Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
4–1
CHAPTER 4
THE ACCOUNTING CYCLE
DISCUSSION QUESTIONS
1. The end-of-period spreadsheet illustrates the flow of accounting information from the unadjusted trial
2. a. Current assets are composed of cash and other assets that may reasonably be expected to be realized in
3. Current liabilities are liabilities that will be due within a short time (usually one year or less) and that are to
5. Closing entries are necessary at the end of an accounting period (1) to transfer the balances in temporary
6. Adjusting entries bring the accounts up to date, while closing entries reduce the revenue, expense, and
dividends accounts to zero balances for use in recording transactions for the next accounting period.
7. The purpose of the post-closing trial balance is to make sure that the ledger is in balance at the beginning
of the next period.
8. a. The financial statements are the most important output of the accounting cycle.
9. Preparing an end-of-period spreadsheet is an optional step of the accounting cycle.
10. a. Liquidity is the ability of a business to convert assets into cash, while solvency is the ability of a
CHAPTER 4 The Accounting Cycle
BASIC EXERCISES
BE 4–1
1. Balance sheet
5.
Balance sheet
2. Balance sheet
6.
Balance sheet
3. Income statement
7.
Statement of stockholders’ equity
4. Income statement
8.
Income statement
BE 4–2
AAA Delivery Services
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y7
Common
Stock
Retained
Earnings
Total
Balances, January 1, 20Y7
$40,000
$815,500
$855,500
Net income
67,250
67,250
Dividends
(10,000)
(10,000)
Balances, December 31, 20Y7
$40,000
$872,750
$912,750
BE 4–3
1. Current liabilities
5.
Stockholders’ equity
2. Current assets
6.
Long-term liabilities
3. Property, plant, and equipment
7.
Current assets
4. Current assets
8.
Current liabilities
BE 4–4
Closing Entries
Nov.
30
Fees Earned
1,150,000
Wages Expense
613,750
Rent Expense
120,000
Supplies Expense
9,150
Miscellaneous Expense
11,000
Retained Earnings
396,100
30
Retained Earnings
25,000
Dividends
25,000
4–3
BE 4–5
BE 4–6
a.
20Y4
20Y3
Current assets ...............
$1,586,250
$1,210,000
Current liabilities ...........
705,000
550,000
Working capital ..............
$ 881,250
$ 660,000
Current ratio ...................
2.25
2.20
($1,586,250 $705,000)
($1,210,000 $550,000)
b. The increase from 2.20 to 2.25 indicates a favorable change.
EXERCISES
Ex. 4–1
Ex. 4–2
Ex. 4–3
Demo Consulting
Income Statement
For the Year Ended August 31, 20Y9
Fees earned
$ 1,480,000
Expenses:
Salary expense
$843,100
Supplies expense
22,600
Depreciation expense
11,800
Miscellaneous expense
12,500
Total expenses
(890,000)
Net income
$ 590,000
CHAPTER 4 The Accounting Cycle
4–4
Ex. 4–3 (Concluded)
Demo Consulting
Statement of Stockholders’ Equity
For the Year Ended August 31, 20Y9
Common
Stock
Retained
Earnings
Total
Balances, September 1, 20Y8
$ 85,000
$ 810,000
$ 895,000
Issued common stock
15,000
15,000
Net income
590,000
590,000
Dividends
(30,000)
(30,000)
Balances, August 31, 20Y9
$100,000
$1,370,000
$ 1,470,000
Demo Consulting
Balance Sheet
August 31, 20Y9
Assets
Current assets:
Cash
$ 182,500
Accounts receivable
234,500
Supplies
5,000
Total current assets
$ 422,000
Property, plant, and equipment:
Land
$ 775,000
Office equipment
$400,000
Accumulated depreciation
(72,000)
Book value—office equipment
328,000
Total property, plant, and equipment
1,103,000
Total assets
$ 1,525,000
Liabilities
