Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Chapter 4
1. Adjusting entries are made at the end of the accounting period to record all
2. The four different types are adjustments for:
(1) Deferred revenues — previously recorded liabilities that need to be adjusted at
the end of the period to reflect revenues that have been earned (e.g., Unearned
Ticket Revenue must be adjusted for the portion of ticket revenues earned in
3. A contra-asset is an account related to an asset that is an offset or reduction to the
asset’s balance. Accumulated Depreciation is a contra-account to the equipment
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
11. The income statement accounts are closed at the end of the accounting period
because, in effect, they are temporary subaccounts to retained earnings (i.e., a part
of stockholders’ equity). They are used only for accumulation during the accounting
period. When the period ends, these accumulated accounts must be transferred
12. A post-closing trial balance is a listing taken from the ledger after the adjusting and
closing entries have been journalized and posted. It is not a necessary part of the
4-4 Solutions Manual
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
1. c
2. b
3. b
4. b
5. b
6. c
7. c
8. c
9. c
10. c
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Authors’ Recommended Solution Time
(Time in minutes)
Mini-exercises
Exercises
Problems
Alternate
Problems
Comprehensive
Problems
Cases and
Projects
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No.
Time
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15
students often benefit from the extra effort, we find that some become frustrated by the
perceived difficulty of the task. You can reduce student frustration and anxiety by
making your expectations clear. For example, when our goal is to sharpen research
skills, we devote class time to discussing research strategies. When we want the
students to focus on a real accounting issue, we offer suggestions about possible
Continuing
Case
4-6 Solutions Manual
© 2014 by McGraw-Hill Global Education Holdings, LLC. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
M4–1.
Hagadorn Company
Adjusted Trial Balance
At June 30, 2014
Debit
Credit
Cash
$ 175
Accounts receivable
420
Inventories
710
Prepaid expenses
30
Buildings and equipment
1,400
Accumulated depreciation
$ 250
Land
300
Accounts payable
250
Accrued expenses payable
160
Income taxes payable
50
Unearned fees
90
Long-term debt
1,460
Common stock
100
Additional paid-in capital
300
Retained earnings
150
Sales revenue
2,400
Interest income
60
Cost of sales
780
Salaries expense
640
Rent expense
460
Depreciation expense
150
Interest expense
70
Income taxes expense
135
Totals
$ 5,270
$ 5,270
M4–2.
(1) D
(2) C
(3) A
(4) D
(5) A
(6) B
(7) B
(8) C
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
M4–3. (1) D
M4–4.
(a)
1. Rent revenue is now earned.
2. Cash was received in the past – a deferred revenue was recorded.
3. Amount: $1,200 4 months = $300 earned
Adjusting entry –
Unearned rent revenue (−L) …………………….
300
Rent revenue (+R, +SE) ……………………
300
(b)
1. Depreciation Expense on the equipment is now incurred.
2. Cash was paid in the past when the equipment was purchased — a
deferred expense was recorded. The net book value of the equipment is
overstated. Accumulated Depreciation (the contra-account) needs to be
increased for the amount used during the period.
3. Amount: $3,200 given
Adjusting entry –
Depreciation expense (+E, −SE) ………………
3,200
Accumulated depreciation (+XA, −A) …..
3,200
(c)
1. Insurance expense was incurred in the period.
2. Cash was paid for the insurance in the past – a deferred expense was
recorded.
3. Amount: $5,000 x 6/24 = $1,250
Adjusting entry –
Insurance expense (+E, −SE) …………………..
1,250
Prepaid insurance (−A) ……………………..
1,250
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
NE
+450
–450
NE
+450
–450
b.
+280
NE
+280
+280
NE
+280
c.
NE
+8,000
–8,000
NE
+8,000
–8,000
M4–8.
ROMNEY’S MARKETING COMPANY
Income Statement
For the Year Ended December 31, 2015
Operating Revenues:
Sales revenue
Total operating revenues
Operating Expenses:
Wages expense
Depreciation expense
Utilities expense
Insurance expense
Rent expense
Total operating expenses
Operating Income
Other Items:
Interest revenue
Rent revenue
Pretax Income
Income tax expense
$ 38,500
38,500
19,500
1,800
380
750
9,000
31,430
7,070
100
800
7,970
2,700
Net Income
$ 5,270
Earnings per share*
$9.58
* calculated as $5,270 [(300 + 800) 2] = $5,270 550 = $9.58
Average number of shares
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Statement of Stockholders’ Equity
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
M4–10.
Req. 1
ROMNEY’S MARKETING COMPANY
Balance Sheet
At December 31, 2015
Assets
Current Assets:
Cash
Accounts receivable
Interest receivable
Prepaid insurance
Total current assets
Notes receivable
Equipment (net of accumulated depreciation, $3,000)
Total Assets
Liabilities
Current Liabilities:
Accounts payable
Accrued expenses payable
Income taxes payable
Unearned rent revenue
Total current liabilities
Stockholders’ Equity
Common stock ($0.10 par value)
Additional paid-in capital
Retained earnings
Total Stockholders’ Equity
Total Liabilities and Stockholders’ Equity
$ 1,500
2,200
100
1,600
5,400
2,800
12,290
$ 20,490
$ 2,400
3,920
2,700
500
9,520
80
3,620
7,270
10,970
$ 20,490
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
EXERCISES
E4–1.
