Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-19
HANDOUT 4 – 1 SOLUTION, continued
(d) The company had acquired Property, Plant & Equipment costing $40,000 on January 1, 2014.
Suppose that the depreciation on this Equipment was calculated to be $2,000 for 2014.
Debit and credit the accounts affected.
Dec. 31
Depreciation Expense (+E, –SE)
2,000
2014
Accumulated Depreciation (+xA, –A)
2,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Accumulated
Depreciation
(+xA)
–2,000
Depreciation
Exp. (+E)
–2,000
(e) On December 1, 2014, the company had sold $500 in gift certificates for decorating services to a
customer. On December 31, 2014, the accountant received an envelope containing $400 worth of
redeemed gift certificates, not yet recorded in the company’s books.
Debit and credit the accounts affected.
Dec. 31
Unearned Revenue (–L)
400
2014
Decorating Revenue (+R, +SE)
400
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Unearned
Revenue
(–L)
–400
Revenue
(+R)
+400
(f) On June 30, 2014, the company invested $20,000 in a certificate of deposit that will yield 12% interest
at the end of one year.
Debit and credit the accounts affected.
Dec. 31
Interest Receivable (+A)
1,200
2014
Investment Income (+R, +SE)
1,200
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Interest
Receivable
(+A)
+1,200
Investment
Income (+R)
+1,200
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-20
HANDOUT 4 – 1 SOLUTION, continued
(g) The company borrowed a note payable from the bank for $30,000 on January 1, 2014, due with all
interest on June 30, 2015. The note payable requires 10% interest.
Debit and credit the accounts affected.
Dec. 31
Interest Expense (+E, –SE)
3,000
2014
Interest Payable (+L)
3,000
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Interest
Payable
(+L)
+3,000
Interest
Expense (+E)
–3,000
(h) The company calculated its income taxes as $26,110 for the year ended December 31, 2014.
Debit and credit the accounts affected.
Dec. 31
Income Tax Expense (+E, –SE)
26,110
2014
Income Tax Payable (+L)
26,110
Ensure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Income Tax
Payable
(+L)
+26,110
Income Tax
Expense (+E)
–26,110
(i) On December 15, 2014, the company declared a $750 dividend, payable January 15, 2015.
Debit and credit the accounts affected.
Dec. 31
Retained Earnings (–SE)
750
2014
Dividend Payable (+L)
750
nsure the equation still balances and debits = credits.
Assets
=
Liabilities
Stockholders’ Equity
Dividend
Payable
(+L)
+750
Retained
Earnings
(–SE)
–750
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-21
HANDOUT 4 – 1 SOLUTION, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
+ Accounts Receivable –
Unadj.
4,000
Adj.
4,000
+ Prepaid Rent –
Unadj.
12,000
4,000
(b)
Adj.
8,000
+ Prepaid Insurance –
Unadj.
6,000
3,500
(c)
Adj.
2,500
+ Certificate of Deposit –
Unadj.
20,000
Adj.
20,000
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
+ Property, Plant & Equipment –
Unadj.
40,000
Adj.
40,000
– Accumulated Depr. +
0
Unadj.
2,000
(d)
2,000
Adj.
– Accounts Payable +
250
Unadj.
– Dividend Payable +
0
Unadj.
750
(i)
750
Adj.
– Unearned Revenue +
500
Unadj.
(e)
400
100
Adj.
– Notes Payable +
30,000
Unadj.
– Interest Payable +
0
Unadj.
3,000
(g)
3,000
Adj.
– Income Tax Payable +
0
Unadj.
26,110
(h)
26,110
Adj.
Stockholders’ Equity
– Common Stock +
1,000
Unadj.
1,000
Adj.
– Additional Paid-In
Capital +
9,000
Unadj.
9,000
Adj.
– Retained Earnings +
0
Unadj.
(i)
750
Adj.
750
– Decorating Revenue +
120,000
Unadj.
400
(e)
120,400
Adj.