Current liabilities:
Accounts payable
$ 41,500
Salaries payable
13,500
Total liabilities
$ 55,000
Stockholders’ Equity
Common stock
$ 100,000
Retained earnings
1,370,000
Total stockholders’ equity
1,470,000
Total liabilities and stockholders’ equity
$ 1,525,000
CHAPTER 4 The Accounting Cycle
4–5
Ex. 4–4
Triton Consulting
Income Statement
For the Year Ended April 30, 20Y3
Fees earned
$ 279,000
Expenses:
Salary expense
$242,000
Supplies expense
1,650
Depreciation expense
900
Miscellaneous expense
2,000
Total expenses
(246,550)
Net income
$ 32,450
Triton Consulting
Statement of Stockholders’ Equity
For the Year Ended April 30, 20Y3
Common
Stock
Retained
Earnings
Total
Balances, May 1, 20Y2
$15,000
$ 52,200
$ 67,200
Issued common stock
5,000
5,000
Net income
32,450
32,450
Dividends
(10,000)
(10,000)
Balances, April 30, 20Y3
$20,000
$ 74,650
$ 94,650
CHAPTER 4 The Accounting Cycle
4–6
Ex. 4–4 (Concluded)
Triton Consulting
Balance Sheet
April 30, 20Y3
Assets
Current assets:
Cash
$ 21,500
Accounts receivable
51,150
Supplies
750
Total current assets
$ 73,400
Property, plant, and equipment:
Office equipment
$ 32,000
Accumulated depreciation
(5,400)
Total property, plant, and equipment
26,600
Total assets
$ 100,000
Liabilities
Current liabilities:
Accounts payable
$ 3,350
Salaries payable
2,000
Total liabilities
$ 5,350
Stockholders’ Equity
Common stock
$ 20,000
Retained earnings
74,650
Total stockholders’ equity
94,650
Total liabilities and stockholders’ equity
$ 100,000
Ex. 4–5
Urgent Messenger Service
Income Statement
For the Year Ended November 30, 20Y1
Fees earned
$ 990,000
Expenses:
Salaries expense
$502,400
Rent expense
80,000
Utilities expense
40,000
Depreciation expense
12,200
Supplies expense
7,150
Insurance expense
5,750
Miscellaneous expense
6,650
Total expenses
(654,150)
Net income
$ 335,850
CHAPTER 4 The Accounting Cycle
4–7
Ex. 4–6
Acorn Health Services Co.
Income Statement
For the Year Ended January 31, 20Y7
Service revenue
$ 634,900
Expenses:
Wages expense
$548,200
Rent expense
60,000
Utilities expense
44,700
Depreciation expense
10,000
Insurance expense
9,000
Supplies expense
4,100
Miscellaneous expense
8,150
Total expenses
(684,150)
Net loss
$ (49,250)
Ex. 4–7
a.
FedEx Corporation
Income Statement
For the Year Ended May 31
(in millions)
Revenues
$ 50,365
Expenses:
Salaries and employee benefits
$18,581
Purchased transportation
9,966
Rentals and landing fees
2,854
Depreciation expense
2,631
Fuel expense
2,399
Maintenance and repairs expense
2,108
Provision for income taxes
920
Other expense (income) net
9,086
Total expenses
(48,545)
Net income
$ 1,820
b. The income statements are very similar. The actual statement, which is for the year
CHAPTER 4 The Accounting Cycle
4–8
Ex. 4–8
Climate Control Systems Co.
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y2
Common
Stock
Retained
Earnings
Total
Balances, January 1, 20Y2
$ 75,000
$4,150,800
$4,225,800
Issued common stock
25,000
25,000
Net income
700,000
700,000
Dividends
(160,000)
(160,000)
Balances, December 31, 20Y2
$100,000
$4,690,800
$4,790,800
Ex. 4–9
Restoration Arts
Statement of Stockholders’ Equity
For the Year Ended April 30, 20Y5
Common
Retained
Stock
Earnings
Total
Balances, May 1, 20Y4
$10,000
$475,500
$485,500
Issued common stock
7,500
7,500
Net loss
(31,200)
(31,200)
Dividends
(5,000)
(5,000)
Balances, April 30, 20Y5
$17,500
$439,300
$456,800
Ex. 4–10
Ex. 4–11
CHAPTER 4 The Accounting Cycle
4–9
Ex. 4–12
Dynamic Weight Loss Co.
