of use of assets. This would seem to be ethical. (2) This does not represent the hiding of assets, but rather is a change in the nature of assets. Since the expenditure was necessary, although perhaps accelerated, it would seem to be ethical. (3) This represents an intentional attempt to deceive the financial aid office. It would therefore appear to be both unethical and potentially illegal. (4) This is a difficult issue. By taking the leave, actual net income would be reduced. The form asks the applicant to report actual net income. However, it is potentially deceptive since you do not intend on taking unpaid absences in the future, thus future income would be higher than reported income.

(b)

Companies might want to overstate net income in order to potentially increase the stock price by improving investors’ perceptions of the company. Also, a higher net income would make it easier to receive debt financing. Finally, managers would want a higher net income to increase the size of their bonuses.

(c)

Sometimes companies want to report a lower income if they are negotiating with employees. For example, professional sports teams frequently argue that they can not increase salaries because they aren’t making enough money. This also occurs in negotiations with unions. For tax accounting (as opposed to the financial accounting in this course) companies frequently try to minimize the amount of reported taxable income.

(d)

Unfortunately many times people who are otherwise very ethical will make unethical decisions regarding financial reporting. They might be driven to do this because of greed. Frequently it is because their superiors have put pressure on them to take an unethical action, and they are afraid to not follow directions because they might lose their job. Also, in some instances top managers will tell subordinates that they should be a team player, and do the action because it would help the company, and therefore would help fellow employees.

LO 2 BT: E Difficulty: Moderate TOT: 20 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Reporting, Professional Demeanor

1-46

CT 1-8

CONSIDERING PEOPLE, PLANET, AND PROFIT

The 5 aspirations relate to the company’s goals related to sustaining its business, its brands, its people, its community and the planet. LO N/A BT: C Difficulty: Easy TOT: 10 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication

1-47

CT 1-9

FASB CODIFICATION ACTIVITY

No solution necessary LO N/A BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Technology AICPA FC: None

1-48

IFRS EXERCISES

IFRS1-1 The International Accounting Standards Board, IASB, and the Financial Accounting Standards Board, FASB, are two key players in developing international accounting standards. The IASB releases international standards known as International Financial Reporting Standards (IFRS). The FASB releases U.S. standards, referred to a Generally Accepted Accounting Principles or GAAP. LO7 BT: K Difficulty: Easy TOT: 4 min. AACSB: Diversity AICPA FC: Measurement AICPA BB: International Perspective

IFRS1-2 A single set of high-quality accounting standards is needed because of increases in multinational corporations, mergers and acquisitions, use of information technology, and international financial markets. LO7 BT: K Difficulty: Easy TOT: 2 min. AACSB: Diversity AICPA FC: Measurement AICPA BB: International Perspective

1-49

IFRS1-3

(a) (b) (c)

INTERNATIONAL FINANCIAL REPORTING PROBLEM

Ernst & Young et Autres; Deloitte & Associes 22, avenue Montaigne Paris, France 75008 The company reports in Euros.

LO7 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International Perspective

1-50

CHAPTER 2 The Recording Process ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Describe how accounts, debits, and credits are used to record business transactions.

1, 2, 3, 4, 5, 6, 7, 8, 9, 21

Indicate how a journal is used in the recording process.

Brief Exercises

A Problems

Do It!

Exercises

1, 2

1, 2, 4, 6, 7,

10, 11, 12, 13, 14, 16

3, 4, 5, 6

3, 5, 6, 7, 8, 1A, 2A, 3A, 9, 12, 13, 14, 5A 17

Explain how a ledger and posting help in the recording process.

15, 17

7, 8

10, 11, 14, 17

2A, 3A, 5A

Prepare a trial balance.

18, 19, 20

9, 10

11, 12, 13, 15, 16, 17

2A, 3A, 4A, 5A

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

1A, 2A, 3A, 5A

2-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

2-2

Description

Difficulty Level

Time Allotted (min.)

Journalize a series of transactions.

Easy

20–30

Journalize transactions, post, and prepare a trial balance.

Easy

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

Prepare a correct trial balance.

Moderate

30–40

Journalize transactions, post, and prepare a trial balance.

Moderate

40–50

ANSWERS TO QUESTIONS 1.

A T account has the following parts: (a) the title, (b) the left or debit side, and (c) the right or credit side.

LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

Disagree. The terms debit and credit mean left and right respectively.

LO 1 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

Pete is incorrect. The double-entry system merely records the dual effect of a transaction on the accounting equation. A transaction is not recorded twice; it is recorded once, with a dual effect.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Melissa is incorrect. A debit balance only means that debit amounts exceed credit amounts in an account. Conversely, a credit balance only means that credit amounts are greater than debit amounts in an account. Thus, a debit or credit balance is neither favorable nor unfavorable.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(a) Asset accounts are increased by debits and decreased by credits. (b) Liability accounts are decreased by debits and increased by credits. (c) Revenues and owner’s capital are increased by credits and decreased by debits. Expenses and owner’s drawing are increased by debits and decreased by credits.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(a) (b) (c) (d) (e) (f) (g)

Accounts Receivable—debit balance. Cash—debit balance. Owner’s Drawings—debit balance. Accounts Payable—credit balance. Service Revenue—credit balance. Salaries and Wages Expense—debit balance. Owner’s Capital—credit balance.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(a) (b) (c) (d) (e)

Accounts Receivable—asset—debit balance. Accounts Payable—liability—credit balance Equipment—asset—debit balance. Owner’s Drawings—owner’s equity—debit balance. Supplies—asset—debit balance.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(a) Debit Supplies and credit Accounts Payable. (b) Debit Cash and credit Notes Payable. (c) Debit Salaries and Wages Expense and credit Cash.

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

(1) (2) (3) (4) (5) (6)

Cash—both debit and credit entries. Accounts Receivable—both debit and credit entries. Owner’s Drawings—debit entries only. Accounts Payable—both debit and credit entries. Salaries and Wages Expense—debit entries only. Service Revenue—credit entries only.

2-3

LO 1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Questions Chapter 2 (Continued) 10.

The basic steps in the recording process are: (1) Analyze each transaction for its effect on the accounts. (2) Enter the transaction information in a journal. (3) Transfer the journal information to the appropriate accounts in the ledger.

LO 2 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

11.

The advantages of using the journal in the recording process are: (1) It discloses in one place the complete effects of a transaction. (2) It provides a chronological record of all transactions. (3) It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

12.

(a) The debit should be entered first. (b) The credit should be indented.

LO 2 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

13.

When three or more accounts are required in one journal entry, the entry is referred to as a compound entry. An example of a compound entry is the purchase of equipment, part of which is paid for with cash and the remainder is on account.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

14.

(a) No, debits and credits should not be recorded directly in the ledger. (b) The advantages of using the journal are: 1. It discloses in one place the complete effects of a transaction. 2. It provides a chronological record of all transactions. 3. It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

LO 2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

15.

The advantage of the last step in the posting process is to indicate that the item has been posted.

LO 3 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

16.

(a) Cash ............................................................................................ Owner’s Capital ................................................................... (Invested cash in the business)

7,000

(b) Prepaid Insurance ........................................................................ Cash.................................................................................... (Paid one-year insurance policy)

800

(c)

2-4

7,000

800

Supplies ....................................................................................... Accounts Payable................................................................ (Purchased supplies on account)

2,000

(d) Cash ............................................................................................ Service Revenue ................................................................. (Received cash for services performed)

8,500

2,000

8,500

LO 2 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

Questions Chapter 2 (Continued) 17.

(a) The entire group of accounts maintained by a company, including all the asset, liability, and owner’s equity accounts, is referred to collectively as the ledger. (b) A chart of accounts is a list of accounts and the account numbers that identify their location in the ledger. The chart of accounts is important, particularly for a company that has a large number of accounts, because it helps organize the accounts and define the level of detail that a company desires in its accounting system.

LO 3 BT: K Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement, Reporting

18.

A trial balance is a list of accounts and their balances at a given time. The primary purpose of a trial balance is to prove (check) that the debits equal the credits after posting. A trial balance also facilitates the discovery of errors in journalizing and posting. In addition, it is useful in preparing financial statements.

LO 4 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

19.

No, Victor is not correct. The proper sequence is as follows: (b) Business transaction occurs. (c) Information entered in the journal. (a) Debits and credits posted to the ledger. (e) Trial balance is prepared. (d) Financial statements are prepared.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

20.

(a) The trial balance would balance. (b) The trial balance would not balance.

LO 4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

21.

The normal balances are Cash debit, Accounts Payable credit, and Interest Expense debit.

LO 1 BT: K Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

2-5

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 2-1

1. 2. 3. 4. 5. 6.

Accounts Payable Advertising Expense Service Revenue Accounts Receivable Owner’s Capital Owner’s Drawings

(a) Debit Effect Decrease Increase Decrease Increase Decrease Increase

(b) Credit Effect Increase Decrease Increase Decrease Increase Decrease

LO 1 BT: C Difficulty: Easy TOT: 7 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-2

June 1 2 3 12

Account Debited Cash Equipment Rent Expense Accounts Receivable

Account Credited Owner’s Capital Accounts Payable Cash Service Revenue

LO 1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-3 June 1 2 3 12

Cash ..................................................................... Owner’s Capital ...........................................

5,000

Equipment............................................................ Accounts Payable ........................................

3,600

Rent Expense ...................................................... Cash..............................................................

800

Accounts Receivable .......................................... Service Revenue ..........................................

400

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

2-6

5,000 3,600 800 400

BRIEF EXERCISE 2-4 The basic steps in the recording process are: 1.

Analyze each transaction. In this step, business documents are examined to determine the effects of the transaction on the accounts.

Enter each transaction in a journal. This step is called journalizing and it results in making a chronological record of the transactions.

Transfer journal information to ledger accounts. This step is called posting. Posting makes it possible to accumulate the effects of journalized transactions on individual accounts.

LO 2 BT: C Difficulty: Moderate TOT: 6 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 2-5 (a) Aug.

Effect on Accounting Equation

(b)

Debit-Credit Analysis

The asset Cash is increased; the owner’s equity account Owner’s Capital is increased.

Debits increase assets: debit Cash $9,000. Credits increase owner’s equity: credit Owner’s Capital $9,000.

The asset Prepaid Insurance is increased; the asset Cash is decreased.

Debits increase assets: debit Prepaid Insurance $2,100. Credits decrease assets: credit Cash $2,100.

The asset Cash is increased; the revenue Service Revenue is increased.

Debits increase assets: debit Cash $3,600. Credits increase revenues: credit Service Revenue $3,600.

The expense Salaries and Wages Expense is increased; the asset Cash is decreased.

Debits increase expenses: debit Salaries and Wages Expense $1,000. Credits decrease assets: credit Cash $1,000.

LO 2 BT: C Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Measurement

2-7

BRIEF EXERCISE 2-6 Aug. 1 4 16 27

Cash ...................................................................... Owner’s Capital ............................................

9,000

Prepaid Insurance ................................................ Cash ..............................................................

2,100

Cash ...................................................................... Service Revenue...........................................

3,600

Salaries and Wages Expense .............................. Cash ..............................................................

1,000

9,000 2,100 3,600 1,000

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 2-7 Cash 5/12 4,200 5/15 3,000 Ending Bal. 7,200

5/5

Accounts Receivable 5,400 5/12

Service Revenue 5/5 5,400 5/15 3,000 Ending Bal. 8,400

4,200

Ending Bal. 1,200 LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 2-8 Cash Date May 12 15

2-8

Explanation

Ref. J1 J1

Debit 4,200 3,000

Credit

Balance 4,200 7,200

BRIEF EXERCISE 2-8 (Continued) Accounts Receivable Date Explanation May 5 12

Ref. J1 J1

Debit 5,400

Service Revenue Date Explanation May 5 15

Ref. J1 J1

Debit

Credit 4,200

Balance 5,400 1,200

Credit 5,400 3,000

Balance 5,400 8,400

LO 3 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 2-9 AMARO COMPANY Trial Balance June 30, 2020 Cash ............................................................................ Accounts Receivable ................................................. Equipment................................................................... Accounts Payable ...................................................... Owner’s Capital .......................................................... Owner’s Drawings ...................................................... Service Revenue ........................................................ Salaries and Wages Expense .................................... Rent Expense .............................................................

Debit $ 5,800 3,000 17,000

Credit

$ 8,100 15,000 1,200 10,000 5,100 1,000 $33,100

$33,100

[($5,800 + $3,000 + $17,000 + $1,200 + $5,100 + $1,000) = ($8,100 + $15,000 + $10,000)] [(Cash + Accts. rec. + Equip. + Owner’s draws. + Sal. & wages exp. + Rent exp.) = (Accts. pay. + Owner’s cap. +Serv. rev.)] LO 4 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

2-9

BRIEF EXERCISE 2-10 SHAUSHANK COMPANY Trial Balance December 31, 2020 Cash ........................................................................... Prepaid Insurance ..................................................... Accounts Payable...................................................... Unearned Service Revenue ...................................... Owner’s Capital ......................................................... Owner’s Drawings ..................................................... Service Revenue ........................................................ Salaries and Wages Expense ................................... Rent Expense.............................................................

Debit $10,600 3,500

Credit $ 3,000 2,200 9,000

4,500 25,400 18,600 2,400 $39,600

$39,600

[($10,600 + $3,500 + $4,500 + $18,600 + $2,400) = ($3,000 + $2,200 + $9,000 + $25,400)] [(Cash + Prepd. ins. + Owner’s draws. + Sal. & wages exp. + Rent exp.) = (Accts. pay. + Unearn. serv. rev. + Owner’s cap. + Serv. rev.)] LO 4 BT: AN Difficulty: Moderate TOT: 7 min. AACSB: Analytic AICPA FC: Measurement

2-10

SOLUTIONS FOR DO IT! EXERCISES DO IT! 2-1 Tom would likely need the following accounts in which to record the transactions necessary to ready his photography studio for opening day: Cash (debit balance) Supplies (debit balance) Notes Payable (credit balance)

Equipment (debit balance) Accounts Payable (credit balance) Owner’s Capital (credit balance)

LO 1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

DO IT! 2-2 Each transaction that is recorded is entered in the general journal. The three activities would be recorded as follows: 1. 2.

Cash.............................................................. Owner’s Capital...................................

6,500

Supplies ....................................................... Cash ..................................................... Accounts Payable ...............................

1,200

6,500 400 800

No entry because no transaction has occurred.

LO 2 BT: AP Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 2-3 Cash 4/1 1,600 4/16 700 4/3 3,400 4/20 250 4/30 4,050 LO 3 BT: AP Difficulty: Easy TOT: 3 min. AACSB: Analytic AICPA FC: Measurement

2-11

DO IT! 2-4 MACON COMPANY Trial Balance December 31, 2020 Cash ........................................................................... Accounts Receivable ................................................ Supplies ..................................................................... Equipment .................................................................. Notes Payable ............................................................ Accounts Payable...................................................... Salaries and Wages Payable .................................... Owner’s Capital ......................................................... Owner’s Drawings ..................................................... Service Revenue ........................................................ Rent Expense............................................................. Salaries and Wages Expense ...................................

Debit $ 6,000 8,000 7,000 80,000

Credit

$ 20,000 11,000 3,000 28,000 9,000 90,000 4,000 38,000 $152,000

$152,000

[($6,000 + $8,000 + $7,000 + $80,000 + $9,000 + $4,000 + $38,000) = ($20,000 + $11,000 + $3,000 + $28,000 + $90,000)] [(Cash + Accts. rec. + Supp. + Equip. + Owner’s draws. + Rent exp. + Sal. & wages exp.) = (Notes pay. + Accts. pay. + Sal. & wages pay. + Owner’s cap. + Serv. rev.)] LO 4 BT: AP Difficulty: Easy TOT: 7 min. AACSB: Analytic AICPA FC: Measurement

2-12

SOLUTIONS TO EXERCISES EXERCISE 2-1 1.

False. An account is an accounting record of a specific asset, liability, or owner’s equity item.

False. An account shows increases and decreases in the item it relates to.

False. Each asset, liability, and owner’s equity item has a separate account.

False. An account has a left, or debit side, and a right, or credit side.

True.

LO 1 BT: K Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

2-13

(b) Specific Account

Effect

(d) Normal Balance

(a) Basic Type

(b) Specific Account

Effect

(d) Normal Balance

Jan. 2

Asset

Cash

Increase

Debit

Owner’s Equity

Owner’s Capital

Increase

Credit

Asset

Equipment

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Supplies

Increase

Debit

Liability

Accounts Payable

Increase

Credit

Asset

Accounts Receivable

Increase

Debit

Owner’s Equity

Service Revenue

Increase

Credit

Owner’s Equity

Advertising Expense

Increase

Debit

Asset

Cash

Decrease

Debit

Asset

Cash

Increase

Debit

Asset

Accounts Decrease Receivable

Debit

Liability

Accounts Payable

Decrease

Credit

Asset

Cash

Decrease

Debit

Owner’s Equity

Owner’s Drawings

Increase

Debit

Asset

Cash

Decrease

Debit

Transaction

(a) Basic Type

(c)

Account Credited

LO 1 BT: C Difficulty: Easy TOT: 12 min. AACSB: None AICPA FC: Measurement

(c)

EXERCISE 2-2

2-14

Account Debited

EXERCISE 2-3 General Journal Account Titles and Explanation

Date Jan. 2

3 9 11 16 20 23 28

Ref.

Debit

Cash ................................................... Owner’s Capital .........................

10,000

Equipment ......................................... Cash ...........................................

3,000

Supplies ............................................. Accounts Payable .....................

600

Accounts Receivable ........................ Service Revenue ........................

2,400

Advertising Expense......................... Cash ...........................................

350

Cash ................................................... Accounts Receivable ................

900

Accounts Payable ............................. Cash ...........................................

300

Owner’s Drawings ............................. Cash ...........................................

1,000

J1 Credit 10,000 3,000 600 2,400 350 900 300 1,000

LO2 BT: AP Difficulty: Easy Tot: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 2-4 Oct. 1

Debits increase assets: debit Cash $17,000. Credits increase owner’s equity: credit Owner’s Capital $17,000.

No transaction.

Debits increase assets: debit Equipment $1,900. Credits increase liabilities: credit Accounts Payable $1,900.

2-15

EXERCISE 2-4 (Continued) Oct. 6

Debits increase assets: debit Accounts Receivable $3,800. Credits increase revenues: credit Service Revenue $3,800.

Debits decrease liabilities: debit Accounts Payable $1,300. Credits decrease assets: credit Cash $1,300.

Debits increase expenses: debit Salaries and Wages Expense $2,500. Credits decrease assets: credit Cash $2,500.

