205. The following information is available for Hughes Co.
2011 2010 2009
Net income 2,500 1,700 1,900
Net sales 37,000 35,000 32,000
Total assets 420,000 395,000 375,000
From the information provided, calculate Hughes’ profit margin ratio for each of the three
years. In 2010 economic conditions and a slowing economy impacted the results of
operations. Comment on the results, assuming that the industry average for the profit margin
ratio is 7% for each of the three years.
206. The unadjusted trial balance and the adjustment data for Harris Training Institute are
given below along with adjusting entry information. If these adjustments are not recorded,
what is the impact on net income? Show calculation for net income without the adjustments
and net income with the adjustments. Which one gives the most accurate net income? What
accounting principles are being violated if the adjustments are not made?
Harris Training Institute
Unadjusted Trial Balance
December 31
(in millions)
Cash…………………………………………………. $ 58,000
Accounts receivable…………..……………… 59,000
Prepaid insurance …………………………… 12,000
Equipment ……………………………………. 8,000
Accumulated depreciation–equipment ……….. $ 2,000
Buildings……………………………………………… 57,500
Accumulated depreciation–buildings………….. 17,500
Land…………………………………. 55,000
Unearned rent………………………………….. 16,000
Long-term notes payable………………………. 50,000
Harris, Capital ………………………………. 115,600
Tuition fees earned ………………………. 74,000
Training fees earned …………………………. 23,400
Wages expense ……………………………………… 32,000
Utilities expense ……………………………. 8,000
Property taxes expense ………………………… 5,000
Interest expense ……………………………………. 4,000 ________
Totals ……………………………………….. $ 298,500 $298,500
Additional information items:
a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the
insurance invoice indicates that one half of the policy has expired by the end of the December
31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to
Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
207. The unadjusted trial balance and the adjustment data for Harris Training Institute are
given below along with adjusting entry information. What is the impact of the adjusting
entries on the balance sheet? Show calculation for total assets, total liabilities, and owner’s
equity without the adjustments; show calculation for total assets, total liabilities, and owner’s
equity with the adjustments. Which one gives the most accurate presentation of the balance
sheet?
Harris Training Institute
Unadjusted Trial Balance
December 31
(in millions)
Cash…………………………………………. $ 58,000
Accounts receivable…………..……………… 59,000
Prepaid insurance …………………………… 12,000
Equipment ……………………………………. 8,000
Accumulated depreciation–equipment ……….. $ 2,000
Buildings………………………………………. 57,500
Accumulated depreciation–buildings………….. 17,500
Land…………………………………. 55,000
Unearned rent………………………………….. 16,000
Long-term notes payable………………………. 50,000
Harris, Capital ………………………………. 115,600
Tuition fees earned ………………………. 74,000
Training fees earned ……………………. 23,400
Wages expense …………………………… 32,000
Utilities expense …………………………. 8,000
Property taxes expense …………………… 5,000
Interest expense …………………………… 4,000 ________
Totals ……………………………………….. $ 298,500 $298,500
Additional information items:
a. The Prepaid Insurance account consists of a payment for a 1 year policy. An analysis of the
insurance invoice indicates that one half of the policy has expired by the end of the December
31 year-end.
b. A cash payment for space sublet for 8 months was received on July 1 and was credited to
Unearned Rent.
c. Accrued interest expense on the note payable of $1,000 has been incurred but not paid.
208. Using the selected information given below for Bliss Company, calculate return on
assets, debt ratio, and profit margin. Comment on the results of operations and the financial
position of the company for the year.
Sales 950,000
Expenses 795,000
Assets (beginning of the year) 1,500,000
Assets (end of the year) 1,900,000
Liabilities 850,000
209. Prepare adjusting entries for the year ended December 31, for each of these separate
situations. Assume that prepaid expenses are initially recorded in asset accounts and that fees
collected in advance are initially recorded as liabilities.
a. The Prepaid Rent account has a debit balance of $12,000 before adjustment, representing a
prepayment for four months rent made on December 1 of the current year.
b. One-third of the work related to $18,000 of cash received in advance was performed during
this period.
c. Unpaid accrued salaries at December 31 amounts to $15,000
d. Work was completed for a client on December 31 in the amount of $21,000, but was not
previously billed or recorded.
e. Estimated depreciation on office equipment is $27,000.
210. Salvo Co. had the following transactions in the last two months of its year ended
December 31. Prepare entries for these transactions under the method that records prepaid
expenses as expenses and records unearned revenues as revenues. Also prepare adjusting
entries at the end of the year.
Nov. 1 Paid $11,400 for 12 months of insurance coverage through October 31 of next year.
5 Received $8,000 cash for future services to be provided to a customer.
7 Paid $10,000 for future advertising.
Dec. 31 A portion of the insurance paid for on November 1 has expired. No adjustment was made
in November to the insurance account.
31 Services of $2,500 are not yet provided to the customer who paid on November 5.
31 Of the advertising paid for on November 7, $1,500 is not yet used.
211. The following two separate situations require adjusting journal entries to prepare
financial statements as of the fiscal year ended April 30. For each situation, present both the
April 30 adjusting entry and the subsequent entry during May to record the payment of the
accrued expenses or receipt of the accrued revenue.
a. Cage Company has 10 employees, who earn a total of $2,900 in salaries each working day.
They are paid on Monday for the five-day workweek ending on the previous Friday. Assume
that fiscal year ended April 30, is a Thursday and all employees will be paid salaries for five
full days on the following Monday. All employees worked each day.
b. Services of $4,000 have been performed for a client through April 30. The client will pay
the entire amount of the contract when services are completed on May 23.
c. Paid the employees salaries on May 4.
d. Received payment from the client in the amount of $11,500 for services that are now
completed on May 23.
Fill in the Blank Questions
212. Companies experiencing seasonal variations in sales often choose a fiscal year
corresponding to their ________________________ year.
213. ______________________ are required at the end of the accounting period because
certain internal transactions and events remain unrecorded.
214. Accrual accounting and the adjusting process rely on two principles: the
___________________ principle and the ________________________ principle.
215. __________ basis accounting means that revenues are recognized when cash is received
and that expenses are recorded when cash is paid. _____________ basis accounting means
that the financial effects of revenues and expenses are recorded when earned or incurred.
216. Adjusting is a three-step process (1) _________________, (2) ___________________,
and (3) _______________________.
217. ________________ refer to costs incurred in a period that are both unpaid and
unrecorded. ___________ refer to revenues earned in a period that are both unrecorded and
not yet received in cash (or other assets).
218. Accrued revenues at the end of one accounting period often result in cash
_______________________ in the next period.
219. ______________ revenues are liabilities requiring delivery of products and for services.
220. If a prepaid expense account were not adjusted for the amount used, on the balance sheet
assets would be ___________________ and equity would be ___________________.
221. Profit margin = ___________________ divided by net sales.
222. The _______________ depreciation method allocates equal amounts of an asset’s cost to
depreciation during its useful life.
223. ___________________ is the process of allocating the cost of plant assets to their
expected useful lives.
224. A _____________ account is an account linked with another account, having an opposite
normal balance, and reported as a subtraction from that other account’s balance.
225. _____________ expenses are those costs that are incurred in a period but are both unpaid
and unrecorded.
226. An _______________________ is a listing of all of the accounts in the ledger with their
account balances before adjustments are made.
227. An _______________________ is a listing of all of the accounts in the ledger with their
account balances after adjustments are made.