S4–5
The change in estimated depreciation expense will increase net income this year but
some depreciation will now extend into next year, decreasing net income then.
Although it’s true that GAAP requires the use of estimates in certain instances (such as
depreciation), the estimates should be fair and unbiased. Given the increasing
competition from online products, we must question whether DVD demand would
S4–6
Req.1
(a)
Supplies Expense (+E, −SE)…………………
4,200
Supplies (−A)……………………………….
4,200
To record supplies used ($6,000 − $1,800 = $4,200).
(b)
Insurance Expense (+E, −SE)…………………….
2,000
Prepaid Insurance (−A)……………………
2,000
To record expired insurance at December 31.
(c)
Depreciation Expense (+E, −SE)…………………
8,000
Accum. Depn–Equip (+xA, −A)…….
8,000
To record depreciation for one year.
(d)
Salaries and Wages Expense (+E,−SE)…………
2,200
Salaries and Wages Payable (+L)…………
2,200
To record salaries and wages earned but not paid.
(e)
Service Revenue (−R, −SE)..…………
7,000
Unearned Revenue (+L) ……………..
7,000
To record service revenue not earned but
collected in advance, previously recorded as earned.
(f)
Income Tax Expense (+E, −SE)……………………
3,650
Income Tax Payable (+L)……………………
3,650
To record income taxes.
Computation:
Service revenue: $85,000 − 7,000 = $78,000
Expenses: $47,000 + 4,200 + 2,000 + 8,000 + 2,200 = 63,400
Net income before taxes $14,600
Income tax expense: $14,600 x 25% = $ 3,650
Fundamentals of Financial Accounting, 5/e 4–101
S4–6 (continued)
Req. 2 PIRATE PETE MOVING CORPORATION
Corrections to the Financial Statements
Amounts
Reported
Changes
Plus Minus
Correct
Amounts
Income Statement:
Revenue:
Service Revenue
$ 85,000
e
7,000
$ 78,000
Expenses:
Salaries and Wages Expense
17,000
d
2,200
19,200
Supplies Expense
12,000
a
4,200
16,200
Other Expenses
18,000
18,000
Insurance Expense
0
b
2,000
2,000
Depreciation Expense
0
c
8,000
8,000
Income Tax Expense
0
f
3,650
3,650
Total Expenses
47,000
67,050
Net Income
$ 38,000
$ 10,950
December 31 Balance Sheet
Assets:
Current Assets:
Cash
$ 2,000
$ 2,000
Receivables
3,000
3,000
Supplies
6,000
a
4,200
1,800
Prepaid Insurance
4,000
b
2,000
2,000
Total Current Assets
15,000
8,800
Equipment
40,000
40,000
Accumulated Depn.
0
c
8,000
(8,000)
Remaining Assets
27,000
27,000
Total Assets
$ 82,000
$ 67,800
Liabilities:
Current Liabilities:
Accounts Payable
$ 9,000
$ 9,000
Salaries and Wages Payable
0
d
2,200
2,200
Unearned Revenue
0
e
7,000
7,000
Income Tax Payable
0
f
3,650
3,650
Total Current Liabilities
9,000
21,850
Stockholders’ Equity:
Common Stock
35,000
35,000
Retained Earnings
38,000
10,950
Total Stockholders’ Equity
73,000
45,950
Total Liab. and Stockholders’ Equity
$ 82,000
$ 67,800
S4–6 (continued)
Req.3
(a) Decrease Net Income by $27,050.
(b) Decrease Total Assets by $14,200.
Req. 4
(today’s date)
Fundamentals of Financial Accounting, 5/e 4–103
© 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
S4–7
Fundamentals of Financial Accounting, 5/e 4–104
S4–7 (continued)
S4–7 (continued)
Fundamentals of Financial Accounting, 5/e 4–106
© 2016 by McGraw–Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
ANSWERS TO CONTINUING CASE
CC–4
Req. 1
a) Deferral
b) Deferral
c) Accrual
d) Deferral
e) Deferral
f) Deferral
Req. 2
a)
Prepaid Rent (+A)…………………………………..
Cash (–A)…………………………………………
4,800
4,800
b)
Building (+A)……………..…………………………....….
Cash (–A)…………………………………………
47,000
47,000
c)
This requires an accrual adjustment (see requirement 3).
d)
Prepaid Insurance (+A)…………………………….
Cash (–A)…………………………………………
3,000
3,000
e)
Supplies (+A)………………………………………..
Accounts Payable (+L)…………………………
2,000
2,000
f)
Cash (+A)……………………………………………
Unearned Revenue (+L)……………………….
90
90
Req. 3
a)
Rent Expense (+E, –SE)…………………………..
Prepaid Rent (–A)………………………………
(4/8 x $4,800)
2,400
2,400
b)
Depreciation Expense (+E, –SE)………………….
Accum. Depn.–Equip. (+xA, –A)………………
2,000
2,000
c)
Salaries and Wages Expense (+E, –SE).…….…..
Salaries and Wages Payable (+L)………..…..
($1,000 x 2)
2,000
2,000
d)
Insurance Expense (+E, –SE)…………………….
Prepaid Insurance (–A)…………………………
(7/12 x 3,000)
1,750
1,750
e)
Supplies Expense (+E, –SE)……………………...
Supplies (–A)……………………………………
($2,000 – $700)
1,300
1,300
f)
Unearned Revenue (–L)…………………………..
Service Revenue (+R, +SE)…………………..
90
90