Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
AP4–2.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
f.
Accrued expense
c.
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
a.
Insurance expense (+E, −SE) ………………………………..
1,600
Prepaid insurance (−A) ……………………………….
1,600
($3,200 ÷ 6 months x 3 months of coverage)
b.
Unearned maintenance revenue (−L) ……………………..
225
Maintenance revenue (+R, +SE) ……………………
225
($450 ÷ 2 months x 1 month)
c.
Wage expense (+E, −SE) ……………………………………..
900
Wages payable (+L) …………………………………….
900
d.
Depreciation expense (+E, −SE) …………………………...
3,000
Accumulated depreciation (+XA, −A) ………………
3,000
e.
Unearned service revenue (−L) ……………………………..
700
Service revenue (+R, +SE) …………………………...
700
($4,200 ÷ 12 months x 2 months)
f.
Interest expense (+E, −SE) ……………………………………
675
Interest payable (+L) ……………………………………..
675
($18,000 x .09 x 5/12)
g.
Property tax expense (+E, −SE) …………………………….
500
Property tax payable (+L) ………………………………
500
h.
Accounts receivable (+A) ………………………………………
2,000
Service revenue (+R, +SE) …………………………..
2,000
4-42 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.
AP4–3.
Req. 1
a.
Deferred expense
e.
Deferred expense
b.
Accrued revenue
f.
Deferred expense
c.
Deferred expense
g.
Accrued revenue
d.
Accrued expense
h.
Accrued expense
Req. 2
a.
Supplies expense (+E, −SE) ………………………………….
1,250
Supplies (−A) ………………………………………………
1,250
(Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400)
b.
Accounts receivable (+A) ………………………………………
7,500
Catering revenue (+R, +SE) ………………………….
7,500
c.
Insurance expense (+E, −SE) ………………………………..
200
Prepaid insurance (−A)………………………………..
200
($1,200 x 2/12 months of coverage)
d.
Repairs expense (+E, −SE) ……………………………………
600
Accounts payable (+L) …………………………………
600
e.
Rent expense (+E, −SE) ……………………………………….
700
Prepaid rent (−A) …………………………………………..
700
($2,100 x 1/3 months of rent used)
f.
Depreciation expense (+E, −SE) …………………………….
2,600
Accumulated depreciation (+XA, −A) ………………
2,600
g.
Interest receivable (+A) …………………………………………
80
Interest income (+R, +SE) ………………………………
80
($4,000 x .12 x 2/12)
h.
Income tax expense (+E, −SE) ………………………………
7,389
Income tax payable (+L) …………………………………
7,389
To accrue income tax expense incurred but not paid:
Income before adjustments (given) $22,400
Effect of adjustments (a) through (g) + 2,230 (-$1,250+$7,500
Income before income taxes 24,630 –$200-$600-$700
Income tax rate x 30% -$2,600+$80)
Income tax expense $ 7,389
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
AP4–4.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
f.
Accrued expense
c.
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
–1,600
NE
–1,600
NE
+1,600
–1,600
b.
NE
–225
+225
+225
NE
+225
c.
NE
+900
–900
NE
+900
–900
d.
–3,000
NE
–3,000
NE
+3,000
–3,000
e.
NE
–700
+700
+700
NE
+700
f.
NE
+675
–675
NE
+675
–675
g.
NE
+500
–500
NE
+500
–500
h.
+2,000
NE
+2,000
+2,000
NE
+2,000
Computations:
a.
$3,200 prepaid insurance x 3/6 months of coverage = $1,600 used
b.
$450 unearned revenue x 1/2 months = $225 earned
c.
Amount is given.
d.
Amount is given.
e.
$4,200 unearned revenue x 2/12 months = $700 earned
f.
$18,000 principal x .09 x 5/12 months = $675 interest expense
g.
Amount is given.
h.
Amount is given.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
AP4–6.
Req. 1
December 31, 2014, Adjusting Entries
(1)
Accounts receivable (+A) ………………………………….
1,500
(b)
Service revenue (+R, +SE) ………………………
1,500
(j)
To record service revenues earned, but not collected.
(2)
Rent expense (+E, −SE) …………………………………..
400
(m)
Prepaid rent (−A) …………………………..…………
400
(c)
To record rent expired as an expense.
(3)
Depreciation expense (+E, −SE) ………………………..
17,500
(l)
Accumulated depreciation (+XA, −A)
17,500
(e)
To record depreciation expense.
(4)
Unearned revenue (−L) …………………………………….
8,000
(g)
Service revenue (+R, +SE) ………………………
8,000
(j)
To record service revenue earned.
(5)
Income tax expense (+E, −SE) ………………………….
6,500
(n)
Income taxes payable (+L) ……………………….
