Chapter 3
Accrual Accounting & Income
Short Exercises
(10 min.) S 3-1
Millions
Sales revenue …………………………………………………………….
$825
Cost of goods sold …………………………………………………….
(255)
All other expenses ……………………………………………………..
(325)
Net income ………………………………………………………………..
$245
Beginning cash ………………………………………………………….
$ 75
Collections ($825 − $27) ……………………………………………..
798
Payments for: inventory …………………………………………….
(350)
everything else ……………………………………
(255)
Ending cash ………………………………………………………………
$ 268
(10 min.) S 3-2
Statement
Reports (Amounts in millions)
Income statement
Interest expense …………………………………
$ 0.6
Balance sheet
Notes payable ($4.7 + $1.7 − $1.6) ………..
$4.8
Interest payable ………………………………….
0.2
3-2 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(10 min.) S 3-3
At the end of each accounting period, the business reports its
performance through the preparation of financial statements. In order to
The accrued salaries, which are owed to the employees but have not
been paid, are an expense related to the current period but also
(10 min.) S 3-4
The large auto manufacturer should record sales revenue when the
revenue is earned by delivering automobiles to Budget or Hertz. The
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible long-lived
3-4 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(10 min.) S 3-6
a. The Expense Recognition Principle
(10 min.) S 3-7
a.
Oct. 31
Rent Expense ($6,000 × 1/6) ……………
1,000
Prepaid Rent …………………………..
1,000
To record rent expense.
Prepaid Rent
Rent Expense
Oct. 1
6,000
Oct. 31
1,000
Oct. 31
1,000
Bal.
5,000
Bal.
1,000
b.
Oct. 31
Supplies Expense ($950 − $270) ……….
680
Supplies …………………………………..
680
To record supplies expense.
Supplies
Supplies Expense
Oct. 1
950
Oct. 31
680
Oct. 31
680
Bal.
270
Bal.
680
(10 min.) S 3-8
Req. 1
(a)
Jan. 1
Equipment ………………………………………..
35,000
Cash ……………………………………………
35,000
Purchased equipment.
(b)
Dec. 31
Depreciation Expense −
Equipment ($35,000 / 5) …………………
7,000
Accumulated Depreciation −
Equipment …………………………...
Record depreciation expense.
7,000
Req. 2
Equipment
Accumulated
Depreciation −
Equipment
Depreciation
Expense −
Equipment
Jan.1
35,000
Dec. 31
7,000
Dec. 31
7,000
Bal.
35,000
Bal.
7,000
Bal.
7,000
Req. 3
Equipment ………………………………………………………………
$35,000
Less: Accumulated depreciation ………………………………
(7,000)
Book value ……………………………………………………………..
$28,000
3-6 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(10 min.) S 3-9
(Amounts in millions)
Income statement:
2014
Salary expense ($44.1 + $2.2) ……………….
$46.3
Balance sheet:
2014
Salary payable …………………………………….
$ 2.2
(10 min.) S 3-10
Req. 1
Oct. 31
Interest Expense ……………………………………………
312
Interest Payable ………………………………………..
312
To accrue interest expense for October.
Nov. 30
Interest Expense ……………………………………………
312
Interest Payable ………………………………………..
312
To accrue interest expense for November.
Dec. 31
Interest Expense ……………………………………………
312
Interest Payable ………………………………………..
312
To accrue interest expense for December.
Req. 2
Interest Payable
Oct. 31
312
Nov. 30
312
Dec. 31
312
Bal.
936
Req. 3
Dec. 31
Interest Payable ……………………………………………
936
Cash ………………………………………………………
936
To pay interest.
(10 min.) S 3-11
Req. 1
Oct. 31
Interest Receivable ……………………………………….
312
Interest Revenue ………………………………………
312
To accrue interest revenue for October.
Nov. 30
Interest Receivable ……………………………………….
312
Interest Revenue ………………………………………
312
To accrue interest revenue for November.
Dec. 31
Interest Receivable ……………………………………….
312
Interest Revenue ………………………………………
312
To accrue interest revenue for December.
Req. 2
Interest Receivable
Oct. 31
312
Nov. 30
312
Dec. 31
312
Bal.
936
Req. 3
Dec. 31
Cash ………………………………………………………
Interest Receivable …………………………...
To collect interest.
(5-10 min.) S 3-12
Unearned revenues are liabilities because The World Star has received
cash from subscribers in advance of providing them with newspapers.
a.
Cash ……………………………………………………..
60,000
Unearned Subscription Revenue ……….
60,000
Received cash for revenue in advance.
40,000
40,000
Prepaid Rent at December 31:
Unadjusted amount …………………………………………..
