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Chapter 4
Completing the Accounting Cycle
QUESTIONS
1. The four-step closing entry process is: (i) close the revenue (and gain) accounts to
the Income Summary account, (ii) close the expense (and loss) accounts to the
2. Closing entries affect temporary accounts: revenues, expenses, withdrawals, and
income summary. Specifically, closing entries at the end of an accounting period
3. (i) Closing entries prepare the temporary accounts—revenue and expense (and gain
4. The Income Summary account is used to summarize the period’s revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net
5. Yes, an error would have occurred because a post-closing trial balance should only
6. A work sheet can be used to collect and organize data for preparing (i) adjusting
7. The adjustments in the Adjustments columns of a work sheet are identified by
letters to link the debits with the credits to ensure that the entries are complete and
8. A company’s operating cycle is the normal time between paying cash for
9. Assets on a typical classified balance sheet include current assets and noncurrent
assets—where noncurrent assets usually include long-term investments, plant
10. Unearned revenue is reported as a liability—usually a current liability.
11. Plant assets (also called property, plant and equipment or long-lived assets) are
tangible long-lived assets used to produce or sell goods or services.
12.A Reversing entries simplify subsequent entries for accrued expenses and accrued
13.A The following reversing entry could be made as of the first day of the next
accounting period, after the post-closing trial balance is completed and financial
QUICK STUDIES
Quick Study 4-1 (10 minutes)
1. Permanent accounts report on activities related to one or more future
accounting periods, and they carry their ending balances into the next
period.
4. Temporary accounts accumulate data related to one accounting period.
Quick Study 4-2 (5 minutes)
1. (e) Analyzing transactions and events.
2. (h) Journalizing transactions and events.
Quick Study 4-3 (10 minutes)
1. B
2. F
Quick Study 4-4 (5 minutes)
Current assets
Cash ............................................................
$ 7,000
Accounts receivable ................................
18,000
Office supplies ...........................................
2,800
Prepaid insurance .....................................
3,560
Total current assets ................................
$31,360
Current liabilities
Accounts payable ......................................
$11,000
Unearned services revenue ......................
3,000
Total current liabilities ..............................
$14,000
Current ratio = $31,360 / $14,000 = 2.24
Quick Study 4-5 (5 minutes)
a.
5
d.
3
b.
4
e.
2
c.
1
Quick Study 4-6 (5 minutes)
a.
BS
d.
IS
b.
BS
e.
BS
c.
BS
f.
IS
Quick Study 4-7 (20 minutes)
CLAUDELL COMPANY
Work Sheet
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Income
Statement
Balance Sheet
Account Title
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Prepaid Rent ........................
1,000
(a)
200
800
800
Services Revenue ..............
55,600
(b)
900
56,500
56,500
Wages expense ..................
5,000
(c)
700
5,700
5,700
Accounts Receivable ........
(b)
900
900
900
Wages Payable ...................
(c)
700
700
700
Rent Expense ......................
(a)
200
200
200
Quick Study 4-8 (10 minutes)
Computation of B. Warton, Capital for the Dec. 31, 2013, balance sheet
B. Warton, Capital (beginning) .........................
$ 72,000
Add net income ($181,000 - $122,000) .............
59,000
131,000
Less withdrawals ...............................................
(39,000)
B. Warton, Capital (ending) ..............................
$ 92,000
Quick Study 4-9 (15 minutes)
Dec. 31 Services Revenue ......................................... 13,000
Income Summary .................................. 13,000
To close the revenue account.
31 D.Mai, Capital ................................................ 800
D. Mai, Withdrawals ............................. 800
To close the withdrawals account.
Quick Study 4-10 (5 minutes)
The only account from QS 4-9 that would appear in post-closing trial balance
is D. Mai, Capital.
Quick Study 4-11A (10 minutes)
2013
Jan. 1 Management Fees Earned ............................ 12,000
Accounts Receivable ........................... 12,000
To reverse accrued revenue.
Quick Study 4-12 (10 minutes)
a. The closing process is identical under U.S. GAAP and IFRS.
EXERCISES
Exercise 4-1 (35 minutes)
Closing entries
(1) Services Revenue ......................................... 401 76,000
Income Summary .................................. 901 76,000
To close the revenue account.
To close income summary.
(4) M. Muncel, Capital ........................................ 301 22,000
M. Muncel, Withdrawals ....................... 302 22,000
To close the withdrawals account.
Posted ledger accounts
M. Muncel, Capital No. 301
Salaries Expense No. 622
Date
PR
Debit
Credit
Balance
Date
PR
Debit
Credit
Balance
May31
40,000
May31
20,000
(3)
28,200
68,200
(2)
20,000
0
(4)
22,000
46,200
M. Muncel, Withdrawals No. 302
Insurance Expense No. 637
Date
PR
Debit
Credit
Balance
Date
PR
Debit
Credit
Balance
May31
22,000
May31
4,400
(4)
22,000
0
(2)
4,400
0
Services Revenue No. 401
Rent Expense No. 640
Date
PR
Debit
Credit
Balance
Date
PR
Debit
Credit
Balance
May31
76,000
May31
8,400
(1)
76,000
0
(2)
8,400
0
Depreciation Expense No. 603
Income Summary No. 901
Date
PR
Debit
Credit
Balance
Date
PR
Debit
Credit
Balance
May31
15,000
(1)
76,000
76,000
(2)
15,000
0
(2)
47,800
28,200
(3)
28,200
0
Exercise 4-2 (30 minutes)
1.