LO1 BT: C Difficulty: Easy Tot: 8 min. AACSB: None AICPA FC: Measurement

EXERCISE 2-5

Date Oct. 1

General Journal Account Titles and Explanation Cash .................................................. Owner’s Capital .......................

Ref.

Debits 17,000

No entry.

Equipment ........................................ Accounts Payable ...................

1,900

Accounts Receivable ....................... Service Revenue......................

3,800

Accounts Payable ............................ Cash .........................................

1,300

Salaries and Wages Expense .......... Cash .........................................

2,500

27 30

LO2 BT: AP Difficulty: Easy Tot: 8 min. AACSB: Analytic AICPA FC: Measurement

2-16

17,000

Credit

1,900 3,800 1,300 2,500

EXERCISE 2-6 (a)

1. 2. 3.

Increase the asset Cash, increase the liability Notes Payable. Increase the asset Equipment, decrease the asset Cash. Increase the asset Supplies, increase the liability Accounts Payable.

(b)

Cash ................................................................. Notes Payable ........................................... Equipment........................................................ Cash .......................................................... Supplies ........................................................... Accounts Payable.....................................

2. 3.

5,000 5,000 3,900 3,900 650 650

LO1, 2 BT: AP Difficulty: Easy Tot: 8 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 2-7 (a)

Assets = Liabilities + Owner’s Equity 1. + + (Investment) 2. – – (Expense) 3. + + (Revenue) 4. – – (Drawings)

(b)

1. 2. 3. 4.

Cash ................................................................. Owner’s Capital ........................................ Rent Expense .................................................. Cash .......................................................... Accounts Receivable ...................................... Service Revenue ....................................... Owner’s Drawings ........................................... Cash ..........................................................

4,000 4,000 840 840 5,200 5,200 750 750

LO1, 2 BT: AP Difficulty: Easy Tot: 10 min. AACSB: Analytic AICPA FC: Measurement

2-17

EXERCISE 2-8 General Journal Date March 1 3 5 8

12 14 22 24 27 28 30

Account Titles Rent Expense ................................................... Cash ..........................................................

Debit 1,200

Accounts Receivable ....................................... Service Revenue ......................................

160

Cash .................................................................. Service Revenue ......................................

Equipment ........................................................ Cash .......................................................... Accounts Payable ....................................

600

Cash .................................................................. Accounts Receivable ...............................

160

Salaries and Wages Expense.......................... Cash ..........................................................

525

Utilities Expense .............................................. Cash ..........................................................

Cash .................................................................. Notes Payable...........................................

1,500

Repairs Expense .............................................. Cash ..........................................................

220

Accounts Payable ............................................ Cash ..........................................................

510

Prepaid Insurance ............................................ Cash ..........................................................

1,800

1,200 160 75 90 510 160 525 72 1,500 220 510

LO 2 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

2-18

Credit

1,800

EXERCISE 2-9 Trans. 1. 2. 3. 4. 5. 6. 7.

8. 9. 10. 11. 12. 13.

Account Titles Cash .................................................................... Owner’s Capital ..........................................

Debit 24,000

Cash .................................................................... Notes Payable.............................................

7,000

Equipment .......................................................... Cash ............................................................

11,000

Rent Expense ..................................................... Cash ............................................................

1,200

Supplies.............................................................. Cash ............................................................

1,450

Advertising Expense ......................................... Accounts Payable ......................................

600

Cash .................................................................... Accounts Receivable ......................................... Service Revenue ........................................

2,000 16,000

Owner’s Drawings ............................................. Cash ............................................................

400

Utilities Expense ................................................ Cash ............................................................

2,000

Accounts Payable .............................................. Cash ............................................................

600

Interest Expense ................................................ Cash ............................................................

Salaries and Wages Expense............................ Cash ............................................................

6,400

Cash .................................................................... Accounts Receivable .................................

12,000

Credit 24,000 7,000 11,000 1,200 1,450 600

18,000 400 2,000 600 40 6,400 12,000

LO 2 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

2-19

EXERCISE 2-10 1. 2. 3. 4. 5.

False. The general ledger contains all the asset, liability, and owner’s equity accounts. True. False. The accounts in the general ledger are arranged in financial statement order: first the assets, then the liabilities, owner’s capital, owner’s drawings, revenues, and expenses. True. False. The general ledger is not a book of original entry; transactions are first recorded in the general journal, then in the general ledger.

LO3 BT: K Difficulty: Easy Tot: 4 min. AACSB: None AICPA FC: Measurement

EXERCISE 2-11 (a)

Aug. 1 10 31 Bal.

Cash 5,000 Aug. 12 2,600 900 6,200

Accounts Receivable Aug. 25 1,700 Aug. 31 Bal. 800

Aug. 12

2-20

Equipment 5,000

2,300

900

Notes Payable Aug. 12

2,700

Owner’s Capital Aug. 1

5,000

Service Revenue Aug. 10 25 Bal.

2,600 1,700 4,300

EXERCISE 2-11 (Continued) (b)

JUNE FELDMAN, INVESTMENT BROKER Trial Balance August 31, 2020 Cash......................................................................... Accounts Receivable .............................................. Equipment ............................................................... Notes Payable ......................................................... Owner’s Capital ...................................................... Service Revenue .....................................................

Debit $ 6,200 800 5,000

$12,000

Credit

$ 2,700 5,000 4,300 $12,000

[($6,200 + $800 + $5,000) = ($2,700 + $5,000 + $4,300)] [(Cash + Accts. rec. + Equip.) = (Notes pay. + Owner’s cap. + Serv. rev.)] LO3, 4 BT: AP Difficulty: Easy Tot: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-21

EXERCISE 2-12 (a) Date Apr. 1

2-22

General Journal Account Titles and Explanation Ref. Cash ..................................................... Owner’s Capital .............................. (Owner’s investment of cash in business) Supplies……………………………….. Accounts Payable………………… (Purchased supplies on Account)

Debit 14,000

14,000 1,800 1,800

Accounts Receivable……………….. Service Revenue………………….. (Billed customers for services provided)

3,000

Cash ..................................................... Service Revenue ............................. (Received cash for services performed)

900

Salaries and Wages Expense............. Cash ................................................ (Paid salaries to date)

1,300

Accounts Payable ............................... Cash ................................................ (Paid creditors on account)

1,500

Cash ..................................................... Accounts Receivable ..................... (Received cash in payment of account)

400

Cash ..................................................... Unearned Service Revenue ........... (Received cash for future services)

1,000

Credit

3,000

900

1,300

1,500

400

1,000

EXERCISE 2-12 (Continued) (b)

NEGRETE LANDSCAPING COMPANY Trial Balance April 30, 2020 Cash.......................................................................... Accounts Receivable ............................................... Supplies ................................................................... Accounts Payable .................................................... Unearned Service Revenue ..................................... Owner’s Capital ....................................................... Service Revenue ...................................................... Salaries and Wages Expense .................................

Debit $13,500 2,600 1,800

Credit

300 1,000 14,000 3,900

1,300 $19,200

$19,200

[($13,500 + $2,600 + $1,800 + $1,300) = ($300 + $1,000 + $14,000 + $3,900)] [(Cash + Accts. rec. + Supp. + Sal. & wages exp.) = (Accts. pay. + Unearn. serv. rev. + Owner’s cap. + Serv. rev.)] LO2, 4 BT: AP Difficulty: Moderate Tot: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 2-13 (a) Oct. 1 Cash ............................................................. Owner’s Capital .................................... (Owner’s investment of cash in business)

3,000

10 Cash ............................................................. Service Revenue .................................. (Received cash for services performed)

750

10 Cash ............................................................. Notes Payable ...................................... (Obtained loan from bank)

4,000

20 Cash ............................................................. Accounts Receivable ........................... (Received cash in payment of account)

500

3,000

750

4,000

500

2-23

EXERCISE 2-13 (Continued) 20 Accounts Receivable .................................. Service Revenue .................................. (Billed clients for services performed) (b)

940 940

SHUMWAY CO. Trial Balance October 31, 2020 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Equipment .......................................................... Notes Payable .................................................... Accounts Payable .............................................. Owner’s Capital .................................................. Owner’s Drawings.............................................. Service Revenue ................................................ Salaries and Wages Expense ............................ Rent Expense......................................................

Debit $ 7,200 1,240 400 2,000

Credit

$ 4,000 500 5,000 300 2,490 500 350 $11,990

$11,990

[($7,200 + $1,240 + $400 + $2,000 + $300 + $500 + $350) = ($4,000 + $500 + $5,000 + $2,490)] [(Cash + Accts. rec. + Supp. + Equip. + Owner’s draws. + Sal. & wages exp. + Rent exp.) = (Notes pay. + Accts. pay. + Owner’s cap. + Serv. rev.)] LO2, 4 BT: AP Difficulty: Moderate Tot: 15 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 2-14 (a) Date Sept. 1 5

25 30 2-24

General Journal Account Titles and Explanation Cash .................................................. Owner’s Capital ........................

Ref. 101 301

Debit 10,000

Equipment ........................................ Cash .......................................... Accounts Payable ....................

157 101 201

14,000

Accounts Payable ............................ Cash ..........................................

201 101

3,000

Owner’s Drawings ............................ Cash ..........................................

306 101

900

J1 Credit 10,000 4,000 10,000 3,000 900

EXERCISE 2-14 (Continued) (b) Cash Date Sept. 1 5 25 30

Explanation

Equipment Date Explanation Sept. 5 Accounts Payable Date Explanation Sept. 5 25 Owner’s Capital Date Explanation Sept. 1 Owner’s Drawings Date Explanation Sept. 30

Ref. J1 J1 J1 J1

Ref. J1

Ref. J1 J1

Ref. J1

Debit 10,000

Credit 4,000 3,000 900

Debit 14,000

Debit

Credit

No. 157 Balance 14,000

Credit 10,000

No. 201 Balance 10,000 7,000

3,000

Debit

Debit 900

No. 101 Balance 10,000 6,000 3,000 2,100

Credit 10,000

Credit

No. 301 Balance 10,000 No. 306 Balance 900

LO2, 3 BT: AP Difficulty: Moderate Tot: 15 min. AACSB: Analytic AICPA FC: Measurement

2-25

EXERCISE 2-15 Error 1. 2. 3. 4. 5. 6.

(a) In Balance No Yes Yes No Yes No

(b) Difference $525 — — 415 — 27*

*$652 - $625 LO4 BT: AN Difficulty: Moderate Tot: 6 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 2-16 PROMPT DELIVERY SERVICE Trial Balance July 31, 2020 Debit Cash ($74,819 – Debit total without Cash $62,338) .................................................................. Accounts Receivable ................................................ Prepaid Insurance ..................................................... Equipment .................................................................. Notes Payable ............................................................ Accounts Payable...................................................... Salaries and Wages Payable .................................... Owner’s Capital ......................................................... Owner’s Drawings ..................................................... Service Revenue ........................................................ Salaries and Wages Expense ................................... Maintenance and Repairs Expense .......................... Gasoline Expense...................................................... Utilities Expense ........................................................

Credit

$12,481 7,640 1,968 45,360 $17,000 8,394 815 38,000 700 10,610 4,428 961 758 523 $74,819

$74,819

[($12,481 + $7,640 + $1,968 + $45,360 + $700 + $4,428 + $961 + $758 + $523) = ($17,000 + $8,394 + $815 + $38,000 + $10,610)] [(Cash + Accts. rec. + Prepd. ins. + Equip. + Owner’s draws. + Sal. & wages exp. + Maint. & repairs exp. + Gas. exp. + Util. exp.) = (Notes pay. + Accts. pay. + Sal. & wages pay. + Owner’s cap. + Serv. rev.)] LO 4 BT: AP Difficulty: Easy Tot: 10 min. AACSB: Analytic AICPA FC: Reporting

2-26

EXERCISE 2-17 (a) Date Oct.

1 2

No entry

Rent Expense .................................................... Cash ...........................................................

8 10 12 16 21 24 27 31

Account Titles Debit Cash .................................................................. 66,000 Owner’s Capital .........................................

Credit 66,000

2,000 2,000

Equipment ......................................................... 18,000 Cash ........................................................... Accounts Payable ..................................... Advertising Expense ........................................ Cash ...........................................................

500

Maintenance and Repairs Expense ................. Accounts Payable .....................................

390

Accounts Receivable........................................ Service Revenue .......................................

3,200

Supplies ............................................................ Accounts Payable .....................................

410

4,000 14,000 500 390 3,200 410

Accounts Payable ............................................. 14,000 Cash ........................................................... Utilities Expense ............................................... Cash ...........................................................

148

Cash .................................................................. Accounts Receivable ................................

3,200

Salaries and Wages Expense .......................... Cash ...........................................................

5,100

14,000 148 3,200 5,100

2-27

EXERCISE 2-17 (Continued) (b) 10/1 10/27

Bal.

Cash 66,000 10/4 3,200 10/7 10/8 10/21 10/24 10/31 43,452

2,000 4,000 500 14,000 148 5,100

Accounts Receivable 10/12 3,200 10/27 3,200

10/16 Bal.

Supplies 410 410

10/7 Bal.

Equipment 18,000 18,000

10/21

2-28

10/8 Bal.

3,200 3,200

Advertising Expense 500 500

Salaries and Wages Expense 10/31 5,100 Bal. 5,100 Maintenance & Repairs Expense 10/10 390 Bal. 390

Accounts Payable 14,000 10/7 14,000 10/10 390 10/16 410 Bal. 800 Owner’s Capital 10/1 Bal.

Service Revenue 10/12 Bal.

66,000 66,000

10/4 Bal.

Rent Expense 2,000 2,000

10/24 Bal.

Utilities Expense 148 148

EXERCISE 2-17 (Continued) (c)

BEYERS SECURITY COMPANY Trial Balance October 31, 2020 Cash .................................................................... Supplies .............................................................. Equipment .......................................................... Accounts Payable .............................................. Owner’s Capital .................................................. Service Revenue ................................................ Advertising Expense ......................................... Salaries and Wages Expense ............................ Maintenance and Repairs Expense .................. Rent Expense ..................................................... Utilities Expense ................................................

Debit $43,452 410 18,000

Credit

$ 800 66,000 3,200 500 5,100 390 2,000 148 $70,000

$70,000

(Tot. credits = Accts. pay. + Owner’s cap. + Serv. rev.) LO 2, 3, 4 BT: AP Difficulty: Moderate TOT: 30 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-29

SOLUTIONS TO PROBLEMS PROBLEM 2-1A

Date Account Titles and Explanation Mar. 1 Cash ........................................................ Owner’s Capital .............................. (Owner’s investment of cash in business)

2-30

Ref.

Debit 20,000

20,000

3 Land......................................................... Buildings ................................................. Equipment ............................................... Cash ................................................ (Purchased Rainbow’s Golf Land)

12,000 2,000 1,000

5 Advertising Expense .............................. Cash ................................................ (Paid for advertising)

900

6 Prepaid Insurance .................................. Cash ................................................ (Paid for one-year insurance policy)

600

10 Equipment ............................................... Accounts Payable .......................... (Purchased equipment on account)

1,050

18 Cash ........................................................ Service Revenue ............................ (Received cash for services performed)

1,100

19 Cash (150 x $10) ..................................... Unearned Service Revenue ........... (Received cash for coupon books sold)

1,500

J1 Credit

15,000

900

600

1,050

1,100

1,500

PROBLEM 2-1A (Continued) Date Mar. 25

Account Titles and Explanation Owner’s Drawings............................... Cash ............................................. (Withdrew cash for personal use)

Ref.

Debit 800

Credit 800

Salaries and Wages Expense ............. Cash ............................................. (Paid salaries)

250

Accounts Payable ............................... Cash ............................................. (Paid creditor on account)

1,050

Cash ..................................................... Service Revenue ......................... (Received cash for services performed)

2,700

250

1,050

2,700

LO1, 2 BT: AP Difficulty: Easy TOT: 20 AACSB: Analytic AICPA FC: Measurement

2-31

PROBLEM 2-2A (a) Date

Account Titles and Explanation

Ref.

Debit

Apr. 1

Cash ........................................................ Owner’s Capital ............................. (Owner’s investment of cash in business)

101 301

20,000

No entry—not a transaction.

Rent Expense ......................................... Cash ............................................... (Paid monthly office rent)

729 101

1,500

Supplies.................................................. Accounts Payable .......................... (Purchased supplies on account from Dazzle Company)

126 201

4,000

Accounts Receivable ............................. Service Revenue ............................ (Billed clients for services performed)

112 400

5,100

Cash ........................................................ Unearned Service Revenue........... (Received cash for future service)

101 209

1,000

Cash ........................................................ Service Revenue ............................ (Received cash for services performed)

101 400

2,100

Salaries and Wages Expense................ Cash ............................................... (Paid monthly salary)

726 101

2,800

2-32

20,000

J1 Credit

1,500

4,000

5,100

1,000

2,100

Weygandt, Accounting Principles, 13/e, Solutions Manual

2,800

(For Instructor Use Only)

PROBLEM 2-2A (Continued) Date

Account Titles and Explanation

Ref.

Debits

Apr. 30

Accounts Payable .............................. Cash ............................................ (Paid Dazzle Company on account)

201 101

2,600

Credit 2,600

(b) Cash Date Apr. 1 2 11 20 30 30

Explanation

Accounts Receivable Date Explanation Apr. 10 Supplies Date Explanation Apr. 3 Accounts Payable Date Explanation Apr. 3 30 Unearned Service Revenue Date Explanation Apr. 11 .

Ref. J1 J1 J1 J1 J1 J1

Ref. J1

Ref. J1 J1

Ref. J1

Debit 20,000

Credit 1,500

1,000 2,100 2,800 2,600

Debit 5,100

Debit 4,000

Debit

Credit

No. 112 Balance 5,100

Credit

No. 126 Balance 4,000

Credit 4,000

No. 201 Balance 4,000 1,400

2,600

Debit

No. 101 Balance 20,000 18,500 19,500 21,600 18,800 16,200

Credit 1,000

No. 209 Balance 1,000 2-33

PROBLEM 2-2A (Continued) Owner’s Capital Date Explanation Apr. 1 Service Revenue Date Explanation Apr. 10 20 Salaries and Wages Expense Date Explanation Apr. 30 Rent Expense Date Explanation Apr. 2

2-34

Ref. J1

Ref. J1 J1

Ref. J1

Debit

Debit 2,800

Debit 1,500

Credit 20,000

No. 301 Balance 20,000

Credit 5,100 2,100

No. 400 Balance 5,100 7,200

Credit

No. 726 Balance 2,800

Credit

No. 729 Balance 1,500

PROBLEM 2-2A (Continued) (c)

VERA ERNST, DENTIST Trial Balance April 30, 2020 Cash..................................................................... Accounts Receivable .......................................... Supplies .............................................................. Accounts Payable ............................................... Unearned Service Revenue ................................ Owner’s Capital .................................................. Service Revenue ................................................. Salaries and Wages Expense ............................ Rent Expense ......................................................