Rent Expense at December 31:
Unadjusted amount …………………………………………..
Adjusted amount ($36,000 / 3) …………………………...
(10 min.) S 3-14
a.
Accounts Receivable …………………………….
19,000
Service Revenue ………………………………
19,000
Cash …………………………..………………………..
8,000
Accounts Receivable ………………………..
8,000
b.
Cash …………………………..………………………..
3,000
Unearned Service Revenue ………………..
3,000
Unearned Service Revenue ……………………
2,000
Service Revenue ……………………………….
2,000
(15-30 min.) S 3-15
Uptown Sporting Goods Company
Income Statement
For the Year Ended July 31, 2014
Thousands
Net revenues ……………………………………….
$180,500
Cost of goods sold ……………………………….
136,000
All other expenses ……………………………….
29,600
Net income …………………………………………..
$ 14,900
Uptown Sporting Goods Company
Statement of Retained Earnings
For the Year Ended July 31, 2014
Thousands
Retained earnings, July 31, 2013 …………….
$36,500
Add: Net income…………………………………….
14,900
Retained earnings, July 31, 2014 …………….
$51,400
3-10 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(continued) S 3-15
Uptown Sporting Goods Company
Balance Sheet
July 31, 2014
Thousands
ASSETS
Current:
Cash …………………………………………………….
$ 26,700
Accounts receivable ……………………………..
28,000
Inventories ……………………………………………
35,000
Other current assets ……………………………..
5,000
Total current assets ………………………….
94,700
Property and equipment, net ………………….
19,800
Other assets …………………………………………
22,000
Total assets ……………………………………………….
$136,500
LIABILITIES
Total current liabilities …………………………..
$ 55,100
Long-term liabilities ………………………………
7,500
Total liabilities ……………………………………………
62,600
STOCKHOLDERS’ EQUITY
Common stock ……………………………………..
22,500
Retained earnings …………………………………
51,400
Total stockholders’ equity ………………………….
73,900
Total liabilities and stockholders’ equity ……..
$136,500
(5-10 min.) S 3-16
CLOSING ENTRIES
Thousands
July 31
Net Revenues …………………………………..
180,500
Retained Earnings ……………………
180,500
31
Retained Earnings …………………………...
165,600
Cost of Goods Sold ………………….
136,000
All Other Expenses …………………..
29,600
Retained Earnings
July 31, 2014 Expenses
165,600
July 31, 2013 Bal.
36,500
July 31, 2014 Revenues
180,500
July 31, 2014 Bal.
51,400
Retained Earnings’ ending balance agrees with the amount reported on
the statement of retained earnings and the balance sheet (in S 3-15).
(5 min.) S 3-17
(Dollars in thousands)
Req. 1
Net working capital = Total current assets − Total current liabilities
Req. 2
Current ratio
=
Total current assets
=
$94,700
=
1.72
Total current liabilities
$55,100
Req. 3
Debt ratio
=
=
=
0.46
Copyright © 2015 Pearson Education Inc. Chapter 3 Accrual Accounting & Income 3– 13
(10 min.) S 3-18
1.
Earned revenue of $10,000 on account:
a.
Net working capital = $49,600
[($94,700 + $10,000) − $55,100]
b.
Current ratio
=
$104,700
=
1.90
$55,100
c.
Debt ratio
=
$62,600
=
0.43
$146,500*
*$136,500 +$10,000
2.
Paid accounts payable of $10,000:
a.
Net working capital = $39,600 [($94,700 − $10,000) − ($55,100 −
$10,000)]
b.
Current ratio
=
$84,700
=
1.88
$45,100
c.
Debt ratio
=
$52,600*
=
0.42
$126,500**
*$62,600 − $10,000
**$136,500 − $10,000
Exercises
(5-10 min.) E 3-19A
Millions
a.
Revenue ……………………………………………………………….
$730
The revenue principle says to record revenue when it has been
earned, regardless of when cash is collected. Therefore, report
the amount of revenue earned, regardless of when the company
collects cash.
b.
Total expense ………………………………………………………..
$410
The expense recognition principle governs accounting for
expenses.
c.
Revenue ($730 − $26) …………………………………………….
$704
Total expense ………………………………………………………..
$425
The accrual basis measures revenues as earned and expenses
as incurred, while the cash basis measures revenues collected in
cash and expenses paid in cash.
d.
The income statement reports revenues and expenses.
The statement of cash flows reports cash receipts and cash
payments.
(15-20 min.) E 3-20A
Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
CREDIT
a.
Insurance Expense …………………………………………..
2,300
Prepaid Insurance ($600 + $2,400 − $700) ………
2,300
b.