– Investment Income +
1,200
(f)
+ Wage Expense –
Unadj.
32,000
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
Unadj.
500
+ Supplies Expense –
(a)
1,000
+ Rent Expense –
(b)
4,000
+ Insurance Expense –
(c)
3,500
+ Depreciation Expense –
(d)
2,000
+ Interest Expense –
(g)
3,000
+ Income Tax Expense –
(h)
26,110
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-22
HANDOUT 4 – 2
Deana’s Decorators
Adjusted Trial Balance
December 31, 2014
Debit
Credit
Cash
Supplies
Accounts Receivable
Prepaid Rent
Prepaid Insurance
Certificate of Deposit
Interest Receivable
Property, Plant & Equipment
Accumulated Depreciation
Accounts Payable
Dividend Payable
Unearned Revenue
Notes Payable
Interest Payable
Income Tax Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-23
HANDOUT 4 – 2 SOLUTION
Deana’s Decorators
Adjusted Trial Balance
December 31, 2014
Debit
Credit
Cash
$ 43,450
Supplies
800
Accounts Receivable
4,000
Prepaid Rent
8,000
Prepaid Insurance
2,500
Certificate of Deposit
20,000
Interest Receivable
1,200
Property, Plant & Equipment
40,000
Accumulated Depreciation
$ 2,000
Accounts Payable
250
Dividend Payable
750
Unearned Revenue
100
Notes Payable
30,000
Interest Payable
3,000
Income Tax Payable
26,110
Common Stock ($1 par value)
1,000
Additional Paid-in Capital
9,000
Retained Earnings
750
Decorating Revenue
120,400
Investment Income
1,200
Wage Expense
32,000
Utilities Expense
1,000
Telephone Expense
500
Supplies Expense
1,000
Rent Expense
4,000
Insurance Expense
3,500
Depreciation Expense
2,000
Interest Expense
3,000
Income Tax Expense
26,110
Totals
$193,810
$193,810
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-24
HANDOUT 4 – 3
FINANCIAL STATEMENTS
Deana’s Decorators
Income Statement
For the year ended December 31, 2014
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-25
HANDOUT 4 – 3, continued
Deana’s Decorators
Balance Sheet
December 31, 2014
Assets
Liabilities
Stockholders’ Equity
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-26
HANDOUT 4 – 3 SOLUTION
FINANCIAL STATEMENTS
Deana’s Decorators
Income Statement
For the year ended December 31, 2014
Revenues:
Decorating Revenue
$120,400
Investment Income
1,200
Total Revenues
121,600
Expenses:
Wage Expense
32,000
Utilities Expense
1,000
Telephone Expense
500
Supplies Expense
1,000
Rent Expense
4,000
Insurance Expense
3,500
Depreciation Expense
2,000
Interest Expense
3,000
Income Tax Expense
26,110
Total Expenses
73,110
Net Income
$ 48,490
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-27
HANDOUT 4 – 3 SOLUTION, continued
Deana’s Decorators
Balance Sheet
December 31, 2014
Assets
Current Assets
Cash
$ 43,450
Certificate of Deposit
20,000
Supplies
800
Accounts Receivable
4,000
Interest Receivables
1,200
Prepaid Rent
8,000
Prepaid Insurance
2,500
Total Current Assets
79,950
Property, Plant & Equipment, Net of
Accumulated Depreciation
38,000
Total Assets
$117,950
Liabilities
Current Liabilities:
Accounts Payable
$ 250
Dividends Payable
750
Unearned Revenue
100
Note Payable
30,000
Interest Payable
3,000
Income Tax Payable
26 110
Total Current Liabilities
60,210
Stockholders’ Equity
Common Stock ($1 per share)
1,000
Additional Paid-in Capital
9,000
Retained Earnings*
47,740
Total Stockholders’ Equity
57,740
Total Liabilities and Stockholders’ Equity
$117,950
* Beg. bal. of $0 + Net income of $48,490 – Dividends of $750 = End. bal. of $47,740
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-28
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31, 2014. At January 1, 2014, assets totaled $110,000. Then,
indicate what this ratio measures and how you would interpret the results.