Debit $16,200 5,100 4,000

Credit

$ 1,400 1,000 20,000 7,200 2,800 1,500 $29,600

$29,600

[($16,200 + $5,100 + $4,000 + $2,800 + $1,500) = ($1,400 + $1,000 + $20,000 + $7,200)] [(Cash + Accts. rec. + Supp. + Sal. & wages exp. + Rent exp.) = (Accts. pay. + Unearn. serv. rev. + Owner’s cap. + Serv. rev.)] LO1, 2, 3, 4 BT: AP Difficulty: Easy TOT: 40 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-35

PROBLEM 2-3A (a) Trans. 1.

Account Titles and Explanation

Debit

Cash ................................................... Owner’s Capital ........................

40,000 40,000

No entry—Not a transaction.

Prepaid Rent ...................................... Cash ..........................................

24,000

Equipment.......................................... Cash .......................................... Accounts Payable.....................

30,000

Prepaid Insurance ............................. Cash ..........................................

1,800

Supplies ............................................. Cash ..........................................

420

Supplies ............................................. Accounts Payable.....................

1,500

Cash ................................................... Accounts Receivable ........................ Service Revenue .......................

8,000 12,000

Accounts Payable ............................. Cash ..........................................

400

Cash ................................................... Accounts Receivable ...............

3,000

Utilities Expense................................ Accounts Payable.....................

380

10.

11.

2-36

Credit

24,000

10,000 20,000

1,800

420

1,500

20,000

400

3,000

380

PROBLEM 2-3A (Continued) Trans. 12.

Account Titles and Explanation

Debit

Salaries and Wages Expense ........... Cash ...........................................

6,100

Credit 6,100

(b) (1)

(8) (10)

(8)

(6) (7)

(5)

(3)

Cash 40,000 (3) (4) (5) (6) 8,000 (9) 3,000 (12) 8,280

(4) 24,000 10,000 1,800 420 400 (9) 6,100

Service Revenue (8)

Supplies 420 1,500 1,920

Prepaid Rent 24,000 24,000

Accounts Payable (4) 20,000 (7) 1,500 400 (11) 380 21,480 Owner’s Capital (1)

Accounts Receivable 12,000 (10) 3,000 9,000

Prepaid Insurance 1,800 1,800

Equipment 30,000 30,000

40,000 40,000

20,000 20,000

Salaries and Wages Expense (12) 6,100 6,100

(11)

Utilities Expense 380 380

2-37

PROBLEM 2-3A (Continued) (c)

MAQUOKETA SERVICES Trial Balance May 31, 2020 Cash ................................................................ Accounts Receivable ..................................... Supplies .......................................................... Prepaid Insurance .......................................... Prepaid Rent................................................... Equipment ...................................................... Accounts Payable .......................................... Owner’s Capital .............................................. Service Revenue ............................................ Salaries and Wages Expense ........................ Utilities Expense ............................................

Debit $ 8,280 9,000 1,920 1,800 24,000 30,000

Credit

$21,480 40,000 20,000 6,100 380 $81,480

$81,480

[($8,280 + $9,000 + $1,920 + $1,800 + $24,000 + $30,000 + $6,100 + $380) = ($21,480 + $40,000 + $20,000)] [(Cash + Accts. rec. + Supp. + Prepd. ins. + Prepd. rent + Equip. + Sal. & wages exp. + Util. exp.) = (Accts. pay. + Owner’s cap. + Serv. rev.)] LO1, 2, 3, 4 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-38

PROBLEM 2-4A

SERGEI ASBRECHT CO. Trial Balance June 30, 2020 Cash ($3,140 – $270) .................................................. Accounts Receivable ($2,812 + ($850 - $580)) .......... Supplies ($1,200 – $710) ............................................ Equipment ($2,600 + $710) ........................................ Accounts Payable ($3,666 – $306 – $360)................. Unearned Service Revenue ....................................... Owner’s Capital .......................................................... Owner’s Drawings ($800 + $600) ............................... Service Revenue ($2,480 + ($980 - $98)) ................... Salaries and Wages Expense ($3,200 + $900 – $600) ............................................. Utilities Expense ........................................................

Debit $ 2,870 3,082 490 3,310

Credit

$ 3,000 1,100 8,000 1,400 3,362 3,500 810 $15,462

$15,462

[(($3,140 - $270) + ($2,812 + $270) + ($1,200 - $710) + ($2,600 + $710) + ($800 + $600) + ($3,200 + $900 $600) + $810) = (($3,666 - $306 - $360) + $1,100 + $8,000 + ($2,480 + $882))] [(Cash + Accts. rec. + Supp. + Equip. + Owner’s draws. + Sal. & wages exp. + Util. exp.) = (Accts. pay. + Unearned serv. rev. + Owner’s cap. + Serv. rev.)] LO4 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Reporting

2-39

PROBLEM 2-5A (a) & (c) Cash Date Mar. 1 2 9 10 12 20 20 31 31 31

Explanation Balance

Accounts Receivable Date Explanation Mar. 31 Land Date Mar. 1

Explanation Balance

Buildings Date Explanation Mar. 1 Balance Equipment Date Explanation Mar. 1 Balance

2-40

Ref.  J1 J1 J1 J1 J1 J1 J1 J1 J1

Ref. J1

Ref. 

450 9,000

No. 101 Balance 3,000 1,500 5,800 1,700 800 5,800 3,800 700 1,150 10,150

Debit 450

Credit

No. 112 Balance 450

Credit

No. 140 Balance 24,000

Credit

No. 145 Balance 10,000

Credit

No. 157 Balance 10,000

Debit

Credit 1,500

4,300 4,100 900 5,000 2,000 3,100

Debit

PROBLEM 2-5A (Continued) Accounts Payable Date Explanation Mar. 1 Balance 2 10 Owner’s Capital Date Explanation Mar. 1 Balance Service Revenue Date Explanation Mar. 9 20 31 Rent Revenue Date Explanation Mar. 31 Advertising Expense Date Explanation Mar. 12 Salaries and Wages Expense Date Explanation Mar. 31

Ref.  J1 J1

Ref. 

Ref. J1 J1 J1

Ref. J1

Debit

Credit 2,000

4,100

Debit

Debit 900

Debit 3,100

Credit

No. 201 Balance 7,000 9,000 4,900 No. 301 Balance 40,000

Credit 4,300 5,000 9,000

No. 400 Balance 4,300 9,300 18,300

Credit 900

No. 429 Balance 900

Credit

No. 610 Balance 900

Credit

No. 726 Balance 3,100

2-41

PROBLEM 2-5A (Continued) Rent Expense Date Explanation Mar. 2 20

Ref. J1 J1

Debit 3,500 2,000

Credit

No. 729 Balance 3,500 5,500

(b) J1 Date

Account Titles and Explanation

Ref.

Debit

Mar. 2

Rent Expense........................................ Accounts Payable ........................ Cash ............................................. (Rented films for cash and on account)

729 201 101

3,500

No entry.

Cash ...................................................... Service Revenue .......................... (Received cash for services performed)

101 400

4,300

Accounts Payable ($2,000 + $2,100) ...... Cash ............................................. (Paid creditors on account)

201 101

4,100

4,300

4,100

No entry.

Advertising Expense ............................ Cash ............................................. (Paid advertising expense)

610 101

900

Cash ...................................................... Service Revenue .......................... (Received cash for services performed)

101 400

5,000

Rent Expense........................................ Cash ............................................. (Paid film rental)

729 101

2,000

2-42

2,000 1,500

Credit

900

5,000

2,000

PROBLEM 2-5A (Continued) Date

Account Titles and Explanation

Ref.

Debit

Mar. 31

Salaries and Wages Expense .............. Cash ............................................. (Paid salaries expense)

726 101

3,100

Cash....................................................... Accounts Receivable............................ Rent Revenue .............................. (15% x $6,000) (Received cash and balance on account for rent revenue)

101 112 429

450 450

Cash....................................................... Service Revenue .......................... (Received cash for services performed)

101 400

9,000

Credit 3,100

900

9,000

2-43

PROBLEM 2-5A (Continued) (d)

STARR THEATER Trial Balance March 31, 2020 Cash ................................................................. Accounts Receivable ...................................... Land.................................................................. Buildings .......................................................... Equipment ........................................................ Accounts Payable............................................ Owner’s Capital ............................................... Service Revenue .............................................. Rent Revenue .................................................. Advertising Expense ....................................... Salaries and Wages Expense ......................... Rent Expense..................................................

Debit $10,150 450 24,000 10,000 10,000

Credit

$ 4,900 40,000 18,300 900 900 3,100 5,500 $64,100

$64,100

[($10,150 + $450 + $24,000 + $10,000 + $10,000 + $900 + $3,100 + $5,500) = ($4,900 + $40,000 + $18,300 + $900)] [(Cash + Accts. rec. + Land + Bldgs. + Equip. + Advert. exp. + Sal. & wages exp. + Rent exp.) = (Accts. pay. + Owner’s cap. + Serv. rev. + Rent rev.)] LO1, 2, 3, 4 BT: AP Difficulty: Moderate TOT: 45 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-44

CC2

(a)

Nov.

COOKIE CREATIONS

GENERAL JOURNAL Account Titles and Explanation

Debit

J1 Credit

8 No entry required for cashing U.S. Savings Bonds—this is a personal transaction. 8 Cash ......................................................... Owner’s Capital ..................................

500

11 Advertising Expense ............................... Cash.....................................................

13 Supplies ................................................... Cash.....................................................

125

14 Equipment ............................................... Owner’s Capital ..................................

300

16 Cash ......................................................... Notes Payable .....................................

2,000

17 Equipment ............................................... Cash.....................................................

900

20 Cash ......................................................... Service Revenue .................................

125

25 Cash ......................................................... Unearned Service Revenue................

30 Prepaid Insurance ................................... Cash.....................................................

1,320

500 65 125 300 2,000 900 125 30 1,320

2-45

CC2 (Continued) (b)

Date Nov.

Explanation 8 11 13 16 17 20 25 30

Date

J1 J1 J1 J1 J1 J1 J1 J1

Explanation

Nov. 13

Date

Explanation

Nov. 14 17

Date

J1 J1

Explanation

Nov. 25

2-46

Credits

Balance

900 125 30

125

Credits

1,320

Balance 1,320

Credits

300 900

Unearned Service Revenue Ref. Debits J1

1,320

2,000

Equipment Ref. Debits

Balance 500 435 310 2,310 1,410 1,535 1,565 245

65 125

Prepaid Insurance Ref. Debits J1

Credits

500

Supplies Ref. Debits J1

Nov. 30

Date

Cash Ref. Debits

Balance 300 1,200

Credits

Balance

CC2 (Continued) (b) (Continued)

Date

Explanation

Nov. 16

Date Nov.

Explanation 8 14

Date

Notes Payable Ref. Debits

Owner’s Capital Ref. Debits J1 J1

Explanation

Service Revenue Ref. Debits

Nov. 20

Date

Advertising Expense Ref. Debits

Nov. 11

Explanation

Credits

Balance

2,000

Credits

Balance

500 300

500 800

Credits

Balance

125

Credits

Balance 65

2-47

CC2 (Continued) (c) COOKIE CREATIONS Trial Balance November 30, 2019 Cash ........................................................................... Supplies ..................................................................... Prepaid Insurance ..................................................... Equipment.................................................................. Unearned Service Revenue ...................................... Notes Payable ............................................................ Owner’s Capital ......................................................... Service Revenue........................................................ Advertising Expense .................................................

Debit $ 245 125 1,320 1,200

Credit

65 $2,955

30 2,000 800 125

$2,955

Note to instructors: Because the notes payable is not due for 24 months, it follows Unearned Service Revenue in the accounts and the trial balance. [($245 + $125 + $1,320 + $1,200 + $65) = ($30 + $2,000 + $800 + $125)] [(Cash + Supp. + Prepd. ins. + Equip. + Advert. exp.) = (Unearn. serv. rev. + Notes pay. + Owner’s cap. + Serv. rev.)] LO1, 2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement, Reporting

2-48

EC2-1

ETHICS CASE

(a) The stakeholders in this situation are:   

Ellynn Kole, assistant chief accountant. Users of the company’s financial statements. The Doman Company.

(b) By adding $1,000 to the Equipment account, that account total is intentionally misstated. By not locating the error causing the imbalance, some other account may also be misstated by $1,000. If the amount of $1,000 is determined to be immaterial, and the intent is not to commit fraud (cover up an embezzlement or other misappropriation of assets), Ellynn’s action might not be considered unethical in the preparation of interim financial statements. However, if Ellynn is violating a company accounting policy by her action, then she is acting unethically. (c) Ellynn’s alternatives are: 1. Miss the deadline but find the error causing the imbalance. 2. Tell her supervisor of the imbalance and suffer the consequences. 3. Do as she did and locate the error later, making the adjustment in the next quarter. LO N/A BT: E Difficulty: Moderate TOT: 15 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Communication, Professional Demeanor

2-49

EC2-2

ETHICS CASE

The decision whether to fire Mr. Edmondson was the responsibility of Radio Shack’s board of directors, which is elected by the company’s shareholders to oversee management. The board initially announced its support for the CEO. After further investigation, the board encouraged Mr. Edmondson to resign, which he did. In contrast, when Bausch & Lomb’s CEO offered to resign in a similar situation, the company’s board refused to accept his resignation. Board members stated that they felt he was still the best person for the position. Radio Shack says that although it did a reference check at the time of Mr. Edmondson’s hiring, it did not check his educational credentials. Under the Sarbanes-Oxley Act, companies must now perform thorough background checks as part of a check of internal controls. The bottom line: Your résumé must be a fair and accurate depiction of your past. LO N/A BT: E Difficulty: Moderate TOT: 20 min. AACSB: Ethics AICPA FC: Reporting AICPA PC: Communication, Professional Demeanor

2-50

CT 2-1

FINANCIAL REPORTING PROBLEM

(a)

(1) Increase Side Credit

(1) Decrease Side Debit

(2) Normal Balance Credit

Accounts Receivable

Debit

Credit

Debit

Property, Plant, and Equipment

Debit

Credit

Debit

Cash and Cash Equivalents

Debit

Credit

Debit

Research and Development Expense

Debit

Credit

Debit

Inventories

Debit

Credit

Debit

Account Accounts Payable

(b) 1. 2. 3.

Cash is increased. Cash is decreased. Cash is decreased or Accounts Payable is increased.

Cash is decreased. Cash is decreased or Notes or Mortgage Payable is increased.

LO1, 2 BT: C Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Measurement

2-51

CT 2-2

COMPARATIVE ANALYSIS PROBLEM PepsiCo

(a)

Coca-Cola

Inventory:

Property, Plant & Equipment:

debit

Accounts Payable:

credit

3. Cost of Goods Sold(expense):

debit

Interest Expense:

debit

4. Sales (revenue)

credit

debit

1. Accounts Receivable:

debit

2. Cash and Cash Equivalents: debit

(b) 1.

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Decrease in Salaries and Wages Payable: Cash is decreased (credited).

Increase in Property, Plant and Equipment: Cash is decreased (credited) and Accounts Payable or Notes payable is increased (credited).

Increase in Interest Expense: Cash is decreased (credited).

LO1, 2 BT: AN Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Measurement

2-52

CT 2-3

COMPARATIVE ANALYSIS PROBLEM Amazon

(a)

Wal-Mart

Interest Expense:

debit

1. Net Product Revenues:

credit

Cash and Cash Equivalents:

debit

2. Inventories:

debit

Accounts Payable:

credit

3. Cost of Sales:

debit

(b) The following other accounts are ordinarily involved: 1.

Increase in Accounts Receivable: Service Revenue or Sales Revenue is increased (credited).

Increase in Interest Expense: Cash is decreased (credited).

Decrease in Salaries and Wages Payable: Cash is decreased (credited).

Increase in Service Revenue: Cash or Accounts Receivable is increased (debited).

LO1, 2 BT: AN Difficulty: Easy TOT: 8 min. AACSB: None AICPA FC: Measurement

2-53

CT 2-4

REAL-WORLD FOCUS

The answer is dependent upon the company selected by the student. LO N/A BT: AP Difficulty: Easy TOT: 20 min. AACSB: Technology AICPA FC: Reporting, Technology

2-54

CT 2-5

REAL-WORLD FOCUS

(a) The reason the Green Bay Packers’ issue an annual report is because they are a publicly owned, nonprofit company. They issue the report to the more than 100,000 shareholders who hold shares. None of the other teams are publicly owned, so they have no obligation to make their financial information available except to their small group of owners. (b) At the time that the article was written the owners of the NFL teams and the players’ labor union were negotiating a new contract. Knowing how profitable the NFL teams are would be useful information for the players to know so that they would have a better sense of how much the teams could afford to pay. The Packers are obviously a “small market” team; they are not necessarily representative of teams in general. However, the Packers’ annual report does give the players some sense of the profitability of other teams. (c) Since some of the cost of the stadium that the Packers play in is covered by taxpayers, the county and state government has an interest in the team’s finances. (d) The Packers’ revenues increased during recent years. However, because the cost of players’ salaries increased at a faster rate than revenues, the Packers’ operating profit actually declined. LO3, 4 BT: S Difficulty: Moderate TOT: 25 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

2-55

CT 2-6

COMMUNICATION ACTIVITY

Date:

March 15, 2020

To:

Accounting Instructor

From:

Student

In the first transaction, bills totaling $6,000 were sent to customers for services performed. Therefore, the asset Accounts Receivable is increased $6,000 and the revenue Service Revenue is increased $6,000. Debits increase assets and credits increase revenues, so the journal entry is: Accounts Receivable ............................................................ Service Revenue ............................................................ (Billed customers for services performed)

6,000 6,000

The $6,000 amount is then posted to the debit side of the general ledger account Accounts Receivable and to the credit side of the general ledger account Service Revenue. In the second transaction, $2,000 was paid in salaries to employees. Therefore, the expense Salaries and Wages Expense is increased $2,000 and the asset Cash is decreased $2,000. Debits increase expenses and credits decrease assets, so the journal entry is: Salaries and Wages Expense ............................................... Cash ................................................................................ (Salaries and wages paid)

2,000 2,000

The $2,000 amount is then posted to the debit side of the general ledger account Salaries and Wages Expense and to the credit side of the general ledger account Cash. LO3, 4 BT: S Difficulty: Moderate TOT: 15 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

2-56

CT 2-7

ALL ABOUT YOU

(a) Students’ responses to this question will vary. It is important that the steps that they identify be as specific as possible, and clearly directed toward achieving their goal. You may wish to ask a follow-up question asking them to explain how each step will assist them in achieving their goal. (b) There are many sites on the Internet that provide information about preparing a résumé. For example, you can find extensive resources at: http://www.rileyguide.com/resprep.html. Many schools also have resources in their placement centers or writing labs. The Writing Center at Rensselaer Polytechnic Institute provides useful, concise information on its website at http://www.ccp.rpi.edu/resources/careersand-graduate-school/resumes. A wide variety of sample résumés can be found. (c) It is important to provide accurate and complete documentation of all relevant training, education, and employment experiences so as to provide assurance to the potential employer, and also to enable that employer to do follow-up work. If you say you have certain skills, such as computer skills, try to substantiate the claim with recognized proof of proficiency. Make sure that all addresses and phone numbers are accurate and up-to-date. Also, ensure that the people you use as references have a copy of your résumé and cover letter, and that they are informed that you are interviewing so they know to expect a call. (d) See the sample résumés provided in the websites above for various format options. You might also mention to students that there are electronic résumé templates available on the Internet. LO N/A BT: S Difficulty: Moderate TOT: 20 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

2-57

CT 2-8

CONSIDERING PEOPLE, PLANET AND PROFIT

(a)

The existence of three different forms of certification would most likely create confusion for coffee purchasers. It would be difficult to know what aspects of the coffee growing process each certification covered. Similarly, if there were multiple groups that certified financial statements, each with different criteria, it would be difficult for financial statement users to know what each certification promised.