Paige Consultants, Inc.
Unadjusted Trial Balance
At September 30, 2015
Debit
Credit
Cash
$ 153,000
Accounts receivable
225,400
Supplies
12,200
Prepaid expenses
10,200
Investments
145,000
Buildings and equipment
323,040
Accumulated depreciation
$ 18,100
Land
60,000
Accounts payable
96,830
Accrued expenses payable
25,650
Unearned consulting fees
32,500
Income taxes payable
3,030
Notes payable
160,000
Common stock
3,370
Additional paid-in capital
220,000
Retained earnings *
144,510
Consulting fees revenue
2,564,200
Investment income
10,800
Gain on sale of land
6,000
Wages and benefits expense
1,610,000
Utilities expense
25,230
Travel expense
23,990
Rent expense
152,080
Professional development expense
18,600
Other operating expenses
188,000
General and administrative expenses
321,050
Interest expense
17,200
Totals
$3,284,990
$3,284,990
* Since debits are supposed to equal credits in a trial balance, the balance in Retained
Earnings is determined as the amount in the credit column necessary to make debits
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
E4–3.
Req. 1
The annual reporting period for this company is January 1 through December 31, 2014.
Req. 2 (Adjusting entries)
(a)
1. Wages expense is incurred.
2. Cash will be paid in the next period to employees who worked in the current
period – an accrued expense needs to be recorded.
3. Amount: $4,000 given
Adjusting entry – December 31, 2014
Wages expense (+E, −SE) ………………………
4,000
Wages payable (+L) …………………………
4,000
To record wages accrued at year-end.
(b)
1. Interest revenue is now earned.
2. Cash will be received in the future – an accrued revenue needs to be
recorded.
3. Amount: $1,500 given
Adjusting entry – December 31, 2014
Interest receivable (+A) …………………………..
1,500
Interest revenue (+R, +SE) ………………..
1,500
To record interest earned at year-end.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
E4–5.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
E4–3 (a)
NE
+4,000
–4,000
NE
+4,000
–4,000
E4–3 (b)
+1,500
NE
+1,500
+1,500
NE
+1,500
E4–4 (a)
–600
NE
–600
NE
+600
–600
E4–4 (b)
–68,000
NE
–68,000
NE
+68,000
–68,000
E4–6.
Req. 1
a.
Accrued expense
b.
Deferred expense
c.
Accrued revenue
d.
Deferred expense
e.
Deferred expense
f.
Deferred revenue
g.
Accrued revenue
Req. 2 Computations
a.
Wages expense (+E, −SE) …………………………..
2,700
Given
Wages payable (+L) …………………………..
2,700
b.
Office supplies expense (+E, −SE) …………………………
675
$450 + $500
Office supplies (−A) …………………………..
675
– $275 = $675 used
c.
Rent receivable (+A) …………………………………………….
1,120
$560 x 2 months
Rent revenue (+R, +SE) …………………………..
1,120
= $1,120 earned
d.
Depreciation expense (+E, −SE) …………………………..
12,100
Given
Accumulated depreciation (+XA, −A)
12,100
e.
Insurance expense (+E, −SE)…………………………..
600
$2,400 x 6/24 =
Prepaid insurance (−A) …………………………..
600
$600 used
f.
Unearned rent revenue (−L) …………………………..
3,200
$9,600 x 2/6 =
Rent revenue (+R, +SE) …………………………..
3,200
$3,200 earned
g.
Repair accounts receivable (+A) …………………………..
800
Given
Repair shop revenue (+R, +SE) ……………………
800
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
E4–8.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
(a)
NE
+2,700
–2,700
NE
+2,700
–2,700
(b)
–675
NE
–675
NE
+675
–675
(c)
+1,120
NE
+1,120
+1,120
NE
+1,120
(d)
–12,100
NE
–12,100
NE
+12,100
–12,100
(e)
–600
NE
–600
NE
+600
–600
(f)
NE
–3,200
+3,200
+3,200
NE
+3,200
(g)
+800
NE
+800
+800
NE
+800
E4–9.
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
(a)
+3,300
NE
+3,300
+3,300
NE
+3,300
(b)
–1,650
NE
–1,650
NE
+1,650
–1,650
(c)
NE
+5,500
–5,500
NE
+5,500
–5,500
(d)
NE
–750
+750
+750
NE
+750
(e)
–18,000
NE
–18,000
NE
+18,000
–18,000
(f)
–48,500
NE
–48,500
NE
+48,500
–48,500
(g)
NE
+5,600
–5,600
NE
+5,600
–5,600