Interest Receivable …………………………………………..
2,600
Interest Revenue ………………………………………….
2,600
c.
Unearned Service Revenue ($1,700 − $500) ………..
1,200
Service Revenue ………………………………………….
1,200
d.
Depreciation Expense ………………………………………
5,800
Accumulated Depreciation …………………………...
5,800
e.
Salary Expense ($20,000 × 2/5) ………………………….
8,000
Salary Payable… ………………………………………….
8,000
f.
Income Tax Expense ($21,000 × .35) ………………….
7,350
Income Tax Payable… ………………………………….
7,350
Req. 2
Net income understated by omission of:
Interest revenue …………………………………………
$ 2,600
Service revenue………………………………………….
1,200
Total understatement ………………………………….
$ (3,800)
Net income overstated by omission of:
Insurance expense ……………………………………..
$ 2,300
Depreciation expense …………………………………
5,800
Salary expense …………………………………………..
8,000
Income tax expense ……………………………………
7,350
Total overstatement ……………………………………
23,450
Overall effect — net income overstated by ………..
$19,650
3-16 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
Missing amounts in italics.
1
2
3
4
Beginning Supplies
$2,000
$ 300
$1,000
$1,000
Add: Purchases of supplies
during the year
800
800
1,000
400
Total amount to account for
2,800
1,100
2,000
1,400
Less: Ending Supplies
(1,050)
(600)
(700)
(500)
Supplies Expense
$1,750
$ 500
$1,300
$ 900
Journal entries:
Situation 1:
Supplies ……………………………………..
800
Cash or Accounts Payable …….
800
Situation 2:
Supplies Expense………………………..
500
Supplies ……………………………….
500
(10-20 min.) E 3-22A
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
CREDIT
a.
Interest Expense ……………………………………………….
3,600
Interest Payable ………………………………………..
3,600
b.
Interest Receivable ……………………………………………
4,100
Interest Revenue… ……………………………………
4,100
c.
Unearned Rent Revenue ($16,000 / 2 × 6 / 12) ……..
4,000
Rent Revenue ……………………………………………
4,000
d.
Salary Expense ($6,000 × 4) ……………………………….
24,000
Salary Payable …………………………………………..
24,000
e.
Supplies Expense ……………………………………………..
1,550
Supplies ($3,200 − $1,650) ………………………….
1,550
f.
Depreciation Expense ($60,000 / 5) …………………….
12,000
Accumulated Depreciation …………………………
12,000
3-18 Financial Accounting 10/e Solutions Manual Copyright © 2015 Pearson Education Inc.
(20-30 min.) E 3-23A
California Bulbs, Inc.
Income Statement
Year Ended December 31, 2014
Thousands
Revenues:
Sales revenue ……………………….
$42,500
Expenses:
Cost of goods sold ………………..
$25,000
Selling, administrative, and
general expenses …………….
10,300
Total expenses ………………….
35,300
Income before tax ……………………..
7,200
Income tax expense ……………………
2,100
Net income ………………………………..
$ 5,100
California Bulbs, Inc.
Statement of Retained Earnings
Year Ended December 31, 2014
Thousands
Retained earnings, December 31, 2013 …………..
$ 5,500
Add: Net income …………………………………………..
5,100
Subtotal
10,600
Less: Dividends declared………………………………
(1,500)
Retained earnings, December 31, 2014 …………..
$ 9,100
(continued) E 3-23A
California Bulbs, Inc.
Balance Sheet
December 31, 2014
Thousands
ASSETS
LIABILITIES
Cash ………………………………..
$ 4,200
Accounts payable …………
$ 7,300
Accounts receivable …………
1,700
Income tax payable ……….
500
Inventories ………………………
2,900
Other liabilities ……………..
2,400
Prepaid expenses …………….
1,600
Total liabilities ………………
10,200
Prop., plant, equip.
$16,800
STOCKHOLDERS’
Less: Accum.
EQUITY
Deprec. …….
(2,800)
14,000
Common stock ……………..
14,600
Other assets …………………….
9,500
Retained earnings …………
9,100
Total stockholders’ equity
23,700
Total liabilities and
Total assets ……………………..
$33,900
stockholders’ equity …..
$33,900
(10-20 min.) E 3-24A
One mechanism for solving this exercise is to prepare the relevant T–
accounts, insert the given information, and solve for the unknown
amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal.
290
Sales revenue
20,570
Collections
20,400
End. bal.
460
Prepaid Insurance
Beg. bal.
450
Payment
440
Insurance expense
520
End. bal.
370
Accrued Liabilities Payable
Beg. bal.
670
Payments
4,300
Other operating
expenses
4,410
End. bal.
780