(b)

The Starbucks certification appears to be the most common in that area. It has the advantage of having a direct link to the Starbucks coffee market. Although it does not guarantee that Starbucks will buy its coffee, it is a requirement that must be met before Starbucks will buy somebody’s coffee. Note that the article states that the Starbucks certification “incorporates elements of social responsibility and environmental leadership, but quality of coffee is the first criteria.” The Smithsonian Bird Friendly is considered to have the strictest requirements and, as a result, appears to be the least common.

(c)

The certifications have multiple objectives including organic farming as a means to protect bird species, biodiversity and wildlife habitat. Some included requirements are to improve workers’ living conditions, such as providing running water in worker housing, child labor regulations and education requirements. As mentioned above, the Starbucks certification has the potential financial benefit of making Starbucks a potential customer, which can stabilize farmers’ earnings. Certifications can also be financially beneficial because companies can benefit from the positive public relations effects of either producing or buying coffee produced using sustainable practices.

LO N/A BT: E Difficulty: Moderate TOT: 30 min. AACSB: Technology, Communication AICPA FC: Reporting, Technology AICPA PC: Communication

2-58

IFRS 2-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

Account a. Other operating income and expenses b. Cash and cash equivalents c. Trade accounts payable d. Cost of net financial debt

Financial Statement Consolidated Income Statement

Position in Financial Statement After profit from recurring operations and before operating profit Current assets

Consolidated Balance Sheet Consolidated Balance Current liabilities Sheet Consolidated Income After operating profit and Statement before net profit before minority interests.

LO 5 BT: C Difficulty: Easy TOT: 10 min. AACSB: Diversity AICPA FC: Reporting AICPA BB: International Perspective

2-59

CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Questions

*1.

Explain the accrual basis of accounting and the reasons for adjusting entries.

1, 2, 3, 4, 5, 6, 7, 8, 18

*2.

Prepare adjusting entries for deferrals.

*3.

Brief Exercises

A Problems

Do It!

Exercises

1, 2, 8

1, 2, 3, 4, 10, 11

8, 9, 10, 11, 12, 13, 18, 19, 20

2, 3, 4, 5, 6,8

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 15, 17, 19

1A, 2A, 3A, 4A, 5A, 6A

Prepare adjusting entries for accruals.

8, 14, 15, 16, 17, 18, 19, 20

7, 8

4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14, 16, 17, 19

1A, 2A, 3A, 4A, 5A, 6A

*4.

Describe the nature and purpose of an adjusted trial balance.

9, 10

6, 10, 11, 17, 18

1A, 2A, 3A, 5A, 6A

*5.

Prepare adjusting entries for the alternative treatment of deferrals.

20, 21

*6.

Discuss financial reporting concepts.

23, 24, 25, 26, 27, 28

12, 13, 14, 15

22, 23, 24, 25, 26

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-1

ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Difficulty Level

Time Allotted (min.)

Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance.

Easy

40–50

Prepare adjusting entries, post, and prepare adjusted trial balance, and financial statements.

Easy

50–60

Prepare adjusting entries and financial statements.

Moderate

40–50

Prepare adjusting entries.

Moderate

30–40

Journalize transactions and follow through accounting cycle to preparation of financial statements.

Moderate

60–70

*6A*

Prepare adjusting entries, adjusted trial balance, and financial statements using appendix.

Moderate

40–50

3-2

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

ANSWERS TO QUESTIONS 1.

(a) Under the time period assumption, an accountant is required to determine the relevance of each business transaction to specific accounting periods. (b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year that extends from January 1 to December 31 is referred to as a calendar year. Accounting periods of less than one year are called interim periods.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

The two generally accepted accounting principles that relate to adjusting the accounts are: (1) The revenue recognition principle, which states that revenue should be recognized in the accounting period in the performance obligation is satisfied. (2) The expense recognition principle, which states that efforts (expenses) be matched with accomplishments (revenues).

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

The law firm should recognize the revenue in April. The revenue recognition principle states that revenue should be recognized in the accounting period in the performance obligation is satisfied.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Information presented on an accrual basis is more useful than on a cash basis because it reveals relationships that are likely to be important in predicting future results. To illustrate, under accrual accounting, revenues are recognized when the performance obligation is satisfied so they can be related to the economic environment in which they occur. Trends in revenues are thus more meaningful.

LO1 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

Expenses of $4,500 should be deducted from the revenues in April. Under the expense recognition principle efforts (expenses) should be matched with accomplishments (revenues).

LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

No, adjusting entries are required by the revenue recognition and expense recognition principles.

LO1 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

A trial balance may not contain up-to-date information for financial statements because: (1) Some events are not journalized daily because it is not efficient to do so. (2) The expiration of some costs occurs with the passage of time rather than as a result of daily transactions. (3) Some items may be unrecorded because the transaction data are not yet known.

LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.

LO1, 2, 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-3

Questions Chapter 3 (Continued) 10.

No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Depreciation results in the presentation of the book value of the asset, not its fair value.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

11.

Depreciation expense is an expense account whose normal balance is a debit. This account shows the cost that has expired during the current accounting period. Accumulated depreciation is a contra asset account whose normal balance is a credit. The balance in this account is the depreciation that has been recognized from the date of acquisition to the balance sheet date.

LO2 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

12.

Equipment ............................................................................................... Less: Accumulated Depreciation—Equipment ........................................

$18,000 6,000

$12,000

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting

*13.

In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.

LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*14.

Asset and revenue. An asset would be debited and a revenue would be credited.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*15.

An expense is debited and a liability is credited in the adjusting entry.

LO3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*16.

Net income was understated $200 because prior to adjustment, revenues are understated by $900 and expenses are understated by $700. The difference in this case is $200 ($900 – $700).

($900 - $700 = $200 understated) (Rev. understated – Exp. understated = Net inc. understated) LO3 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

*17.

The entry is: Jan. 9 Salaries and Wages Payable ....................................................... Salaries and Wages Expense ...................................................... Cash .....................................................................................

2,000 3,000 5,000

LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement

*18.

(a) Accrued revenues. (b) Unearned revenues. (c) Accrued expenses.

(d) Accrued expenses or prepaid expenses. (e) Prepaid expenses. (f) Accrued revenues or unearned revenues.

LO1, 2, 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

*19.

(a) Salaries and Wages Payable. (b) Accumulated Depreciation. (c) Interest Expense.

(d) Supplies Expense. (e) Service Revenue. (f) Service Revenue.

LO2, 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

3-4

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 3 (Continued) 20.

Disagree. An adjusting entry affects only one balance sheet account and one income statement account.

LO2, 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

21.

Financial statements can be prepared from an adjusted trial balance because the balances of all accounts have been adjusted to show the effects of all financial events that have occurred during the accounting period.

LO4 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*22.

For Supplies Expense (prepaid expense): expenses are overstated and assets are understated. The adjusting entry is: Assets (Supplies) ..................................................................................... XX Expenses (Supplies Expense)............................................................ XX For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated. The adjusting entry is: Revenues (Rent Revenue) ....................................................................... XX Liabilities (Unearned Rent Revenue) .................................................. XX

LO5 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

**23. (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. (b) The fundamental qualitative characteristics are relevance and faithful representation. The enhancing qualities are comparabiIity, consistency, verifiability, timeliness, and understandability. LO6 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*24.

Gross is correct. Consistency means using the same accounting principles and accounting methods from period to period within a company. Without consistency in the application of accounting principles, it is difficult to determine whether a company is better off, worse off, or the same from period to period.

LO6 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement

*25.

Comparability results when different companies use the same accounting principles. Consistency means using the same accounting principles and methods from year to year within the same company.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*26.

The constraint is the cost constraint. The cost constraint allows accounting standard setters to weigh the cost that companies will incur to provide information against the benefit that financial statement users will gain from having the information available.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*27.

Accounting relies primarily on two measurement principles. Fair value is sometimes used when market price information is readily available. However, in many situations reliable market price information is not available. In these instances, accounting relies on cost as its basis.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-5

Questions Chapter 3 (Continued) *28.

The economic entity assumption states that every economic entity can be separately identified and accounted for. This assumption requires that the activities of the entity be kept separate and distinct from (1) the activities of its owners (the shareholders) and (2) all other economic entities. A shareholder of a company charging personal living costs as expenses of the company is an example of a violation of the economic entity assumption.

LO6 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

3-6

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 3-1 (a) Prepaid Insurance—to recognize insurance expired during the period. (b) Depreciation Expense—to account for the depreciation that has occurred on the asset during the period. (c) Unearned Service Revenue—to record revenue earned for which the performance obligation is satisfied. (d) Interest Payable—to recognize interest accrued but unpaid on notes payable. LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

BRIEF EXERCISE 3-2 Item

(a) Type of Adjustment

(b) Account Balances before Adjustment

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Revenues

Assets Understated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

LO1, 2 BT: AN Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 3-3 Dec. 31

Supplies Expense ................................................ Supplies ($6,700 – $2,100) ...........................

Supplies 6,700 12/31 12/31 Bal. 2,100

4,600

12/31

4,600 4,600

Supplies Expense 4,600

Weygandt, Accounting Principles, 13/e, Solutions Manual

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3-7

BRIEF EXERCISE 3-4 Dec. 31

Depreciation Expense.......................................... Accumulated Depreciation— Equipment .................................................

Depreciation Expense 12/31 3,750

3,750 3,750

Accum. Depreciation—Equipment 12/31 3,750

Balance Sheet: Equipment ........................................................... Less: Accumulated Depreciation— Equipment ................................................

$30,000 3,750

$26,250

LO2 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement, Reporting

BRIEF EXERCISE 3-5 July 1 Dec. 31

Prepaid Insurance ........................................... Cash .........................................................

15,120

Insurance Expense [($15,120 ÷ 4) x 1/2] ........ Prepaid Insurance ...................................

1,890

Prepaid Insurance 7/1 15,120 12/31 12/31 Bal. 13,230

1,890

12/31

15,120 1,890

Insurance Expense 1,890

[($15,120 ÷ 4) x ½ = $1,890] [(Tot. amt. of ins. purch. ÷ Life of policy) x ½ yr. = Ins. exp.] LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 3-6 July 1 Dec. 31

Cash ................................................................. Unearned Service Revenue ....................

15,120

Unearned Service Revenue ............................ Service Revenue ......................................

1,890

Unearned Service Revenue 12/31 1,890 7/1 15,120 12/31 Bal. 13,230

15,120 1,890

Service Revenue 12/31

1,890

[($15,120 ÷ 4) x ½ = $1,890] [(Tot. amt. of ins. sold ÷ Life of policy) x ½ yr. = Serv. rev.] LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement 3-8

Weygandt, Accounting Principles, 13/e, Solutions Manual

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BRIEF EXERCISE 3-7 1. 2. 3.

Dec. 31 31 31

Interest Expense .......................................... Interest Payable ....................................

400

Accounts Receivable ................................... Service Revenue ...................................

2,300

Salaries and Wages Expense ...................... Salaries and Wages Payable ................

900

400 2,300 900

LO3 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 3-8 Account

(a) Type of Adjustment

(b) Related Account

Accounts Receivable Prepaid Insurance Accum. Depr.—Equipment Interest Payable Unearned Service Revenue

Accrued Revenues Prepaid Expenses Prepaid Expenses Accrued Expenses Unearned Revenues

Service Revenue Insurance Expense Depreciation Expense Interest Expense Service Revenue

LO1, 2, 3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

BRIEF EXERCISE 3-9 MILLER COMPANY Income Statement For the Year Ended December 31, 2020 Revenues Service revenue .................................................... Expenses Salaries and wages expense ............................... Rent expense ........................................................ Insurance expense ............................................... Supplies expense ................................................. Depreciation expense ........................................... Total expenses .............................................. Net income ....................................................................

$39,000 $16,000 4,000 2,000 1,500 1,300 24,800 $14,200

[$39,000 – ($16,000 + $4,000 + $2,000 + $1,500 + $1,300) = $14,200] [Serv. rev. – (Sal. & wages exp. + Rent exp. + Ins. exp. + Supp. exp. + Depr. exp.) = Net inc.] LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-9

BRIEF EXERCISE 3-10 MILLER COMPANY Owner’s Equity Statement For the Year Ended December 31, 2020 Owner’s capital, January 1 ............................................................. Add: Net income ............................................................................. Less: Drawings ............................................................................... Owner’s capital, December 31 ........................................................

$16,400 14,200 30,600 7,000 $23,600

($16,400 + $14,200 - $7,000 = $23,600) [Beg. owner’s cap. + Net inc. – Owner’s draws. = End. owner’s cap.] LO4 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Reporting

*BRIEF EXERCISE 3-11 (a) Apr. 30 (b)

Supplies ........................................................ Supplies Expense .................................

400

Service Revenue ........................................... Unearned Service Revenue ..................

3,000

400 3,000

LO5 BT: AN Difficulty: Moderate TOT: 4 min. AACSB: Analytic AICPA FC: Measurement

*BRIEF EXERCISE 3-12 (a) (b) (c) (d) (e) (f) (g) (h)

Predictive value. Confirmatory value. Materiality. Complete. Free from error. Comparability. Verifiability. Timeliness.

LO6 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement

*BRIEF EXERCISE 3-13 (a) Relevant. (b) Faithful representation. (c) Consistency. LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

3-10

Weygandt, Accounting Principles, 13/e, Solutions Manual

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*BRIEF EXERCISE 3-14 (a) (b) (c) (d)

1. 2. 3. 4.

Predictive value. Neutral. Verifiable. Timely.

LO6 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

*BRIEF EXERCISE 3-15 (c) Financial statements should disclose all events and circumstances that would matter to users of financial statements. LO6 BT: C Difficulty: Easy TOT: 1 min. AACSB: None AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

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3-11

SOLUTIONS FOR DO IT! REVIEW EXERCISES DO IT! 3-1 1. (d) 2. (e) 3. (h) 4. (c) LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement

DO IT! 3-2 1.

Insurance Expense ....................................................... Prepaid Insurance ................................................. (To record insurance expired)

400

Supplies Expense ($2,500 – $1,600) ............................ Supplies ................................................................. (To record supplies used)

900

400

900

($2,500 - $1,600 = $900) (Beg. sup. bal. – Supp. on hand = Supp. exp.)

Depreciation Expense .................................................. Accumulated Depreciation—Equipment .............. (To record monthly depreciation)

480

Unearned Service Revenue ($9,000 x 2/5) .................. Service Revenue .................................................... (To record revenue for services provided)

3,600

480

3,600

($9,000 x 2/5 = $3,600) (Unearned serv. rev. amt. x Fraction of serv. performed = Serv. rev.) LO2 BT: AN Difficulty: Easy TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 3-3 1.

Salaries and Wages Expense ...................................... Salaries and Wages Payable................................. (To record accrued salaries)

1,300

Interest Expense ($20,000 x .06 x 1/12) ....................... Interest Payable ..................................................... (To record accrued interest)

100

1,300

100

($20,000 x .06 x 1/12 = $100) (Prin. x Int. rate x one month = Int. exp.)

3-12

Weygandt, Accounting Principles, 13/e, Solutions Manual

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DO IT! 3-3 (Continued) 3.

Accounts Receivable ................................................... Service Revenue.................................................... (To record revenue for service performed)

2,400 2,400

LO3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

DO IT! 3-4 (a) The net income is determined by adding revenues and subtracting expenses. The net income is computed as follows: Revenues Service revenue................................................ Rent revenue .................................................... Total revenues .......................................... Expenses Salaries and wages expense ........................... Rent expense .................................................... Depreciation expense ...................................... Utilities expense ............................................... Supplies expense ............................................. Interest expense ............................................... Total expenses.......................................... Net income ...............................................................

$11,360 1,600 $12,960 7,400 1,200 700 410 160 40 9,910 $ 3,050

[($11,360 + $1,600) – ($7,400 + $1,200 + $700 + $410 + $160 + $40) = $3,050] [(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Depr. exp. + Util. exp. + Supp. exp. + Int. exp.) = Net inc.]

(b) Total assets and liabilities are computed as follows: Assets Cash .................................................................. Accounts receivable ........................................ Prepaid rent ...................................................... Supplies ............................................................ Equipment ........................................................ Less: Accumulated depreciation— Equipment .............................................. Total assets ...............................................

Weygandt, Accounting Principles, 13/e, Solutions Manual

$ 5,360 580 1,120 920 $12,000

(For Instructor Use Only)

700

11,300 $19,280

3-13

DO IT! 3-4 (Continued) Liabilities Notes payable ................................................... Accounts payable............................................. Unearned rent revenue .................................... Salaries and wages payable ............................ Interest payable ................................................ Total liabilities ...........................................