2013
Dec. 31 Services Revenue ......................................... 404 44,000
Income Summary .................................. 901 44,000
To close the revenue account.
31 Income Summary ......................................... 901 33,100
31 Income Summary ......................................... 901 10,900
T. Cruz, Capital ...................................... 301 10,900
To close income summary.
2.
CRUZ COMPANY
Post-Closing Trial Balance
December 31, 2013
Debit Credit
Cash ................................................................ $19,000
Supplies ......................................................... 13,000
Prepaid insurance ......................................... 3,000
*$47,600 + $10,900 - $7,000 = $51,500
Exercise 4-3 (40 minutes)
Salonika Marketing Company
Work Sheet
Adjusted
Trial Balance
Closing Entry Information
Post-Closing
Trial Balance
No.
Account Title
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash .........................................
9,200
9,200
106
Accounts receivable ...........
25,000
25,000
153
Equipment ..............................
42,000
42,000
154
Accumulated depre-
ciation—Equipment ..........
17,500
17,500
193
Franchise ................................
31,000
31,000
201
Accounts payable ................
15,000
15,000
209
Salaries payable ...................
4,200
4,200
233
Unearned fees .......................
3,600
3,600
301
E. Salonika, Capital ..............
68,500
(4)
15,400
(3)
13,800
66,900
302
E. Salonika, Withdrawals ...
15,400
(4)
15,400
401
Marketing fees earned ........
80,000
(1)
80,000
611
Depreciation expense—
Equipment. ...........................
12,000
(2)
12,000
622
Salaries expense ..................
32,500
(2)
32,500
640
Rent expense ........................
13,000
(2)
13,000
677
Miscellaneous expense .....
8,700
(2)
8,700
901
Income summary ................
(2)
66,200
(1)
80,000
______
______
(3)
13,800
______
______
______
Totals ........................................
188,800
188,800
175,400
175,400
107,200
107,200
Exercise 4-4 (20 minutes)
WILSON TRUCKING COMPANY
Income Statement
For Year Ended December 31, 2013
Trucking fees earned ................................................ $130,000
Expenses
Depreciation expense—Trucks ........................... $23,500
Salaries expense .................................................. 61,000
WILSON TRUCKING COMPANY
Statement of Owner’s Equity
For Year Ended December 31, 2013
K. Wilson, Capital, December 31, 2012 ................... $175,000
Exercise 4-5 (20 minutes)
WILSON TRUCKING COMPANY
Balance Sheet
December 31, 2013
Assets
Plant assets
Trucks ............................................................. $172,000
Accumulated depreciation-Trucks .............. (36,000) 136,000
Land ................................................................ 85,000
Total plant assets .......................................... 221,000
Total assets ...................................................... $249,500
Liabilities
Current liabilities
Total liabilities ................................................. 69,000
Equity
K. Wilson, Capital* ........................................... 180,500
Total liabilities and equity .............................. $249,500
*From Exercise 4-4
Exercise 4-6 (15 minutes)
Current assets:
Cash ................................................................................. $ 8,000
Current liabilities:
Accounts payable ........................................................... $12,000
Interpretation: Wilson Trucking Company’s current ratio of 1.78 exceeds the
industry average of 1.5. This implies the company is in a slightly better
$16,000
Current liabilities
Exercise 4-7 (15 minutes)
Current
Assets
Current
Liabilities
Current
Ratio
Case 1
$ 79,040
/
$ 32,000
=
2.47
Case 2
104,880
/
76,000
=
1.38
Case 3
45,080
/
49,000
=
0.92
Case 4
85,680
/
81,600
=
1.05
Case 5
61,000
/
100,000
=
0.61
Analysis: Company 1 is in the strongest liquidity position. It has about $2.47
of current assets for each $1 of current liabilities. The only potential concern
Exercise 4-8 (15 minutes)
1.
B
5.
D
9.
C
13.
C
2.
C
6.
B
10.
D
14.
C
3.
C
7.
D
11.
C
15.
A
4.
A
8.
A
12.
A
16.
D
Exercise 4-9 (20 minutes)
Planta Company
Work Sheet
Adjusted
Trial Balance
Income Statement
Balance Sheet &
Statement of
Owner’s Equity
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash .............................................
7,000
7,000
106
Accounts receivable ...............
27,200
27,200
153
Trucks ..........................................
42,000
42,000
154
Accumulated depreciation—
Trucks ...........................................
17,500
17,500
183
Land ..............................................
32,000
32,000
201
Accounts payable ....................
15,000
15,000
209
Salaries payable .......................
4,200
4,200
233
Unearned fees ...........................
3,600
3,600
301
F. Planta, Capital .......................
65,500
65,500
302
F. Planta, Withdrawals ............
15,400
15,400
401
Plumbing fees earned ............
84,000
84,000
611
Depreciation expense—
Trucks ........................................
6,500
6,500
622
Salaries expense ......................
38,000
38,000
640
Rent expense ............................
13,000
13,000
677
Miscellaneous expense .........
8,700
______
8,700
______
_______
______
Totals ............................................
189,800
189,800
66,200
84,000
123,600
105,800
Net income .................................
17,800
______
_______
17,800
Totals ............................................
84,000
84,000
123,600
123,600