Balance Sheet
June 30, 20Y7
Assets
Current assets:
Cash
$ 72,000
Accounts receivable
187,500
Supplies
11,200
Prepaid insurance
8,400
Prepaid rent
6,000
Total current assets
$285,100
Property, plant, and equipment:
Land
$375,000
Equipment
$ 325,900
Accumulated depreciation—equipment
(186,000)
Book value—equipment
139,900
Total property, plant, and equipment
514,900
Total assets
$800,000
Liabilities
Current liabilities:
Accounts payable
$ 51,200
Salaries payable
7,500
Unearned fees
21,000
Total liabilities
$ 79,700
Stockholders’ Equity
Common stock
$100,000
Retained earnings
620,300
Total stockholders’ equity
720,300
Total liabilities and stockholders’ equity
$800,000
CHAPTER 4 The Accounting Cycle
4–10
Ex. 4–13
a. 1. The date of the statement should be “August 31, 20Y3” and not “For the Year Ended
August 31, 20Y3.”
b.
Labyrinth Services Co.
Balance Sheet
August 31, 20Y3
Assets
Current assets:
Cash
$ 18,500
Accounts receivable
41,400
Supplies
6,500
Prepaid insurance
16,600
Total current assets
$ 83,000
Property, plant, and equipment:
Land
$225,000
Building
$400,000
Accumulated depreciation—building
(155,000)
Book value—building
245,000
Equipment
$ 97,000
Accumulated depreciation—equipment
(25,000)
Book value—equipment
72,000
Total property, plant, and equipment
542,000
Total assets
$ 625,000
Liabilities
Current liabilities:
Accounts payable
$ 31,300
Wages payable
6,500
Total liabilities
$ 37,800
Stockholders’ Equity
Common stock
$ 75,000
Retained earnings
512,200
Total stockholders’ equity
587,200
Total liabilities and stockholders’ equity
$ 625,000
CHAPTER 4 The Accounting Cycle
4–11
Ex. 4–14
c. Depreciation Expense—Equipment
Ex. 4–15
Closing Entries
Dec.
31
Fees Earned
614,500
Wages Expense
320,000
Rent Expense
140,000
Supplies Expense
18,200
Miscellaneous Expense
8,700
Retained Earnings
127,600
31
Retained Earnings
45,000
Dividends
45,000
Ex. 4–16
Closing Entries
May
31
Fees Earned
1,150,000
Retained Earnings
16,200
Wages Expense
915,000
Rent Expense
200,000
Supplies Expense
19,300
Miscellaneous Expense
31,900
31
Retained Earnings
5,000
Dividends
5,000
CHAPTER 4 The Accounting Cycle
4–12
Ex. 4–17
a. Accounts Payable
Ex. 4–18
Security Services Co.
Post-Closing Trial Balance
July 31, 20Y0
Debit
Credit
Balances
Balances
Cash
41,100
Accounts Receivable
317,400
Supplies
5,000
Equipment
162,750
Accumulated Depreciation—Equipment
73,300
Accounts Payable
82,500
Salaries Payable
5,500
Unearned Rent
12,000
Common Stock
65,000
Retained Earnings
287,950
526,250
526,250
Ex.
4–19
1.
i
6.
c
2.
j
7.
d
3.
f
8.
h
4.
b
9.
g
5.
e
10.
a
Appendix 1 Ex. 4–20
1.
i
6.
f
2.
a
7.
j
3.
g
8.
e
4.
d
9.
h
5.
c
10.
b
CHAPTER 4 The Accounting Cycle
4–13
Appendix 1 Ex. 4–21
Alert Security Services Co.