$ 4,000 790 400 300 40 $ 5,530

[($5,360 + $580 + $1,120 + $920) + ($12,000 - $700) = $19,280]; [(Cash + Accts. rec. + Prepd. rent. + Supp.) + (Equip. – Accum. depr.-equip.) = Tot. assets] ($4,000 + $790 + $400 + $300 + $40 = $5,530); (Notes pay. + Accts. pay. + Unearned rent rev. + Sal. & wages pay. + Int. pay. = Tot. liabl.)

(c) Owner’s Capital at June 30, 2020, can be computed in one of two ways. Using the basic accounting equation (Assets = Liabilities + Owner’s Equity), we find that total assets are $19,280 and total liabilities are $5,530; therefore, Owner’s Equity (Owner’s Capital) is $13,750 ($19,280 – $5,530). Another way to compute the Owner’s Capital at June 30, 2020, is as follows: Owner’s capital, April 1 ........................................... Add: Investments ..................................................... Net income ......................................................

$ $11,200 3,050

Less: Drawings ........................................................ Owner’s capital, June 30 .........................................

–0–

14,250 14,250 500 $13,750

($19,280 - $5,530 = $13,750); (Tot. assets – Tot. liabl. = Owner’s cap.) OR [$0 + ($11,200 + $3,050) - $500 = $13,750]; [(Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draws. = End. owner’s cap.] LO4 BT: AN Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting

3-14

Weygandt, Accounting Principles, 13/e, Solutions Manual

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SOLUTIONS TO EXERCISES EXERCISE 3-1 1.

True.

False. Many business transactions affect more than one of these artificial time periods. For example, the purchase of a building affects expenses for many years.

True.

False. A time period that lasts less than one year, such as monthly or quarterly periods, is called an interim period.

False. All calendar years are fiscal years, but not all fiscal years are calendar years. An accounting time period that is one year in length is referred to as a fiscal year. A fiscal year that starts on January 1 and ends on December 31 is a calendar year.

LO1 BT: C Difficulty: Easy TOT: 5 min. AACSB: None AICPA FC: Measurement

EXERCISE 3-2 (a) Accrual-basis accounting records the transactions that change a company’s financial statements in the periods in which the events occur rather than in the periods in which the company receives or pays cash. Information presented on an accrual basis is useful because it reveals relationships that are likely to be important in predicting future results. Conversely, under cash-basis accounting, revenue is recorded only when cash is received, and an expense is recognized only when cash is paid. As a result, the cash basis of accounting often leads to misleading financial statements. (b) Politicians might desire a cash-basis accounting system over an accrualbasis system because if an accrual-accounting system is used, it could mean that billions in government liabilities presently unrecorded would have to be reported in the federal budget immediately. The recognition of these additional liabilities would make the deficit even worse. This is not what politicians would like to see and be held responsible for.

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-15

EXERCISE 3-2 (Continued) (c) Dear Senator, It is my understanding, after having taken a beginning course in accounting principles, that the federal government uses a cash-basis system rather than an accrual-basis accounting system. I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded yet for the mere reason that they haven’t been paid yet. I realize that the deficit would dramatically increase if we were to implement an accrual system, but in all fairness, we citizens should be given a more accurate picture of what our government is up to. Sincerely, CONCERNED STUDENT LO1 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Reflective Thinking, Communication AICPA FC: Reporting AICPA PC: Communication

EXERCISE 3-3 (a)

Cash received from revenue........................................... Cash paid for expenses .................................................. Cash-basis net income ..........................................

$108,000 (72,000) $ 36,000

($108,000 - $72,000 = $36,000) (Cash collected from cust. – Cash pd. for exp. = Cash-basis net inc.)

(b)

Revenues [($108,000 – $25,000) + $36,000] ................... Expenses [($72,000 – $30,000) + $42,000] ..................... Accrual-basis net income ......................................

$119,000 (84,000) $ 35,000

[(($108,000 - $25,000 + $36,000) – (($72,000 - $30,000) + $42,000) = $35,000] [((Cash collected in 2020 – Cash related in 2019 svcs.) + Svcs. performed in 2020, not collected) – ((Cash pd. for exp. in 2020 – Exp. incurred in 2019) + 2020 exp. incurred and not pd.) = Accrual-basis net inc.] LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting

EXERCISE 3-4 1. 2. 3. 4. 5. 6. 7. 8. 3-16

Weygandt, Accounting Principles, 13/e, Solutions Manual

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EXERCISE 3-4 (Continued) 9. 10. 11.

Prepaid expense. Prepaid expense. Accrued expense.

LO1, 2, 3 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-5 1.

Interest Expense .................................................... Interest Payable ($10,000 x 9% x 4/12) ...................................

300 300

($10,000 x 9% x 4/12 = $300) (Prin. x Int. rate x Mos. loan outstanding = Int. exp.)

Supplies Expense .................................................. Supplies ($2,450 – $900) .................................

1,550 1,550

($2,450 - $900 = $1,550) (End. supp. bal. – Supp. on hand = Supp. exp.)

3. 4.

6. 7.

Depreciation Expense ............................................ Accumulated Depreciation—Equipment .......

1,000

Insurance Expense ................................................ Prepaid Insurance ($2,100 x 7/12) ..............................................

1,225

Unearned Service Revenue ................................... Service Revenue ($32,000 x 1/4) ..............................................

8,000

Accounts Receivable ............................................. Service Revenue..............................................

4,200

Salaries and Wages Expense ................................ Salaries and Wages Payable ($9,000 x 3/5) ................................................

5,400

1,000

1,225

8,000 4,200

5,400

($9,000 x 3/5 = $5,400) (Wkly. sal. amt. x Fraction of wk. worked = Sal. & wages exp.) LO2, 3 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

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3-17

EXERCISE 3-6 Item

(a) Type of Adjustment

(b) Accounts before Adjustment

Accrued Revenues

Assets Understated Revenues Understated

Prepaid Expenses

Assets Overstated Expenses Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Unearned Revenues

Liabilities Overstated Revenues Understated

Accrued Expenses

Expenses Understated Liabilities Understated

Prepaid Expenses

Assets Overstated Expenses Understated

LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-7 1.

Mar. 31

Depreciation Expense ($400 x 3).......... Accumulated Depreciation— Equipment .........................................

1,200 1,200

($400 x 3 = $1,200) (Monthly depr. x 3 mos. = Depr. exp.)

Unearned Rent Revenue .............................. Rent Revenue ($10,200 x 1/3) ...............

3,400 3,400

($10,200 x 1/3 = $3,400) (Unearned rent rev. bal. x Fraction of rev. earned = Rent rev.)

3. 4.

3-18

31 31

Interest Expense ........................................... Interest Payable.....................................

500

Supplies Expense ......................................... Supplies ($2,800 – $750) .......................

2,050

Weygandt, Accounting Principles, 13/e, Solutions Manual

500 2,050

(For Instructor Use Only)

EXERCISE 3-7 (Continued) ($2,800 - $750 = $2,050) (Beg. supp. bal. – End. supp. bal. – Supp. exp.)

Insurance Expense ($300 x 3) ...................... Prepaid Insurance .................................

900 900

LO2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-8 1. 2. 3.

Jan. 31 31 31

31 4.

Accounts Receivable ................................... Service Revenue ...................................

785

Utilities Expense ........................................... Utilities Payable ....................................

650

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

400

Interest Expense ........................................... Interest Payable ....................................

500

Insurance Expense ($24,000 ÷ 12) ............... Prepaid Insurance .................................

2,000

785 650

400 500 2,000

($24,000 ÷ 12 = $2,000) (Prepd. ins. bal. ÷ Term of policy in mos. = Ins. exp.)

Supplies Expense ($1,600 – $400) ............... Supplies .................................................

1,200 1,200

($1,600 - $400 = $1,200) (Beg. supp. bal. – End. supp. bal. = Supp. exp.) LO2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-9 1. 2.

Oct. 31 31

Supplies Expense ......................................... Supplies ($2,500 – $500) .......................

2,000

Insurance Expense ....................................... Prepaid Insurance .................................

120

Weygandt, Accounting Principles, 13/e, Solutions Manual

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2,000 120

3-19

EXERCISE 3-9 (Continued) 3.

4. 5. 6. 7.

Oct. 31

31 31 31 31

Depreciation Expense .................................. Accumulated Depreciation— Equipment .........................................

Unearned Service Revenue .......................... Service Revenue ...................................

600

Accounts Receivable .................................... Service Revenue ...................................

360

Interest Expense ..................................... Interest Payable...............................

Salaries and Wages Expense ................ Salaries and Wages Payable ..........

1,625

50 600 360 95 1,625

LO2, 3 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-10 LUNDEEN CO. Income Statement For the Month Ended July 31, 2020 Revenues Service revenue ($5,500 + $650) ............................. Expenses Salaries and wages expense ($2,300 + $400)......... Supplies expense ($1,200 – $250)........................... Utilities expense ...................................................... Insurance expense................................................... Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$6,150 $2,700 950 600 500 150 4,900 $1,250

[($5,500 + $650) – (($2,300 + $400) + ($1,200 - $250) + $600 + $500 + $150) = $1,250] [Serv. rev. – (Sal. & wages exp. + Supp. exp. + Util. exp. + Ins. exp. + Depr. exp.) = Net inc.] LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

3-20

Weygandt, Accounting Principles, 13/e, Solutions Manual

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EXERCISE 3-11 Answer

Computation

(a) Supplies balance = $800

Supplies expense Add: Supplies (1/31) Less: Supplies purchased Supplies (1/1)

$ 950 850 1,000 $ 800

($950 + $850 - $1,000 = $800) (Supp. exp. + End. supp. bal. – Supp. purch. = Beg. supp. bal.)

(b) Total premium = $4,800 Purchase date = Aug. 1, 2019

Total premium = Monthly premium x 12; $400 x 12 = $4,800 Purchase date: On Jan. 31, there are 6 months’ coverage remaining ($400 x 6). Thus, the purchase date was 6 months earlier on Aug. 1, 2019.

($400 x 12 = $4,800); $2,400 = ½ of $4,800, therefore 6 mos. have elapsed. Aug. 1 2019 is 6 mos. from Jan. 31, 2020 (Monthly exp. x 12 = Tot. prem. for 1 yr.); (6 mos. before Jan. 31, 2020 is Aug. 1, 2019)

Cash paid Salaries and wages payable (1/31/20)

$3,800 920 4,720

Less: Salaries and wages expense Salaries and wages payable (12/31/19)

2,900 $1,820

($3,800 + $920 - $2,900 = $1,820) (Cash pd. + 1/31/20 Sal. & wages pay. – Sal. & wages exp. = 12/31/19 Sal. & wages pay.) LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-12 (a) July 10 14

Supplies ........................................................ Cash .......................................................

650

Cash .............................................................. Service Revenue ...................................

2,200

Weygandt, Accounting Principles, 13/e, Solutions Manual

650

(For Instructor Use Only)

2,200

3-21

EXERCISE 3-12 (Continued) 15 20 (b) July 31 31 31 31

Salaries and Wages Expense ...................... Cash ....................................................... Cash............................................................... Unearned Service Revenue ..................

1,200

Supplies Expense ......................................... Supplies .................................................

900

Accounts Receivable .................................... Service Revenue ...................................

500

Salaries and Wages Expense ...................... Salaries and Wages Payable ................

1,200

Unearned Service Revenue .......................... Service Revenue ...................................

1,150

1,200 1,000 1,000 900 500 1,200 1,150

LO2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-13 Date July 31 31 31 31 31 31 31

Account Titles Debit Interest Expense ($20,000  .06  1/12) ........... 100 Interest Payable ........................................

Credit 100

Supplies Expense ($24,000 – $18,600) ............ 5,400 Supplies .....................................................

5,400

Rent Expense ($3,600  4)................................ Prepaid Rent ..............................................

900

Salaries and Wages Expense .......................... 3,100 Salaries and Wages Payable .................... Depreciation Expense ($6,000  12) ................ Accumulated Depreciation—Buildings ...

3,100

500 500

Unearned Service Revenue ............................. 4,700 Service Revenue .......................................

4,700

Maintenance and Repairs Expense ................. 2,300 Accounts Payable .....................................

2,300

LO 2, 3 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

3-22

Weygandt, Accounting Principles, 13/e, Solutions Manual

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EXERCISE 3-14

Item Incorrect balances Effects of: Salaries and Wages

Net Income $70,000

Rent Revenue Depreciation Correct balances

4,000 (9,000) $55,000

Total Total Assets Liabilities $150,000 $70,000

Owner’s Equity $80,000

10,000 (4,000)

(10,000) 4,000 (9,000) $65,000

(10,000) (9,000) $141,000

$76,000

(Net inc. = Current amt. – Sal. & wages exp. + Rent rev. – Depr. exp.); (Tot. liabl. = Current amt. + Sal. & wages pay. – Rent rev.) ($70,000 – $10,000 + $4,000 – $9,000); ($70,000 + $10,000 – $4,000) LO 2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

EXERCISE 3-15 (a) 2020 June

Aug. 31 Sept.

Nov. 30 Dec.

Prepaid Insurance ...................................... Cash .....................................................

1,800

Prepaid Rent ............................................... Cash .....................................................

6,500

Cash ............................................................ Unearned Service Revenue ................

3,600

Prepaid Cleaning ........................................ Cash .....................................................

2,000

Cash ............................................................ Unearned Service Revenue ................

1,500

Weygandt, Accounting Principles, 13/e, Solutions Manual

1,800 6,500 3,600 2,000

(For Instructor Use Only)

1,500

3-23

EXERCISE 3-15 (Continued) (b) 2020 Dec.

31 31

3-24

Insurance Expense .................................... Prepaid Insurance ............................. ($1,800 × 7/12 months = $1,050)

1,050

Rent Expense ............................................. Prepaid Rent ...................................... ($6,500 × 4/5 months = $5,200)

5,200

Unearned Service Revenue ....................... Service Revenue ............................... ($3,600 × 4/9 months = $1,600)

1,600

Maintenance and Repairs Expense........... Prepaid Cleaning ...............................

1,000

Unearned Service Revenue ....................... Service Revenue ............................... ($1,500 – $475 not played = $1,025 played)

1,025

Weygandt, Accounting Principles, 13/e, Solutions Manual

1,050

5,200

1,600

1,000 1,025

(For Instructor Use Only)

EXERCISE 3-15 (Continued) (c)

Insurance Expense Prepaid Insurance 1,800 12/31 Adj. 1,050

6/1

Dec. 31 Adj. 1,050

Rent Expense Bal.

750 Dec. 31 Adj. 5,200 Prepaid Rent

8/31

Service Revenue

6,500 12/31 Adj. 5,200

Bal.

1,300 Unearned Service Revenue

12/31 Adj. 12/31 Adj.

1,600 9/4 1,025 12/5

3,600 1,500

1,600 1,025

Bal.

2,625

Maintenance and Repairs Expense 12/31 Adj.

Bal.

12/31 Adj. 12/31 Adj.

1,000

2,475

Prepaid Cleaning 11/30

2,000 12/31 Adj. 1,000

Bal.

1,000

Note: The Cash account has not been included in this solution, as per the instructions. LO 2, BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting Copyright © 2018 WILEY

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-25

EXERCISE 3-16 (a) 2020 Dec.

31 31 (b) 2021 Jan. 11 4

1 4 2

Utilities Expense ........................................ Accounts Payable .............................

425

Salaries and Wages Expense .................... Salaries and Wages Payable ............ ($3,500 × 4/7 days = $2,000)

2,000

Interest Expense ........................................ Interest Payable ................................ ($48,000 × 5% × 1/12 months = $200)

200

Accounts Receivable ................................. Service Revenue ...............................

300

Accounts Receivable ................................. Rent Revenue ....................................

6,000

Accounts Payable ...................................... Cash .....................................................

425

Salaries and Wages Payable ..................... Salaries and Wages Expense .................... Cash .....................................................

2,000 1,500

Interest Payable.......................................... Cash .....................................................

200

Cash ............................................................ Accounts Receivable ..........................

300

Cash ............................................................ Accounts Receivable ..........................

6,000

425 2,000

200

300 6,000

425

3,500 200 300 6,000

LO 3 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting

3-26

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

EXERCISE 3-17 Aug. 31 31 31 31

31 31

Accounts Receivable..................................... Service Revenue ....................................

2,400

Supplies Expense .......................................... Supplies ..................................................

1,600

Insurance Expense ........................................ Prepaid Insurance ..................................

1,500

Depreciation Expense ................................... Accumulated Depreciation— Equipment ..........................................

900

Salaries and Wages Expense ....................... Salaries and Wages Payable .................

1,100

Unearned Rent Revenue ............................... Rent Revenue .........................................

1,100

2,400 1,600 1,500

900 1,100 1,100

LO2, 3, 4 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

EXERCISE 3-18 RENFRO COMPANY Income Statement For the Year Ended August 31, 2020 Revenues Service revenue ....................................................... Rent revenue ............................................................ Total revenues .................................................. Expenses Salaries and wages expense .................................. Rent expense ........................................................... Supplies expense .................................................... Insurance expense .................................................. Depreciation expense .............................................. Total expenses ................................................. Net income .......................................................................

$36,400 12,100 $48,500 18,100 15,000 1,600 1,500 900 37,100 $11,400

[($36,400 + $12,100) – ($18,100 + $15,000 + $1,600 + $1,500 + $900) = $11,400] [(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Supp. exp. + Ins. exp. + Depr. exp.) = Net inc.]

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-27

EXERCISE 3-18 (Continued) RENFRO COMPANY Owner’s Equity Statement For the Year Ended August 31, 2020 Owner’s capital, September 1, 2019 ............................................... Add: Net income ............................................................................ Owner’s capital, August 31, 2020 ..................................................

$15,600 11,400 $27,000

($15,600 + $11,400 = $27,000) (Beg. owner’s cap. + Net inc. = End. owner’s cap.)

RENFRO COMPANY Balance Sheet August 31, 2020 Assets Cash ................................................................................. Accounts receivable........................................................ Supplies ........................................................................... Prepaid insurance ........................................................... Equipment ........................................................................ Less: Accum. depreciation—equipment....................... Total assets ......................................................

$10,400 11,200 700 2,500 $14,000 4,500

9,500 $34,300

Liabilities and Owner’s Equity Liabilities Accounts payable .................................................................... Salaries and wages payable.................................................... Unearned rent revenue ............................................................ Total liabilities .................................................................. Owner’s equity Owner’s capital ........................................................................ Total liabilities and owner’s equity .................................