6,500
(f)
To record income taxes for 2014.
Req. 2
Amounts before
Adjusting Entries
Amounts after
Adjusting Entries
Revenues:
Service revenue
$83,000
$92,500
Expenses:
Salary expense
56,000
56,000
Depreciation expense
17,500
Rent expense
400
Income tax expense
6,500
Total expense
56,000
80,400
Net income
$ 27,000
$ 12,100
Net income is $12,100 because this amount includes all revenues and all expenses
(after the adjusting entries). This amount is correct because it incorporates the effects
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
AP4–7.
Req. 1
December 31, 2014, Adjusting Entries:
(a) Depreciation expense (+E, −SE) …………………………. 3,000
Accumulated depreciation (+XA, −A) ………….. 3,000
(b) Insurance expense (+E, −SE) ……………………………… 450
Supplies expense ($1,300 balance – $800 on hand) 500
Remaining expenses (not detailed) 32,900
Total expenses 38,950
Operating Income 9,050
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMPREHENSIVE PROBLEMS
COMP4–1.
Req. 1, 2, 3, and 5 T-accounts (in thousands)
Cash
Accounts Receivable
Supplies
Bal. 6
b 13
Bal. 5
Bal. 13
a 15
e 94
c 52
f 34
h 27
l 22
c 163
g 15
d 4
i 26
f 34
k 25
Bal. 49
Bal. 23
Bal. 18
Land
Equipment
Accumulated
Depreciation
Bal. 0
Bal. 78
Bal. 8
b 13
m 10
Bal. 13
Bal. 78
Bal. 18
Bal. 7
Bal. 0
Bal. 0
g 15
e 20
p 11
Bal. 22
Bal. 21
Bal. 11
Bal. 0
Bal. 0
Bal. 0
o 16
n 1
a 15
Bal. 16
Bal. 1
Bal. 15
Earnings
Bal. 4
Bal. 80
Bal. 17
d 2
d 2
CE 41
Bal. 6
Bal. 82
Bal. 33
Bal. 0
Bal. 0
Bal. 0
m 10
CE 10
p 11
CE 11
CE 1
Bal. 0
Bal. 0
Bal. 0
Expense
Expense
Bal. 0
Bal. 0
Bal. 0
CE 22
CE 16
e 114
CE 114
Bal. 0
CE 215
c 215
Bal. 0
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 2
a.
Cash (+A) ………………………………………………….
15,000
Notes payable (+L) …………………………….
15,000
b.
Land (+A) …………………………………………………..
13,000
Cash (−A) …………………………………………
13,000
c.
Cash (+A) ………………………………………………….
163,000
Accounts receivable (+A) ……………………………..
52,000
Service revenue (+R, +SE) ………………….
215,000
d.
Cash (+A) ………………………………………………….
4,000
Common stock (+SE) …………………………
2,000
Additional paid-in capital (+SE)…………..
2,000
e.
Remaining expenses (+E, −SE) ……………………
114,000
Accounts payable (+L) ………………………..
20,000
Cash (−A) …………………………………………
94,000
f.
Cash (+A) ………………………………………………….
34,000
Accounts receivable (−A) …………………….
34,000
g.
Other assets (+A) ……………………………………….
15,000
Cash (−A) …………………………………………
15,000
h.
Supplies (+A) ……………………………………………..
27,000
Accounts payable (+L) ………………………..
27,000
i.
Accounts payable (−L) …………………………………
26,000
Cash (−A) …………………………………………
26,000
j.
No entry required; no revenue earned in 2015.
k.
Retained earnings (−SE) ……………………………..
25,000
Cash (−A) …………………………………………
25,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Financial Accounting, 8/e 4-51
COMP4–1. (continued)
Req. 3
l.
Supplies expense (+E, −SE) …………………………
22,000
Supplies (−A) ……………………………………..
22,000
($40,000 in account – $18,000 at year end)
m.
Depreciation expense (+E, −SE) …………………..
10,000
Accumulated depreciation (+XA, −A) ……..
10,000
n.
Interest expense (+E, −SE) ………………………….
1,000
Interest payable (+L) …………………………...
1,000
($15,000 x .08 x 10/12)
o.
Wages expense (+E, −SE) …………………………..
16,000
Wages payable (+L) …………………………...
16,000
p.
Income tax expense (+E, −SE) ……………………..
11,000
Income taxes payable (+L) …………………..
11,000
Req. 4
H & H TOOL, INC.
Income Statement
For the Year Ended December 31, 2015
Operating Revenues:
Service revenue
$215,000
Operating Expenses:
Depreciation expense
10,000
Supplies expense
22,000
Wages expenses
16,000
Remaining expenses
114,000
Total operating expenses
162,000
Operating Income
53,000
Other Item:
Interest expense
1,000
Pretax income
52,000
Income tax expense
11,000
Net Income
$ 41,000
Earnings per share
[$41,000 ÷ 12,000 shares all year]
$3.42
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
H & H TOOL, INC.