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended October 31, 20Y3
Account Title
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Debit
Credit
Debit
Credit
Debit
Credit
Cash
12
12
Accounts Receivable
90
(a) 13
103
Supplies
8
(b) 4
4
Prepaid Insurance
12
(c) 10
2
Land
190
190
Equipment
50
50
Accum. Depr.—Equipment
4
(d) 3
7
Accounts Payable
36
36
Wages Payable
0
(e) 1
1
Common Stock
50
50
Retained Earnings
210
210
Dividends
8
8
Fees Earned
200
(a) 13
213
Wages Expense
110
(e) 1
111
Rent Expense
12
12
Insurance Expense
0
(c) 10
10
Utilities Expense
6
6
Supplies Expense
0
(b) 4
4
Depreciation Expense—Equipment
0
(d) 3
3
Miscellaneous Expense
2
2
Totals
500
500
31
31
517
517
CHAPTER 4 The Accounting Cycle
4–14
Appendix 1 Ex. 4–22
Alert Security Services Co.
End-of-Period Spreadsheet (Work Sheet)
For the Year Ended October 31, 20Y3
Adjusted
Trial Balance
Income
Statement
Balance
Sheet
Account Title
Debit
Credit
Debit
Credit
Debit
Credit
Cash
12
12
Accounts Receivable
103
103
Supplies
4
4
Prepaid Insurance
2
2
Land
190
190
Equipment
50
50
Accum. Depr.—Equipment
7
7
Accounts Payable
36
36
Wages Payable
1
1
Common Stock
50
50
Retained Earnings
210
210
Dividends
8
8
Fees Earned
213
213
Wages Expense
111
111
Rent Expense
12
12
Insurance Expense
10
10
Utilities Expense
6
6
Supplies Expense
4
4
Depreciation Expense—Equipment
3
3
Miscellaneous Expense
2
2
Totals
517
517
148
213
369
304
Net income (loss)
65
65
213
213
369
369
CHAPTER 4 The Accounting Cycle
4–15
Appendix 1 Ex. 4–23
Alert Security Services Co.
Income Statement
For the Year Ended October 31, 20Y3
Fees earned
$ 213
Expenses:
Wages expense
$111
Rent expense
12
Insurance expense
10
Utilities expense
6
Supplies expense
4
Depreciation expense—equipment
3
Miscellaneous expense
2
Total expenses
(148)
Net income
$ 65
Alert Security Services Co.
Statement of Stockholders’ Equity
For the Year Ended October 31, 20Y3
Common
Stock
Retained
Earnings
Total
Balances, November 1, 20Y2
$40
$210
$250
Issued common stock
10
10
Net income
65
65
Dividends
(8)
(8)
Balances, October 31, 20Y3
$50
$267
$317
CHAPTER 4 The Accounting Cycle
4–16
Appendix 1 Ex. 4–23 (Concluded)
Alert Security Services Co.
Balance Sheet
October 31, 20Y3
Assets
Current assets:
Cash
$ 12
Accounts receivable
103
Supplies
4
Prepaid insurance
2
Total current assets
$121
Property, plant, and equipment:
Land
$190
Equipment
$ 50
Accumulated depreciation—equipment
(7)
Book value—equipment
43
Total property, plant, and equipment
233
Total assets
$354
Liabilities
Current liabilities:
Accounts payable
$ 36
Wages payable
1
Total liabilities
$ 37
Stockholders’ Equity
Common stock
$ 50
Retained earnings
267
Total stockholders’ equity
317
Total liabilities and stockholders’ equity
$354
CHAPTER 4 The Accounting Cycle
4–17
Appendix 1 Ex. 4–24
20Y3
Adjusting Entries
Oct.
31
Accounts Receivable
13
Fees Earned
13
Accrued fees.
31
Supplies Expense
4
Supplies
4
Supplies used ($8 – $4).
31
Insurance Expense
10
Prepaid Insurance
10
Insurance expired.
31
Depreciation Expense—Equipment
3
Accumulated Depreciation—Equipment
3
Equipment depreciation.
31
Wages Expense
1
Wages Payable
1
Accrued wages.
Appendix 1 Ex. 4–25
20Y3
Closing Entries
Oct.