$ 5,800 1,100 400 7,300 27,000 $34,300

[($10,400 + $11,200 + $700 + $2,500) + ($14,000 - $4,500) = ($5,800 + $1,100 + $400) + $27,000] [(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Accts. pay. + Sal. & wages pay. + Unearned rent rev.) + Owner’s cap.] LO4 BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

3-28

Weygandt, Accounting Principles, 13/e, Solutions Manual

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EXERCISE 3-19 (a) 1. 2. 3.

Cash ................................................................... Accounts Receivable ................................

8,000

Unearned Service Revenue .............................. Service Revenue........................................

25,000

Cash ................................................................... Unearned Service Revenue ......................

38,000

Unearned Service Revenue ($38,000 – $17,000)............................................ Service Revenue ...........................................

8,000 25,000 38,000 21,000 21,000

($38,000 - $17,000 = $21,000) (Gift cert. sold in 2020 – Unused cert. at year-end = Serv. rev.)

Accounts Receivable ........................................ Service Revenue ($161,000 – $25,000 – $21,000) .............

115,000 115,000

($161,000 - $25,000 - $21,000 = $115,000) (2020 Serv. rev. – 2019 Outstdg. gift cert. redeemed – 2020 Outstdg. Gift cert. redeemed = Accts. rec.)

Cash ................................................................... Accounts Receivable ($115,000 – $16,000) ..............................

99,000 99,000

($115,000 - $16,000 = $99,000) (2020 Accts. rec. – End. accts. rec. bal. = Cash collect.)

(b) Cash received by the club = $8,000 + $99,000 + $38,000 = $145,000 ($8,000 + $99,000 + $38,000 = $145,000) (2019 Accts. rec. collect. + 2020 Accts. rec. collect. + Cash rec’d. for gift cert. = Tot. cash rec’d.) LO2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-29

*EXERCISE 3-20 1.

Prepaid Insurance .................................................. Insurance Expense ($2,400 x 5/12) ..............................................

1,000 1,000

($2,400 x 5/12 = $1,000) (Tot. ins. prem. amt. x Fraction of yr. not expired = Prepd. ins.)

Service Revenue .................................................... Unearned Service Revenue ($40,000 x 3/4) ..............................................

30,000 30,000

($40,000 x ¾ = $30,000) (Tot. amt. rec’d for serv. to be provided x portion not performed = Unearned serv. rev.)

Supplies .................................................................. Supplies Expense ...........................................

600 600

LO5 BT: AN Difficulty: Moderate TOT: 6 min. AACSB: Analytic AICPA FC: Measurement

*EXERCISE 3-21 (a) Jan. 2 10 15

1/15

1/2

1,920

Supplies Expense ........................................ Cash ......................................................

1,700

Cash.............................................................. Service Revenue ..................................

6,100

Cash 6,100 1/2 1/10 Insurance Expense 1,920

(b) Jan. 31 31

3-30

Insurance Expense ...................................... Cash ......................................................

1,920 1,700 6,100

Service Revenue 1/15

1,920 1,700 1/10

6,100

Supplies Expense 1,700

Prepaid Insurance ($160 x 11 months) ....... Insurance Expense ..............................

1,760

Supplies ....................................................... Supplies Expense ................................

650

(For Instructor Use Only)

Weygandt, Accounting Principles, 13/e, Solutions Manual

1,760 650

*EXERCISE 3-21 (Continued) 31

Service Revenue .......................................... Unearned Service Revenue .................

4,000 4,000

Prepaid Insurance 1/31 1,760

1/31

Supplies 650

Unearned Service Revenue 1/31 4,000

Insurance Expense 1/2 1,920 1/31 1,760 Bal. 160

Supplies Expense 1/10 1,700 1/31 650 Bal. 1,050

Service Revenue 1/31 4,000 1/15 6,100 Bal. 2,100

(c) Prepaid insurance...................................................................... Supplies ..................................................................................... Unearned service revenue ........................................................ Service revenue ......................................................................... Insurance expense .................................................................... Supplies expense ......................................................................

$1,760 650 4,000 2,100 160 1,050

LO5 BT: AN Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement

*EXERCISE 3-22 (a) (b) (c) (d) (e) (f)

2 6 3 4 5 1

Going concern assumption Economic entity assumption Monetary unit assumption Time period assumption Historical cost principle Full disclosure principle

LO6 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement

*EXERCISE 3-23 (a) This is a violation of the historical cost principle. The inventory was written up to its fair value when it should have remained at cost. (b) This is a violation of the economic entity assumption. The treatment of the transaction treats Austin Weber and Weber Co. as one entity when they are two separate entities. Owner’s Drawings should have been debited for the purchase of the truck. Copyright © 2018 WILEY

Weygandt, Accounting Principles, 13/e, Solutions Manual

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3-31

*EXERCISE 3-23 (Continued) (c) This is a violation of the time period assumption. This assumption states that the economic life of a business can be divided into artificial time periods (months, quarters, or a year). By adding two more weeks to the year, Weber Co. would be misleading financial statement readers. In addition, 2020 results would not be comparable to previous years’ results. The company should use a 52 week year. LO6 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement

*EXERCISE 3-24 1. Comparability 2. Going concern assumption 3. Materiality 4. Full disclosure principle 5. Time period assumption 6. Relevance 7. Historical cost principle 8. Consistency 9. Economic entity assumption 10. Faithful representation 11. Monetary unit assumption 12. Expense recognition principle LO6 BT: C Difficulty: Easy TOT: 6 min. AACSB: None AICPA FC: Measurement

*EXERCISE 3-25 (a) The primary objective of financial reporting is to provide financial information that is useful to investors and creditors for making decisions about providing capital. Since Speyeware’s shares appear to be actively traded, investors must be capable of using the information made available by Speyeware to make decisions about the company. (b) The investors must feel as if the company will show earnings in the future. They must recognize that information relevant to their investment choice is indicated by more than Speyeware’s net income. (c) The change from Canadian dollars to U.S. dollars for reporting purposes should make Speyeware more comparable with companies traded on U.S. stock exchanges. LO6 BT: S Difficulty: Easy TOT: 12 min. AACSB: Reflective Thinking, Communication AICPA FC: Measurement

3-32

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

*EXERCISE 3-26 (a) Accounting information is the compilation and presentation of financial information for a company. It provides information in the form of financial statements and additional disclosures that is useful for decision making. The accounting rules and practices that have substantial authoritative support and are recognized as a general guide for financial reporting purposes are referred to as generally accepted accounting principles (GAAP). The biotechnology company that employs Mindy will follow GAAP to report its assets, liabilities, equity, revenues, and expenses as it prepares financial statements. (b) Mindy is correct in her understanding that the low success rate for new biotech products will be a cause of concern for investors. Her suggestion that detailed scientific findings be reported to prospective investors might offset some of their concerns but it probably won’t conform to the qualitative characteristics of accounting information. These characteristics consist of relevance, faithful representation, comparability, and consistency, verifiability, timeliness, and understandability. They apply to accounting information rather than the scientific findings that Mindy wants to include. LO6 BT: S Difficulty: Easy TOT: 6 min. AACSB: Reflective Thinking AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-33

SOLUTIONS TO PROBLEMS PROBLEM 3-1A (a) Date Account Titles 2020 May 31 Supplies Expense ................................ Supplies ......................................

Ref.

Debit

631 126

900

31 Utilities Expense .................................. Accounts Payable.......................

732 201

250

31 Insurance Expense .............................. Prepaid Insurance ($3,600 ÷ 24 months) ..............

722

150

31 Unearned Service Revenue ................ Service Revenue ($2,000 – $400) ........................

209

31 Salaries and Wages Expense ............. Salaries and Wages Payable [(3/5 x $920) x 2 employees]...........................

726

31 Depreciation Expense ......................... Accumulated Depreciation— Equipment ...............................

717

31 Accounts Receivable .......................... Service Revenue .........................

112 400

J4 Credit

900 250

130

150 1,600

400

1,600 1,104

212

1,104 190

150

190 1,700 1,700

(b) Cash

No. 101

Date Explanation 2020 May 31 Balance

3-34

Ref.

Debit

Credit



Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 4,500

(For Instructor Use Only)

PROBLEM 3-1A (Continued) Accounts Receivable Date Explanation 2020 May 31 Balance 31 Adjusting

Ref.  J4

Debit

Credit

No. 112 Balance 6,000 7,700

1,700

Supplies

No. 126

Date Explanation 2020 May 31 Balance 31 Adjusting Prepaid Insurance Date Explanation 2020 May 31 Balance 31 Adjusting Equipment Date Explanation 2020 May 31 Balance

Ref.

Debit

 J4

Ref.

Debit

 J4

Ref.

Debit

Credit

Balance

900

1,900 1,000

Credit

No. 130 Balance

150

3,600 3,450

Credit

No. 149 Balance



11,400

Accumulated Depreciation—Equipment Date Explanation Ref. 2020 May 31 Adjusting J4

Credit

No. 150 Balance

190

Debit

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-35

PROBLEM 3-1A (Continued) Accounts Payable Date Explanation 2020 May 31 Balance 31 Adjusting

Ref.

Debit

 J4

Credit

No. 201 Balance

250

4,500 4,750

Unearned Service Revenue Date Explanation 2020 May 31 Balance 31 Adjusting Salaries and Wages Payable Date Explanation 2020 May 31 Adjusting

No. 209 Ref.  J4

Ref.

Debit

Credit

1,600

2,000 400

Debit

Credit

No. 212 Balance

1,104

Owner’s Capital Date Explanation 2020 May 31 Balance

No. 301 Ref.

Debit

Credit



No. 400

Explanation

Ref.

Balance Adjusting Adjusting

 J4 J4

Debit

Credit

Balance

1,600 1,700

9,500 11,100 12,800

Supplies Expense Date 2020 May 31 3-36

No. 631

Explanation

Ref.

Debit

Adjusting

900

Balance 18,700

Service Revenue Date 2020 May 31 31 31

Balance

Credit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 900

(For Instructor Use Only)

PROBLEM 3-1A (Continued) Depreciation Expense Date Explanation 2020 May 31 Adjusting Insurance Expense Date Explanation 2020 May 31 Adjusting Salaries and Wages Expense Date Explanation 2020 May 31 Balance 31 Adjusting

Rent Expense Date Explanation 2020 May 31 Balance Utilities Expense Date Explanation 2020 May 31 Adjusting

Ref.

Debit

190

Ref.

Debit

No. 722 Balance

150

Debit

726 Balance

Ref.  J4

Ref.

Credit

No. 717 Balance

Credit

1,104

6,400 7,504

Debit

No. 729 Balance

Credit



900

Ref.

Debit

No. 732 Balance

250

Weygandt, Accounting Principles, 13/e, Solutions Manual

Credit

(For Instructor Use Only)

250

3-37

PROBLEM 3-1A (Continued) (c)

KRAUSE CONSULTING Adjusted Trial Balance May 31, 2020 Cash .................................................................... Accounts Receivable ......................................... Supplies .............................................................. Prepaid Insurance .............................................. Equipment ........................................................... Accumulated Depreciation— Equipment ....................................................... Accounts Payable............................................... Unearned Service Revenue ............................... Salaries and Wages Payable.............................. Owner’s Capital .................................................. Service Revenue ................................................. Supplies Expense ............................................... Depreciation Expense ........................................ Insurance Expense ............................................. Salaries and Wages Expense ............................ Rent Expense ...................................................... Utilities Expense .................................................

Debit Credit $ 4,500 7,700 Prepaid 1,000 Insurance 3,450 11,400 $

190 4,750 400 1,104 18,700 12,800

900 190 150 7,504 900 250 $37,944

$37,944

[($4,500 + $7,700 + $1,000 + $3,450 + $11,400 + $900 + $190 + $150 + $7,504 + $900 + 250) = ($190 + $4,750 + $400 + $1,104 + $18,700 + $12,800)] [(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Supp. exp. + Depr. exp. + Ins. exp. + Sal. & wages exp. + Rent exp. + Util. exp.) = (Accum. Depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s cap. + Serv. rev.) LO2, 3, 4 BT: AN Difficulty: Easy TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting

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Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-2A

(a) Date May 31

31 31

Account Titles Insurance Expense.............................. Prepaid Insurance ($2,400 x 1/12) .........................

Ref. 722

Debit 200

Supplies Expense ............................... Supplies ($2,080 – $750) ............

631 126

1,330

619

425

130

Depreciation Expense ($3,600 x 1/12) + ($1,500 x 1/12) ...... Accumulated Depreciation— Buildings ................................. Accumulated Depreciation— Equipment...............................

J1 Credit

200 1,330

142

300

150

125

Interest Expense ................................. Interest Payable [($40,000 x 6%) x 1/12]..............

718

Unearned Rent Revenue ..................... Rent Revenue (2/3 x $3,300) ..........................

208

Salaries and Wages Expense ............. Salaries and Wages Payable .....

726 212

200

230

200 2,200

429

2,200 750 750

(b) Cash

No. 101

Date Explanation May 31 Balance

Ref. 

Debit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Credit

(For Instructor Use Only)

Balance 3,400

3-39

PROBLEM 3-2A (Continued) Supplies Date Explanation May 31 Balance 31 Adjusting

Ref.  J1

Debit

Credit 1,330

Prepaid Insurance Date Explanation May 31 Balance 31 Adjusting Land Date Explanation May 31 Balance

No. 130 Ref.  J1

Ref. 

Debit

Credit 200

Debit

Credit

Buildings

Balance 2,400 2,200 No. 140 Balance 12,000 No. 141

Date Explanation May 31 Balance

Ref. 

Accumulated Depreciation—Buildings Date Explanation Ref. May 31 Adjusting J1 Equipment Date Explanation May 31 Balance

Ref. 

Debit

Credit

Credit 300

Credit

Accumulated Depreciation—Equipment Date Explanation May 31 Adjusting

3-40

No. 126 Balance 2,080 750

Ref. J1

Balance 60,000 No. 142 Balance 300 No. 149 Balance 15,000 No. 150

Debit

Credit 125

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 125

(For Instructor Use Only)

PROBLEM 3-2A (Continued) Accounts Payable Date Explanation May 31 Balance

Ref. 

Debit

Credit

Unearned Rent Revenue Date Explanation May 31 Balance 31 Adjusting Salaries and Wages Payable Date Explanation May 31 Adjusting

No. 208 Ref.  J1

Ref. J1

Debit

Credit

2,200

Debit

Credit 750

Interest Payable Date Explanation May 31 Adjusting Mortgage Payable Date Explanation May 31 Balance Owner’s Capital Date Explanation May 31 Balance

Balance 3,300 1,100 No. 212 Balance 750 No. 230

Ref. J1

Ref. 

Debit

Credit 200

Balance 200

Credit

No. 275 Balance 40,000

Credit

No. 301 Balance 41,380

Rent Revenue

No. 429

Date Explanation May 31 Balance 31 Adjusting

No. 201 Balance 4,700

Ref.  J1

Debit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Credit 2,200

(For Instructor Use Only)

Balance 10,300 12,500

3-41

PROBLEM 3-2A (Continued) Advertising Expense Date Explanation May 31 Balance

Depreciation Expense Date Explanation May 31 Adjusting

Ref. 

Ref. J1

Debit

Debit 425

Credit

No. 610 Balance 600

Credit

No. 619 Balance 425

Supplies Expense Date May 31

Explanation Adjusting

Interest Expense Date Explanation May 31 Adjusting

Insurance Expense Date Explanation May 31 Adjusting

No. 631 Ref. J1

Ref. J1

Debit 1,330

Debit 200

Credit

No. 718 Balance 200

Credit

No. 722 Balance 200

Salaries and Wages Expense Date Explanation May 31 Balance 31 Adjusting Utilities Expense Date Explanation May 31 Balance

3-42

Balance 1,330

No. 726 Ref.  J1

Ref. 

Debit

Credit

750

Debit

Credit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 3,300 4,050 No. 732 Balance 900

(For Instructor Use Only)

PROBLEM 3-2A (Continued) (c)

HANK’S HOTEL Adjusted Trial Balance May 31, 2020 Cash .................................................................... Supplies .............................................................. Prepaid Insurance .............................................. Land .................................................................... Buildings ............................................................. Accumulated Depreciation—Buildings ............. Equipment........................................................... Accumulated Depreciation—Equipment .......... Accounts Payable .............................................. Unearned Rent Revenue .................................... Salaries and Wages Payable ............................. Interest Payable .................................................. Mortgage Payable............................................... Owner’s Capital .................................................. Rent Revenue ..................................................... Advertising Expense .......................................... Depreciation Expense ........................................ Supplies Expense............................................... Interest Expense................................................. Insurance Expense ............................................. Salaries and Wages Expense ............................ Utilities Expense.................................................

Debit $ 3,400 750 2,200 12,000 60,000

Credit

300

15,000 125 4,700 1,100 750 200 40,000 41,380 12,500 600 425 1,330 200 200 4,050 900 $101,055

$101,055

[($3,400 + $750 + $2,200 + $12,000 + $60,000 + $15,000 + $600 + $425 + $1,330 + $200 + $200 + $4,050 + $900) = ($300 + $125 + $4,700 + $1,100 + $750 + $200 + $40,000 + $41,380 + $12,500)] [(Cash + Supp. + Prepd. ins. + Land + Bldgs. + Equip. + Adv. exp. + Depr. exp. + Supp. exp. + Int. exp. + Ins. exp. + Sal. & wages exp. + Util. exp.) = (Accum. depr.-bldgs. + Accum. depr.-equip. + Accts. pay. + Unearned rent rev. + Sal. & wages pay. + Int. pay. + Mort. pay. + Owner’s cap. + Rent rev.)]

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-43

PROBLEM 3-2A (Continued) (d)

HANK’S HOTEL Income Statement For the Month Ended May 31, 2020 Revenues Rent revenue .................................................. Expenses Salaries and wages expense ......................... Supplies expense ........................................... Utilities expense ............................................. Advertising expense ...................................... Depreciation expense .................................... Interest expense ............................................. Insurance expense ......................................... Total expenses ........................................ Net income .............................................................

$12,500 $4,050 1,330 900 600 425 200 200 7,705 $ 4,795

[$12,500 – ($4,050 + $1,330 + $900 + $600 + $425 + $200 + $200) = $4,795] [Rent rev. – (Sal. & wages exp. + Supp. exp. + Util. exp. + Advert. exp. + Depr. exp. + Int. exp. + Ins. exp.) = Net inc.]

HANK’S HOTEL Owner’s Equity Statement For the Month Ended May 31, 2020 Owner’s capital, May 1 ............................................................ Investment by owner ............................................................... Add: Net income .................................................................... Owner’s capital, May 31...........................................................

0 41,380 41,380 4,795 $46,175

($0 + $41,380 + $4,795 = $46,175) (Beg. owner’s cap. + Invest. + Net inc. = End. owner’s cap.)