Calculation:
What it measures and how to interpret:
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-29
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31, 2014. At January 1, 2014, assets totaled $110,000. Then,
indicate what this ratio measures and how you would interpret the results.
Calculation:
Average Total Assets = (Beginning balance + Ending balance) ÷ 2
Average Total Assets = ($110,000 + $117,950) ÷ 2 = $113,975
Total Asset Turnover Ratio = Net Sales (or Operating Revenues) ÷ Average Total Assets
Total Asset Turnover Ratio = $120,400 ÷ $113,975 = 1.06
What it measures and how to interpret:
The total asset turnover ratio measures the sales generated per dollar of assets. Deana’s Decorators
generated $1.06 of sales per dollar of assets.
The total asset turnover ratio would be interpreted by comparison to that of prior periods and to that of
the company’s competitors.
A high asset turnover ratio signifies efficient management of assets; a low asset turnover ratio signifies
less efficient management. A company’s products or services and business strategy contribute
significantly to its asset turnover ratio. However, when competitors are similar, management’s ability
to control the firm’s assets is vital in determining its success. Stronger financial performance improves
the asset turnover ratio.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-30
HANDOUT 4 – 5
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,
PREPARATION OF POST-CLOSING TRIAL BALANCE
For Deana’s Decorators, prepare the required closing entries. Post the entries to the T-accounts shown on
the next page. Then, prepare a post-closing trial balance.
Date
Accounts
Debit
Credit
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-31
HANDOUT 4 – 5, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
+ Accounts Receivable –
Unadj.
4,000
Adj.
4,000
+ Prepaid Rent –
Unadj.
12,000
4,000
(b)
Adj.
8,000
+ Prepaid Insurance –
Unadj.
6,000
3,500
(c)
Adj.
2,500
+ Certificate of Deposit –
Unadj.
20,000
Adj.
20,000
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
+ Property, Plant & Equipment –
Unadj.
40,000
Adj.
40,000
– Accumulated Depr. +
0
Unadj.
2,000
(d)
2,000
– Accounts Payable +
250
Unadj.
– Dividend Payable +
0
Unadj.
750
(i)
750
Adj.
– Unearned Revenue +
500
Unadj.
(e)
400
100
Adj.
– Notes Payable +
30,000
Unadj.
30,000
Adj.
– Interest Payable +
0
Unadj.
3,000
(g)
3,000
Adj.
– Income Tax Payable +
0
Unadj.
26,110
(h)
26,110
Adj.
Stockholders’ Equity
– Common Stock +
1,000
Adj.
– Additional Paid-in
Capital +
9,000
Adj.
– Retained Earnings +
0
Unadj.
(i)
750
– Decorating Revenue +
120,000
Unadj.
400
(e)
120,400
Adj.
– Investment Income +
1,200
(f)
+ Wage Expense –
Unadj.
32,000
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
Unadj.
500
+ Supplies Expense –
(a)
1,000
+ Rent Expense –
(b)
4,000
+ Insurance Expense –
(c)
3,500
+ Depreciation Expense –
(d)
2,000
+ Interest Expense –
(g)
3,000
+ Income Tax Expense –
(h)
26,110
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-32
HANDOUT 4 – 5, continued
Deana’s Decorators
Post-Closing Trial Balance
December 31, 2014
Account
Debit
Credit
Cash
Supplies
Accounts Receivable
Prepaid Rent
Prepaid Insurance
Certificate of Deposit
Interest Receivable
Property, Plant & Equipment
PP&E – Accumulated Depreciation
Accounts Payable
Dividend Payable
Unearned Revenue
Notes Payable
Interest Payable
Income Tax Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-33
HANDOUT 4 – 5 SOLUTION
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,
PREPARATION OF POST-CLOSING TRIAL BALANCE
For Deana’s Decorators, prepare the required closing entries. Post the entries to the T-accounts shown on
the next page. Then, prepare a post-closing trial balance.