Statement of Stockholders’ Equity
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Financial Accounting, 8/e 4-53
COMP4–1. (continued)
Req. 5
Transaction
Type of Effect on
Cash Flows
Direction and
Amount of Effect
a.
F
+15,000
b.
I
-13,000
c.
O
+163,000
d.
F
+4,000
e.
O
-94,000
f.
O
+34,000
g.
I
-15,000
h.
NE
NE
i.
O
-26,000
j.
NE
NE
k.
F
-25,000
Req. 6
December 31, 2015, Closing Entry
Service revenue (−R) …………………………………..
215,000
Retained earnings (+SE) …………………….
41,000
Depreciation expense (−E) ………………….
10,000
Interest expense (−E) …………………………
1,000
Supplies expense (−E) ………………………..
22,000
Wages expense (−E) ………………………….
16,000
Remaining expenses (−E) …………………..
114,000
Income tax expense (−E) …………………….
11,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4–1. (continued)
Req. 7
(a) Current ratio = Current assets Current liabilities
= $215,000 [($101,000 + $185,000) 2]
= $215,000 $143,000
= 1.50
This suggests that H & H Tool, Inc., generated $1.50 for every dollar of assets.
(c) Net profit margin = Net income Sales
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2.
Req. 1, 2, 3, and 5 T-accounts (in thousands)
Cash
Accounts
Receivable
Supplies
Bal. 5
Bal. 4
Bal. 2
a 20
b 18
d 14
g 8
i 10
l 8
c 5
e 28
d 56
f 3
g 8
h 11
j 3
k 10
Bal. 27
Bal. 10
Bal. 4
Small Tools
Equipment
Accumulated
Depreciation
Bal. 6
Bal. 0
Bal. 0
f 3
l 1
b 18
m 2
Bal. 8
Bal. 18
Bal. 2
Bal. 9
Bal. 7
Bal. 0
h 11
e 7
a 20
Bal. 9
Bal. 13
Bal. 20
Bal. 0
Bal. 1
Earnings
Bal. 6
Bal. 9
Bal. 4
c 4
CE 16
Bal. 7
Bal. 13
Bal. 10
Bal. 0
Bal. 0
Bal. 0
d 70
CE 70
CE 4
CE 1
Bal. 0
Bal. 0
Bal. 0
Bal. 0
o 3
e 35
CE 2
CE 3
CE 44
Bal. 0
Bal. 3
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Financial Accounting, 8/e 4-57
COMP4-2. (continued)
Req. 3
l.
Remaining expenses (+E, −SE) ……………………
9,000
Supplies (−A) ……………………………………..
8,000
Small tools (−A) ………………………………….
1,000
[Supplies used ($12 – 4) and small tools used
($9 – 8)]
m.
Depreciation expense (+E, −SE) …………………..
2,000
Accumulated depreciation (+XA, −A) ……..
2,000
n.
Interest expense (+E, −SE) ………………………….
1,000
Interest payable (+L) …………………………...
1,000
($20,000 principal x .10 x 6/12)
o.
Wages expense (+E, −SE) …………………………..
3,000
Wages payable (+L) …………………………...
3,000
p.
Income tax expense (+E, −SE) ……………………..
4,000
Income taxes payable (+L) …………………..
4,000
Req. 4
FURNITURE REFINISHERS, INC.
Operating Revenues:
Service revenue
$70 000
Operating Expenses:
Depreciation expense
2,000
Wages expense
3,000
Remaining expenses
44,000
Total operating expenses
49,000
Operating Income
21,000
Other Item:
Interest expense
1,000
Pretax income
20,000
Income tax expense
4,000
Net Income
$16,000
Earnings per share
($16,000 ÷ 70,000]
$0.23
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
Req. 5
Transaction
Type of Effect on
Cash Flows
Direction and
Amount of Effect
a.
F
+20,000
b.
I
-18,000
c.
F
+5,000
d.
O
+56,000
e.
O
-28,000
f.
I
-3,000
g.
O
+8,000
h.
O
-11,000
i.
NE
NE
j.
O
+3,000
k.
F
-10,000
Req. 6
December 31, 2016, Closing Entry
Service revenue (−R) …………………………………..
70,000
Retained earnings (+SE) …………………….
16,000
Depreciation expense (−E) ………………….
2,000
Interest expense (−E) …………………………
1,000
Wages expense (−E) ………………………….
3,000
Remaining expenses (−E) …………………..
44,000
Income tax expense (−E) …………………….
4,000