3-44

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-2A (Continued) HANK’S HOTEL Balance Sheet May 31, 2020 Assets Cash.................................................................... Supplies ............................................................. Prepaid insurance.............................................. Land .................................................................... Buildings ............................................................ Less: Accumulated depreciation— buildings ................................................. Equipment .......................................................... Less: Accumulated depreciation— equipment................................................ Total assets .........................................

$ 3,400 750 2,200 12,000 $60,000 300 15,000

59,700

125

14,875 $92,925

Liabilities and Owner’s Equity Liabilities Accounts payable ...................................... Unearned rent revenue .............................. Salaries and wages payable ...................... Interest payable .......................................... Mortgage payable....................................... Total liabilities..................................... Owner’s equity Owner’s capital........................................... Total liabilities and owner’s equity ......

$ 4,700 1,100 750 200 40,000 46,750 46,175 $92,925

[($3,400 + $750 + $2,200 + $12,000 + ($60,000 - $300) + ($15,000 - $125) = ($4,700 + $1,100 + $750 + $200 + $40,000) + $46,175] [(Cash + Supp. + Prepd. ins. + Land + (Bldgs. – Accum. depr.-bldgs.) + (Equip. – Accum. depr.-equip) = (Accts. pay. + Unearned rent rev. + Sal. & wages pay. + Int. pay. + Mort. pay.) + Owner’s cap.] LO2, 3, 4 BT: AN Difficulty: Easy TOT: 60 min. AACSB: Analytic AICPA FC: Measurement, Reporting

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-45

PROBLEM 3-3A (a) Sept. 30 30 30 30 30 30 30

(b)

Accounts Receivable .............................. Service Revenue ................................

1,100

Rent Expense .......................................... Prepaid Rent ......................................

1,700

Supplies Expense ................................... Supplies .............................................

850

Depreciation Expense ............................. Accum. Depreciation—Equipment .....

700

Interest Expense ..................................... Interest Payable .................................

100

Unearned Rent Revenue ......................... Rent Revenue.....................................

1,450

Salaries and Wages Expense ................. Salaries and Wages Payable.............

725

1,100 1,700 850 700 100 1,450 725

ALENA CO. Income Statement For the Quarter Ended September 30, 2020 Revenues Service revenue .................................................. Rent revenue ...................................................... Total revenues ............................................ Expenses Salaries and wages expense ............................. Rent expense ...................................................... Utilities expense ................................................. Supplies expense ............................................... Depreciation expense ........................................ Interest expense ................................................. Total expenses ............................................ Net income .................................................................

$17,100 2,860 $19,960 8,725 3,600 1,510 850 700 100 15,485 $ 4,475

[($17,100 + $2,860) – ($8,725 + $3,600 + $1,510 + $850 + $700 + $100) = $4,475] [(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Util. exp. + Supp. exp. + Depr. exp. + Int. exp.) = Net inc.] 3-46

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-3A (Continued) ALENA CO. Owner’s Equity Statement For the Quarter Ended September 30, 2020 Owner’s capital, July 1, 2020 ............................... Investment by owner ............................................ Add: Net income .................................................

$ $22,000 4,475

Less: Drawings .................................................... Owner’s capital, September 30, 2020 ..................

26,475 26,475 1,600 $24,875

($0 + ($22,000 + $4,475) - $1,600 = $24,875) (Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draws. = End. owner’s cap.)

ALENA CO. Balance Sheet September 30, 2020 Assets Cash....................................................................... Accounts receivable ............................................. Supplies ................................................................ Prepaid rent........................................................... Equipment ............................................................. Less: Accum. depreciation—equipment ............ Total assets ............................................

$ 8,700 11,500 650 500 $18,000 700

17,300 $38,650

Liabilities and Owner’s Equity Liabilities Notes payable ................................................ Accounts payable ......................................... Salaries and wages payable ......................... Unearned rent revenue ................................. Interest payable ............................................. Total liabilities........................................ Owner’s equity Owner’s capital.............................................. Total liabilities and owner’s equity ......

$10,000 2,500 725 450 100 13,775 24,875 $38,650

[($8,700 + $11,500 + $650 + $500) + ($18,000 - $700) = ($10,000 + $2,500 + $725 + $450 + $100) + $24,875] [(Cash + Accts. rec. + Supp. + Prepd. rent) + (Equip. – Accum. depr.-equip) = (Notes pay. + Accts. pay. + Sal. & wages pay. + Unearned rent rev. + Int. pay.) + Owner’s cap.]

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-47

PROBLEM 3-3A (Continued) (c) Interest of 12% per year equals a monthly rate of 1%; monthly interest is $100 ($10,000 x 1%). Since total interest expense is $100, the note has been outstanding one month. ($10,000 x 12% x Fraction of a yr. = $100); (Fraction of a yr. = 1/12 or one month) (Prin. x Int. rate x Fraction of a yr. = Int. exp.) LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting

3-48

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

PROBLEM 3-4A

Dec. 31

Insurance Expense ....................................... Prepaid Insurance ................................. ($7,920 ÷ 3) = $2,640 [($4,400 ÷ 2) = 2,200 $4,840

4,840 4,840

[($7,920 ÷ 3) + ($4,400 ÷ 2) = $4,840] [(Policy B4564 ÷ Policy term) + (Policy A2958 ÷ Policy term) = Ins. exp.]

Dec. 31

Unearned Rent Revenue .............................. Rent Revenue ........................................ [Nov. 5 x $5,000 x 2 = $50,000 [Dec. 3 x $8,500 x 1 = 25,500 $75,500

75,500 75,500

[(5 x $5,000 x 2) + (3 x $8,500 x 1) = $75,500] [(No. of Nov. leases x Monthly rent x No. of mos.) + (No. of Dec. leases x Monthly rent x No. of mos.) = Rent rev.]

Dec. 31

Interest Expense ........................................... Interest Payable ($120,000 x 6% x 2/12).......................

1,200 1,200

($120,000 x 6% x 2/12 = $1,200) (Prin. x Int. rate x Fraction of yr. = Int. exp.)

Dec. 31

Salaries and Wages Expense ...................... Salaries and Wages Payable ................ 5 x $700 x 2/5 = $1,400 [3 x $500 x 2/5 = 600 $2,000

2,000 2,000

[(5 x $700 x 2/5) + (3 x $500 x 2/5) = $2,000] [No. of emp. x Wkly sal. x Days worked) + (No. of emp. x Wkly. sal. x Days worked) = Sal. & wages exp.] LO2, 3 BT: AN Difficulty: Moderate TOT: 40 min. AACSB: Analytic AICPA FC: Measurement

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-49

PROBLEM 3-5A

(a), (c) & (e) Cash Date Nov. 1 8 10 12 20 22 25 29

Explanation Balance

Accounts Receivable Date Explanation Nov. 1 Balance 10 27

Supplies Date Explanation Nov. 1 Balance 17 30 Adjusting

Equipment Date Explanation Nov. 1 Balance 15

3-50

Ref.  J1 J1 J1 J1 J1 J1 J1

Ref.  J1 J1

Ref.  J1

Debit

Credit 1,700

3,620 3,100 2,700 400 1,700 600

Debit

Credit 3,620

2,200

Debit

Credit

700 1,100

Debit

Credit

2,000

Weygandt, Accounting Principles, 13/e, Solutions Manual

No. 101 Balance 2,400 700 4,320 7,420 4,720 4,320 2,620 3,220

No. 112 Balance 4,250 630 2,830

No. 126 Balance 1,800 2,500 1,400

No. 153 Balance 12,000 14,000

(For Instructor Use Only)

PROBLEM 3-5A (Continued) Accumulated Depreciation—Equipment Date Explanation Ref. Nov. 1 Balance  30 Adjusting J1

Accounts Payable Date Explanation Nov. 1 Balance 15 17 20

Unearned Service Revenue Date Explanation Nov. 1 Balance 29 30 Adjusting

Salaries and Wages Payable Date Explanation Nov. 1 Balance 8 30 Adjusting

Owner’s Capital Date Explanation Nov. 1 Balance

Ref.  J1 J1 J1

Ref.  J1 J1

Ref. 

Debit

Credit 200

Debit

Credit 2,000 700

2,700

Debit

Credit 600

1,220

Debit

Credit

700 350

No. 201 Balance 2,600 4,600 5,300 2,600

No. 209 Balance 1,200 1,800 580

No. 212 Balance 700 0 350

Credit

No. 301 Balance 13,950

(For Instructor Use Only)

3-51

Debit

Weygandt, Accounting Principles, 13/e, Solutions Manual

No. 154 Balance 2,000 2,200

PROBLEM 3-5A (Continued) Service Revenue Date Explanation Nov. 12 27 30 Adjusting

Depreciation Expense Date Explanation Nov. 30 Adjusting

Supplies Expense Date Explanation Nov. 30 Adjusting

Ref. J1 J1 J1

Ref. J1

Debit

Debit 200

Debit 1,100

Credit 3,100 2,200 1,220

Credit

No. 615 Balance 200

Credit

No. 631 Balance 1,100

Salaries and Wages Expense Date Nov.

Explanation 8 25 30

Adjusting

No. 726 Ref. J1 J1 J1

Debit 1,000 1,700 350

Credit

Rent Expense

Balance 1,000 2,700 3,050

No. 729

Date Explanation Nov. 22

3-52

No. 407 Balance 3,100 5,300 6,520

Ref. J1

Debit 400

Credit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 400

(For Instructor Use Only)

PROBLEM 3-5A (Continued) (b)

General Journal J1

Date Nov.

10 12 15 17 20 22 25 27 29

Account Titles and Explanation Salaries and Wages Payable .............. Salaries and Wages Expense ............ Cash .............................................

Ref. 212 726 101

Debit 700 1,000

Cash..................................................... Accounts Receivable ..................

101 112

3,620

Cash..................................................... Service Revenue .........................

101 407

3,100

Equipment ........................................... Accounts Payable .......................

153 201

2,000

Supplies .............................................. Accounts Payable .......................

126 201

700

Accounts Payable ............................... Cash .............................................

201 101

2,700

Rent Expense ...................................... Cash .............................................

729 101

400

Salaries and Wages Expense ............ Cash .............................................

726 101

1,700

Accounts Receivable.......................... Service Revenue .........................

112 407

2,200

Cash..................................................... Unearned Service Revenue ........

101 209

600

Weygandt, Accounting Principles, 13/e, Solutions Manual

Credit

1,700 3,620 3,100 2,000 700 2,700 400 1,700 2,200

(For Instructor Use Only)

600

3-53

PROBLEM 3-5A (Continued) (d) & (f)

HAMM EQUIPMENT REPAIR Trial Balances November 30, 2020

Cash ........................................... Accounts Receivable ................ Supplies ..................................... Equipment .................................. Accumulated Depreciation— Equipment ............................... Accounts Payable...................... Unearned Service Revenue ...... Salaries and Wages Payable..... Owner’s Capital ......................... Service Revenue ........................ Depreciation Expense ............... Supplies Expense ...................... Salaries and Wages Expense ... Rent Expense .............................

Before Adjustment Dr. Cr. $ 3,220 2,830 2,500 14,000

After Adjustment Dr. Cr. $ 3,220 2,830 1,400 14,000

$ 2,000 2,600 1,800 –0– 13,950 5,300

$ 2,200 2,600 580 350 13,950 6,520

-0200 -01,100 2,700 3,050 400 400 $25,650 $25,650 $26,200

$26,200

[Before adj.: ($3,220 + $2,830 + $2,500 + $14,000 + $2,700 + $400) = ($2,000 + $2,600 + $1,800 + $0 + $13,950 + $5,300)]; [(Cash + Accts. rec. + Supp. + Equip. + Sal. & wages exp. + Rent exp.) = (Accum. depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s cap. + Serv. rev.)] [After adj.: ($3,220 + $2,830 + $1,400 + $14,000 + $200 + $1,100 + $3,050 + $400) = ($2,200 + $2,600 + $580 + $350 + $13,950 + $6,520)]; [(Cash + Accts. rec. + Supp. + Equip. + Depr. exp. + Supp. exp. + Sal. & wages exp. + Rent exp.) = (Accum. depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s cap. + Serv. rev.)]

(e) 1. Nov. 30

3-54

Supplies Expense........................ Supplies ($2,500 – $1,400) ....

631 126

1,100

Salaries and Wages Expense ..... Salaries and Wages Payable................................

726

350

Depreciation Expense ................. Accumulated Depreciation— Equipment ..........................

615

1,100

212

154

Weygandt, Accounting Principles, 13/e, Solutions Manual

350 200 200

(For Instructor Use Only)

PROBLEM 3-5A (Continued) ....................................... 4.

(g)

Unearned Service Revenue ......... Service Revenue ....................

209 407

1,220 1,220

HAMM EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2020 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Rent expense ................................................... Depreciation expense ..................................... Total expenses......................................... Net Income ..............................................................

$6,520 $3,050 1,100 400 200 4,750 $1,770

[$6,520 – ($3,050 + $1,100 + $400 + $200) = $1,770] [Serv. rev. – (Sal. & wages exp. + Supp. exp. + Rent exp. + Depr. exp.) = Net inc.]

HAMM EQUIPMENT REPAIR Owner’s Equity Statement For the Month Ended November 30, 2020 Owner’s capital, November 1 .................................................. Plus: Net income.................................................................... Owner’s capital, November 30 ................................................

$13,950 1,770 $15,720

($13,950 + $1,770 = $15,720) (Beg. owner’s cap. + Net inc. = End. owner’s cap.)

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-55

PROBLEM 3-5A (Continued) HAMM EQUIPMENT REPAIR Balance Sheet November 30, 2020 Assets Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Total assets ...................................................

$ 3,220 2,830 1,400 $14,000 2,200

11,800 $19,250

Liabilities and Owner’s Equity Liabilities Accounts payable............................................................. Unearned service revenue ............................................... Salaries and wages payable ............................................ Total liabilities ........................................................... Owner’s equity Owner’s capital ................................................................. Total liabilities and owner’s equity .................................

$ 2,600 580 350 3,530 15,720 $19,250

[($3,220 + $2,830 + $1,400) + ($14,000 - $2,200) = ($2,600 + $580 + $350) + $15,720] [(Cash + Accts. rec. + Supp.) + (Equip. – Accum. depr.-equip) = (Accts. pay. + Unearned serv. rev. + Sal. & wages pay.) + Owner’s cap.] LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 70 min. AACSB: Analytic AICPA FC: Measurement, Reporting

3-56

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 3-6A

(a) 1.

June 30

Supplies ................................................ Supplies Expense .........................

1,300 1,300

Interest Expense ($20,000 x 6% x 5/12) ........................ Interest Payable ............................

500 500

($20,000 x 6% x 5/12 = $500) (Prin. x Int. rate x Fraction of a yr. = Int. exp.)

Prepaid Insurance [($2,700 ÷ 12) x 9] .............................. Insurance Expense .......................

2,025 2,025

[($2,700 ÷ 12) x 9 = $2,025] [(Amt. of ins. prem. ÷ Life of ins. policy in mos.) x No. of mos. unexpired = Prepd. ins. bal.]

4. 5. 6.

30 30 30

Service Revenue ................................... Unearned Service Revenue............

1,300

Accounts Receivable ........................... Service Revenue ...........................

2,000

Depreciation Expense ($2,250 ÷ 2) ........................................ Accumulated Depreciation— Equipment .................................

1,300 2,000 1,125 1,125

($2,250 x ½ = $1,125) (Ann. depr. x ½ yr. = Depr. exp.)

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-57

*PROBLEM 3-6A (Continued) (b)

GABRIEL’S GRAPHICS COMPANY Adjusted Trial Balance June 30, 2020 Cash .................................................................... Accounts Receivable ($14,000 + $2,000)........... Supplies .............................................................. Prepaid Insurance .............................................. Equipment ........................................................... Accumulated Depreciation—Equipment ........... Notes Payable ..................................................... Accounts Payable............................................... Interest Payable .................................................. Unearned Service Revenue ............................... Owner’s Capital .................................................. Sales Revenue .................................................... Service Revenue ($6,000 – $1,300 + $2,000) ..... Salaries and Wages Expense ............................ Supplies Expense ($3,700 – $1,300) .................. Advertising Expense .......................................... Rent Expense ...................................................... Utilities Expense ................................................. Depreciation Expense ........................................ Insurance Expense ($2,700 – $2,025) ................ Interest Expense .................................................

Debit $ 8,600 16,000 1,300 2,025 45,000

Credit

30,000 2,400 1,900 1,500 1,700 1,125 675 500 $112,725

1,125 20,000 9,000 500 1,300 22,000 52,100 6,700

$112,725

[($8,600 + $16,000 + $1,300 + $2,025 + $45,000 + $30,000 + $2,400 + $1,900 + $1,500 + $1,700 + $1,125 + $675 + $500) = ($1,125 + $20,000 + $9,000 + $500 + $1,300 + $22,000 + $52,100 + $6,700)] [(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Sal. & wages exp. + Supp. exp. + Advert. exp. + Rent exp. + Util. exp. + Depr. exp. + Ins. exp. + Int. exp.) = (Accum. depr.-equip. + Notes pay. + Accts. pay. + Int. pay. + Unearned serv. rev. + Owner’s cap. + Sales rev. + Serv. rev.)]

3-58

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

*PROBLEM 3-6A (Continued) GABRIEL’S GRAPHICS COMPANY Income Statement For the Six Months Ended June 30, 2020

(c)

Revenues Sales revenue ................................................ Service revenue............................................. Total revenues ....................................... Expenses Salaries and wages expense ........................ Supplies expense .......................................... Advertising expense ..................................... Utilities expense ............................................ Rent expense ................................................. Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................

$52,100 6,700 $58,800 30,000 2,400 1,900 1,700 1,500 1,125 675 500 39,800 $19,000

[($52,100 + $6,700) – ($30,000 + $2,400 + $1,900 + $1,700 + $1,500 + $1,125 + $675 + $500) = $19,000] [(Sales rev. + Serv. rev.) – (Sal. & wages exp. + Supp. exp. + Advert. exp. + Util. exp. + Rent exp. + Depr. exp. + Ins. exp. + Int. exp.) = Net inc.]

GABRIEL’S GRAPHICS COMPANY Owner’s Equity Statement For the Six Months Ended June 30, 2020 Owner’s capital, January 1...................................................... Investment by owner ............................................................... Add: Net income ..................................................................... Owner’s capital, June 30 .........................................................

0 22,000 22,000 19,000 $41,000

($0 + $22,000 + $19,000 = $41,000) (Beg. owner’s cap. + Invest. + Net inc. = End. owner’s cap.)