Date
Accounts
Debit
Credit
Dec. 31
Decorating Revenue (–R)
120,400
2014
Investment Income (–R)
1,200
Wage Expense (–E)
32,000
Utilities Expense (–E)
1,000
Telephone Expense (–E)
500
Supplies Expense (–E)
1,000
Rent Expense (–E)
4,000
Insurance Expense (–E)
3,500
Depreciation Expense (–E)
2,000
Interest Expense (–E)
3,000
Income Tax Expense (–E)
26,110
Retained Earnings (+SE)
48,490
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-34
HANDOUT 4 – 5 SOLUTION, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
+ Accounts Receivable –
Unadj.
4,000
Adj.
4,000
+ Prepaid Rent –
Unadj.
12,000
4,000
(b)
Adj.
8,000
+ Prepaid Insurance –
Unadj.
6,000
3,500
(c)
Adj.
2,500
+ Certificate of Deposit –
Unadj.
20,000
Adj.
20,000
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
+ Property, Plant & Equipment
–
Unadj.
40,000
Adj.
40,000
– Accumulated Depr. +
0
Unadj.
2,000
(d)
2,000
– Accounts Payable +
250
Unadj.
– Dividend Payable +
0
Unadj.
750
(i)
750
Adj.
– Unearned Revenue +
500
Unadj.
(e)
400
100
Adj.
– Notes Payable +
30,000
Unadj.
30,000
Adj.
– Interest Payable +
0
Unadj.
3,000
(g)
3,000
Adj.
– Income Tax Payable +
0
Unadj.
26,110
(h)
26,110
Adj.
Stockholders’ Equity
– Common Stock +
1,000
Adj.
– Additional Paid-in
Capital +
9,000
Adj.
– Retained Earnings +
0
Unadj.
(i)
750
48,490
Close
47,740
– Decorating Revenue +
120,000
Unadj.
400
(e)
Close
120,400
120,400
Adj.
0
Bal
– Investment Income +
Close
1,200
1,200
(f)
0
Bal
+ Wage Expense –
Unadj.
32,000
32,000
Close
Bal
0
+ Utilities Expense –
Unadj.
1,000
1,000
Close
Bal
0
+ Telephone Expense –
Unadj.
500
500
Close
Bal
0
+ Supplies Expense –
(a)
1,000
1,000
Close
Bal
0
+ Rent Expense –
(b)
4,000
4,000
Close
Bal
0
+ Insurance Expense –
(c)
3,500
3,500
Close
Bal
0
+ Depreciation Expense –
(d)
2,000
2,000
Close
Bal
0
+ Interest Expense –
(g)
3,000
3,000
Close
Bal
0
+ Income Tax Expense –
(h)
26,110
26,110
Close
Bal
0
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-35
HANDOUT 4 – 5 SOLUTION, continued
Deana’s Decorators
Post-closing Trial Balance
December 2014
Account
Debit
Credit
Cash
$ 43,450
Supplies
800
Accounts Receivable
4,000
Prepaid Rent
8,000
Prepaid Insurance
2,500
Certificate of Deposit
20,000
Interest Receivable
1,200
Property, Plant & Equipment
40,000
Accumulated Depreciation
$ 2,000
Accounts Payable
250
Dividend Payable
750
Unearned Revenue
100
Notes Payable
30,000
Interest Payable
3,000
Income Tax Payable
26,110
Common Stock ($1 par value)
1,000
Additional Paid-in Capital
9,000
Retained Earnings
47,740
Decorating Revenue
0
Investment Income
0
Wage Expense
0
Utilities Expense
0
Telephone Expense
0
Supplies Expense
0
Rent Expense
0
Insurance Expense
0
Depreciation Expense
0
Interest Expense
0
Income Tax Expense
0
Totals
$119,950
$119,950