Weygandt, Accounting Principles, 13/e, Solutions Manual

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3-59

*PROBLEM 3-6A (Continued) GABRIEL’S GRAPHICS COMPANY Balance Sheet June 30, 2020 Assets Cash ....................................................................... Accounts receivable ............................................. Supplies ................................................................. Prepaid insurance ................................................. Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Total assets ............................................

$ 8,600 16,000 1,300 2,025 $45,000 1,125

43,875 $71,800

Liabilities and Owner’s Equity Liabilities Notes payable ................................................ Accounts payable.......................................... Unearned service revenue ............................ Interest payable ............................................. Total liabilities ........................................ Owner’s equity Owner’s capital .............................................. Total liabilities and owner’s equity.........

$20,000 9,000 1,300 500 30,800 41,000 $71,800

[($8,600 + $16,000 + $1,300 + $2,025) + ($45,000 - $1,125) = ($20,000 + $9,000 + $1,300 + $500) + $41,000] [(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Notes pay. + Accts. pay. + Unearned serv. rev. + Int. pay.) + Owner’s cap.] LO2, 3, 4, 5 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting

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Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

CC3

CONTINUING COOKIE CHRONICLE

(a) Date

GENERAL JOURNAL Account Titles and Explanation

Debit

Nov. 30 Supplies Expense............................................. Supplies........................................................

30 Depreciation Expense ...................................... Accumulated Depreciation—Equipment [($300 + $900) ÷ 60 months] ....................

J2 Credit

[($300 + $900) ÷ 60 = $20] (Cost of equip. ÷ Useful life in mos. = Monthly depr. exp.)

30 Interest Expense............................................... Interest Payable ($2,000 x .06 x 1/12 x .5) ............................

5 5

($2,000 x .06 x 1/12 x .5 = $5) (Prin. x Int. rate x half of a mo. = Monthly int. exp.)

30 Accounts Receivable ....................................... Service Revenue ..........................................

300

30 Utilities Expense............................................... Accounts Payable ........................................

Weygandt, Accounting Principles, 13/e, Solutions Manual

300

(For Instructor Use Only)

3-61

CC3 (Continued) (a) (Continued)

Date

Cash Ref.

Explanation

Accounts Receivable Ref. Debit J2

Date

Supplies Ref. Debit

Explanation

Nov. 30 Balance 30

Explanation

Nov. 30 Balance

Date

Explanation

300

✓ J2 Prepaid Insurance Ref. Debit

300

Credit

Balance

125 90

Credit

Balance

✓ Equipment Ref. Debit

Balance

1,320

Credit

Balance 1,200

Accumulated Depreciation—Equipment Explanation Ref. Debit Credit

Balance

Nov. 30

3-62

Credit

✓

Nov. 30 Balance

Date

Balance 245

Nov. 30

Date

Credit

✓

Nov. 30 Balance

Date

Debit

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

CC3 (Continued) (a) (Continued)

Date

Explanation

Nov. 30

Date

Explanation

Nov. 30

Date

Unearned Service Revenue Explanation Ref. Debit

Explanation

Nov. 30 Balance

Date

Explanation

Nov. 30 Balance

Date

Interest Payable Ref. Debit J2

Nov. 30 Balance

Date

Accounts Payable Ref. Debit

Explanation

Credit

Balance

Credit

Balance

Credit

Balance

✓

Notes Payable Ref. Debit

Credit

✓

2,000

Owner’s Capital Ref. Debit

Credit

✓

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 800

Service Revenue Ref. Debit ✓ J2

Balance

Credit

Balance

300

125 425

(For Instructor Use Only)

3-63

CC3 (Continued) (a) (Continued)

Date

Utilities Expense Ref. Debit

Explanation

Nov. 30

Date

Explanation

Date

✓

Explanation

Nov. 30

Date

Explanation

Nov. 30

3-64

Balance 65

Credit

Balance 35

Credit

Interest Expense Ref. Debit J2

Credit

Depreciation Expense Ref. Debit

Balance 45

Supplies Expense Ref. Debit

Nov. 30

Date

Advertising Expense Ref. Debit

Nov. 30 Balance

Credit

Balance 20

Credit

Weygandt, Accounting Principles, 13/e, Solutions Manual

Balance 5

(For Instructor Use Only)

CC3 (Continued) (b) COOKIE CREATIONS Adjusted Trial Balance November 30, 2019 Account Cash ............................................................................... Accounts Receivable .................................................... Supplies ......................................................................... Prepaid Insurance ......................................................... Equipment ..................................................................... Accumulated Depreciation—Equipment ..................... Accounts Payable ......................................................... Interest Payable ............................................................ Unearned Service Revenue .......................................... Notes Payable ............................................................... Owner’s Capital ............................................................. Service Revenue ........................................................... Utilities Expense ........................................................... Advertising Expense ..................................................... Supplies Expense ......................................................... Depreciation Expense ................................................... Interest Expense ........................................................... Totals ................................................................

Debit $ 245 300 90 1,320 1,200

Credit

20 45 5 30 2,000 800 425

45 65 35 20 5 $3,325

$3,325

[($245 + $300 + $90 + $1,320 + $1,200 + $45 + $65 + $35 + $20 + $5) = ($20 + $45 + $5 + $30 + $2,000 + $800 + $425)] [(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Util. exp. + Advert. exp. + Supp. exp. + Depr. exp. + Int. exp.) = (Accum. depr.-equip. + Accts. pay. + Int. pay. + Unearned serv. rev. + Notes pay. + Owner’s cap. + Serv. rev.)]

Weygandt, Accounting Principles, 13/e, Solutions Manual

(For Instructor Use Only)

3-65

CC3 (Continued) (c) Revenues Service revenue ............................................................ Expenses Advertising expense ..................................................... Utilities expense ........................................................... Supplies expense ......................................................... Depreciation expense ................................................... Interest expense ........................................................... Net income ...........................................................................

$425 $65 45 35 20 5

170 $255

[$425 – ($65 + $45 + $35 + $20 + $5) = $255] [Serv. rev. – (Advert. exp. + Util. exp. + Supp. exp. + Depr. exp. + Int. exp.) = Net inc.]

Yes, Cookie Creations has been profitable in November. It has a profit of $255 which is more than one half of the revenue earned in November. [Note: Owner’s Equity Statement is not required—shown for information purposes only.] COOKIE CREATIONS Owner’s Equity Statement For the Month Ended November 30, 2019 Owner’s Capital, November 1, 2019 .................................... Add: Investment .................................................................. Net income .................................................................. Owner’s Capital, November 30, 2019 ..................................

0 800 255 $1,055

($0 + $800 + $255 = $1,055) (Beg. owner’s cap. + Invest. + Net inc. = End. owner’s cap.)

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CC3 (Continued) (c) (Continued) [Note: Balance Sheet is not required—shown for information purposes only.] COOKIE CREATIONS Balance Sheet November 30, 2019 Assets Cash ................................................................................ Accounts receivable ...................................................... Supplies .......................................................................... Prepaid insurance .......................................................... Equipment....................................................................... Less: Accumulated depreciation—equipment ............ Total assets ................................................................

$ 245 300 90 1,320 $1,200 20

1,180 $3,135

Liabilities and Owner’s Equity Liabilities Notes payable ............................................................ Accounts payable ...................................................... Unearned service revenue ........................................ Interest payable ......................................................... Total liabilities ....................................................... Owner’s equity Owner’s capital .......................................................... Total liabilities and owner’s equity ......................

$2,000 45 30 5 2,080 1,055 $3,135

[($245 + $300 + $90 + $1,320) + ($1,200 - $20) = ($2,000 + $45 + $30 + $5) + $1,055] [(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Notes pay. + Accts. pay. + Uneaned serv. rev. + Int. pay.) + Owner’s cap.] LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement, Reporting

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EC3

ETHICS CASE

(a) The stakeholders in this situation are:  Zoe Baas, controller.  The president of Russell Company.  Russell Company stockholders. (b) 1.

It is unethical for the president to place pressure on Zoe to misstate net income by requesting her to prepare incorrect adjusting entries.

It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Zoe did nothing unethical by dating the adjusting entries December 31.

(c) Zoe can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal). LO1, 2, 3, 4 BT: E Difficulty: Moderate TOT: 12 min. AACSB: Ethics AICPA FC: Measurement AICPA PC: Professional Demeanor, Communication

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CT 3-1

FINANCIAL REPORTING PROBLEM

(a) Items that may result in adjusting entries for prepayments are: 1. Other current assets (per balance sheet). 2. Property, plant and equipment, net (per balance sheet). 3. Acquired intangible assets, net (per balance sheet)—amortization is similar to depreciation (explained later in Chapter 10). (b) Accrual adjusting entries were probably made for accounts payable and accrued expenses. (c) Apple’s net income increased since 2013. Its net income increased by $2,473 million from 2013 to 2014, and by $13,884 million from 2014 to 2015. Apple’s net income increased by 44.2% from 2013 to 2015. LO2, 3, 4 BT: AN Difficulty: Easy TOT: 12 min. AACSB: Analytic AICPA FC: Measurement, Reporting

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CT 3-2

COMPARATIVE ANALYSIS PROBLEM

(Amounts shown in millions) PepsiCo

Coca-Cola

(a)

Net increase (decrease) in property, plant, and equipment (net) from 2014 to 2015.

$(927)

$(2,062)

(b)

Increase (decrease) in selling, general, and administrative expenses from 2014 to 2015.

$(1,241)

$(791)

(c)

Increase (decrease) in long-term debt (obligations) from 2014 to 2015.

$5,392

$9,344

(d)

Increase (decrease) in net income from 2014 to 2015.

$(1,057)

$242

(e)

Increase (decrease) in cash and cash equivalents from 2014 to 2015.

(($

2,962

$(1,649)

LO N/A BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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CT 3-3

COMPARATIVE ANALYSIS PROBLEM

1. (Amounts in millions) Amazon

Wal-Mart

(a)

Increase (decrease) in interest expense, from 2014 to 2015.

$249

$87

(b)

Increase (decrease) in net income from 2014 to 2015.

$837

$(2,019)

(c)

Increase (decrease) in cash from operations from 2014 to 2015.

($5,078

$(1,175)

Cash flow from operations is the difference between cash receipts from revenues and cash payments for expenses (see chapter 1). Depreciation expense is a major reason why cash flow from operations and net income are different for these two companies. Depreciation expense reduces a company’s net income, but does not affect cash flow from operations since it’s a noncash expense. Other reasons would include changes in accounts receivable, inventory, and accounts payable.

LO N/A BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting

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CT 3-4

REAL–WORLD FOCUS

Answers will vary depending on the company and article chosen by the student. LO N/A BT: S Difficulty: Easy TOT: 15 min. AACSB: Technology, Communication AICPA FC: Reporting AICPA PC: Communication

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CT 3-5 (a)

DECISION MAKING ACROSS THE ORGANIZATION HAPPY CAMPER PARK Income Statement For the Quarter Ended March 31, 2020

Revenues Rent revenue ($90,000 – $15,000) ................ Expenses Salaries and wages expense [$29,800 + ($300 x 2)] ................................. Advertising expense ($5,200 + $110) ........... Supplies expense ($6,200 – $1,700) ............. Maintenance and repairs expense ($4,000 + $260) ............................................ Insurance expense ($7,200 x 3/12) ............... Utilities expense ($900 + $180) ..................... Depreciation expense ................................... Interest expense ($12,000 x 10% x 3/12) ......... Total expenses....................................... Net income ............................................................

$75,000 $30,400 5,310 4,500 4,260 1,800 1,080 800 300 48,450 $26,550

[($90,000 - $15,000) – ($29,800 + ($300 x 2)) – ($5,200 + $110) – ($6,200 - $1,700) – ($4,000 + $260) – ($7,200 x 3/12) – ($900 + $180) - $800 – ($12,000 x 10% x 3/12) = $26,550] [Rent rev. – Sal. & wages exp. – Advert. exp. – Supp. exp. - Maint. & repairs exp. – Ins. exp. – Util. exp. – Depr. exp. – Int. exp. = Net inc.]

(b) The generally accepted accounting principles pertaining to the income statement that were not recognized by Erica were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized when the performance obligation is satisfied. The $15,000 for summer rentals has not been performed and, therefore, should not be reported in income for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was $7,750 ($48,450 – $40,700). The overstatement of revenues ($15,000) plus the understatement of expenses ($7,750) equals the difference in reported income of $22,750 ($49,300 – $26,550). LO N/A BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic, Communication AICPA FC: Reporting AICPA PC: Communication

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CT 3-6

COMMUNICATION ACTIVITY

Dear Ms. Kahn: Upon reviewing the accounts of your company at the end of the year, I discovered that adjusting entries were not made. Adjusting entries are made at the end of the accounting period to ensure that the revenue recognition and expense recognition principles required under generally accepted accounting principles are followed. The use of adjusting entries makes it possible to report on the balance sheet the appropriate assets, liabilities, and owner’s equity at the statement date and to report on the income statement the proper net income (or loss) for the year. Adjusting entries are needed because the trial balance may not contain an up-to-date and complete record of transactions and events for the following reasons: 1.

Some events are not journalized daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees.

The expiration of some costs is not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment depreciation, rent, and insurance.

Some expenses, such as the cost of utility service and property taxes, may be unrecorded because the bills for the costs have not been received.

There are four types of adjusting entries:

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Prepaid expenses—expenses paid in cash and recorded as assets before they are used or consumed.

Unearned revenues—revenues received in cash and recorded as liabilities before they are earned.

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CT 3-6 (Continued) 3.

Accrued revenues—revenues earned but not yet received in cash or recorded.

Accrued expenses—expenses incurred but not yet paid in cash or recorded.

I will be happy to answer any questions you may have on adjusting entries. Signature LO1, 2, 3 BT: S Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Measurement, Reporting AICPA PC: Communication

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CT 3-7

ALL ABOUT YOU

We address the issue of contingent liabilities in greater detail in Chapter 11. Our primary interest in this exercise is to engage students in a discussion regarding the general nature of the financial statement elements (assets, liabilities, equity, revenues and expenses). (a)

By taking out the bank loan your friend has incurred a liability. You do not have a liability unless your friend defaults, or unless it becomes clear that he will default. The loan application may, however, require you to disclose any guarantees that you have signed, since they represent potential liabilities.

(b) Accounting standards have specific requirements regarding accounting for situations where there is uncertainty regarding whether a liability has been incurred. Those standards require an evaluation of the probability of an amount being owed. Without going into detail regarding those standards, the basic idea is that if it is probable that you will owe money, then you should accrue a liability. If it is not probable, but it is possible that you will owe money, then you should disclose facts regarding the situation. The most important point is that this event has the potential to materially impact your finances, and therefore you have a responsibility to disclose it to the bank in some form. (c)

Losing your job would not create a financial liability, although it would most certainly reduce your revenues. You are obviously concerned that you might lose your job, but you don’t have specific information that would suggest that it will happen. Therefore, you probably don’t have an obligation to disclose this information to the bank. However, unless you are relatively certain that you would be able to find suitable employment relatively quickly, you might want to wait until your job situation has stabilized before pursuing a loan of this size.

LO N/A BT: E Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication

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CT 3-8

CONSIDERING PEOPLE, PLANET, AND PROFIT

The balance sheet should provide a fair representation of what a company owns and what it owes. If significant obligations of the company are not reported on the balance sheet, the company’s net worth (its equity) will be overstated. While it is true that it is not possible to estimate the exact amount of future environmental cleanup costs, it is becoming clear that companies will be held accountable. Therefore, it doesn’t seem reasonable to not accrue for environmental costs. Recognition of these liabilities provides a more accurate picture of the company’s financial position. It also has the potential to improve the environment. As companies are forced to report these amounts on their financial statements they will start to look for more effective and efficient means to reduce toxic waste, and therefore reduce their costs. LO N/A BT: E Difficulty: Moderate TOT: 10 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication

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CT 3-9

(a)

FASB CODIFICATION ACTIVITY

Revenues are inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.

(b) Compensation is reciprocal transfers of cash or other assets in exchange for services performed. LO N/A BT: K Difficulty: Easy TOT: 12 min. AACSB: Communication AICPA FC: Reporting AICPA PC: Communication

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IFRS 3-1

INTERNATIONAL FINANCIAL REPORTING PROBLEM

(a) Note 1.25 indicates that revenue is recognized in the following ways: Direct sales to customers are recognized at the time of purchase by retail customers; wholesale sales recognize revenue when title to the goods passes to third party customers, generally upon shipment; and revenue is presented net of all forms of discount. (b) Note 1.25 states that the estimated rate of returns is based on statistics of historical returns. (c) Louis Vuitton could have adjustments for prepayments such as: Depreciation expense, Amortization of intangible assets, and Deferred tax assets. (d) Louis Vuitton could have adjustments for accruals such as: Finance costs (interest expense), Tax liabilities, and Trade and other payables. LO7 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic, Diversity AICPA FC: Reporting

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CHAPTER 4 Completing the Accounting Cycle ASSIGNMENT CLASSIFICATION TABLE Learning Objectives

Questions

Brief Exercises

*1.

Prepare a worksheet.

1, 2, 3, 4, 5

1, 2, 3

1, 2, 3 5, 6

1A, 2A, 3A, 4A, 5A

*2.

Prepare closing entries and a post-closing trial balance.

6, 7, 8, 9, 11

4, 5, 6, 7

4, 7, 8, 11, 19

1A, 2A, 3A, 4A, 5A

*3.

Explain the steps in the accounting cycle and how to prepare correcting entries.

10, 11, 12, 13

8, 9

10, 12, 13,

*4.

Identify the sections of a classified balance sheet.

14, 15, 16, 17, 10, 11 18, 19

3, 9, 14, 15, 16, 17

1A, 2A, 3A, 4A, 5A

*5.

Prepare reversing entries.

10, 20, 21

Do It!

Exercises

A Problems

18, 19

*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix *to the chapter.

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ASSIGNMENT CHARACTERISTICS TABLE Problem Number

Description

Time Allotted (min.)

Prepare worksheet, financial statements, and adjusting and closing entries.

Simple

40–50

Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.

Moderate

50–60

Prepare financial statements, closing entries, and postclosing trial balance.

Moderate

40–50

Complete worksheet; prepare classified balance sheet, entries, and post-closing trial balance.

Moderate

50–60

Complete all steps in accounting cycle.

Complex

70–90

Analyze errors and prepare correcting entries and trial balance.

Moderate

40–50

Comprehensive Problem: Chapters 2 to 4

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Difficulty Level