31
Fees Earned
213
Wages Expense
111
Rent Expense
12
Insurance Expense
10
Utilities Expense
6
Supplies Expense
4
Depreciation Expense—Equipment
3
Miscellaneous Expense
2
Retained Earnings
65
31
Retained Earnings
8
Dividends
8
CHAPTER 4 The Accounting Cycle
4–18
Appendix 2 Ex. 4–26
a.
Jan.
1
Wages Payable
5,500
Wages Expense
5,500
b.
Jan.
6
Wages Expense
61,375
Cash
61,375
c.
Jan.
6
Wages Expense
55,875
Wages Payable
5,500
Cash
61,375
d. $55,875 ($61,375 – $5,500)
Appendix 2 Ex. 4–27
a.
(1)
Sales Salaries Expense ........................................................
7,050
Salaries Payable ...............................................................
7,050
Accrued salaries ($11,750 5 days = $2,350;
$2,350 3 days).
(2)
Accounts Receivable ............................................................
51,300
Fees Earned ......................................................................
51,300
Accrued fees earned.
b.
(1)
Salaries Payable ....................................................................
7,050
Sales Salaries Expense ....................................................
7,050
Reversing entry.
(2)
Fees Earned ..........................................................................
51,300
Accounts Receivable .......................................................
51,300
Reversing entry.
Appendix 2 Ex. 4–28
a.
(1)
Wages Expense .....................................................................
13,200
Wages Payable .................................................................
13,200
Accrued salaries ($66,000 ÷ 5).
(2)
Accounts Receivable ............................................................
25,000
Fees Earned ......................................................................
25,000
Accrued fees earned.
b.
(1)
Wages Payable ......................................................................
13,200
Wages Expense ................................................................
13,200
Reversing entry.
(2)
Fees Earned ..........................................................................
25,000
Accounts Receivable .......................................................
25,000
Reversing entry.
CHAPTER 4 The Accounting Cycle
4–19
Appendix 2 Ex. 4–29
a. (1) Payment (last payday in year)
b.
(1)
Wages Expense .....................................................................
15,400
Cash ..................................................................................
15,400
Paid wages.
(2)
Wages Expense .....................................................................
9,250
Wages Payable .................................................................
9,250
Accrued wages.
(3)
Retained Earnings (Closing Entry) ......................................
809,250
Wages Expense ................................................................
809,250
Closing entry.
(4)
Wages Payable ......................................................................
9,250
Wages Expense ................................................................
9,250
Reversing entry.
(5)
Wages Expense .....................................................................
14,800
Cash ..................................................................................
14,800
Paid wages.
Appendix 2 Ex. 4–30
a. (1) Payment (last payday in year)
b.
(1)
Salaries Expense ...................................................................
22,000
Cash ..................................................................................
22,000
Paid salaries.
(2)
Salaries Expense ...................................................................
13,200
Salaries Payable ...............................................................
13,200
Accrued salaries.
(3)
Retained Earnings (Closing Entry) ......................................
1,213,200
Salaries Expense ..............................................................
1,213,200
Closing entry.
(4)
Salaries Payable ....................................................................
13,200
Salaries Expense ..............................................................
13,200
Reversing entry.
(5)
Salaries Expense ...................................................................
24,000
Cash ..................................................................................
24,000
Paid salaries.
CHAPTER 4 The Accounting Cycle
PROBLEMS
Prob. 4–1A
1.
Beacons Company
Income Statement
For the Year Ended December 31, 20Y5
Revenues:
Fees earned
$372,800
Rent revenue
1,100
Total revenues
$ 373,900
Expenses:
Salaries and wages expense
$163,100
Advertising expense
21,700
Utilities expense
16,400
Depreciation expense—building
12,000
Repairs expense
8,850
Depreciation expense—equipment
4,800
Insurance expense
3,150
Supplies expense
2,180
Miscellaneous expense
4,320
Total expenses
(236,500)
Net income
$ 137,400
2.
Beacons Company
Statement of Stockholders’ Equity
For the Year Ended December 31, 20Y5
Common
Stock
Retained
Earnings
Total
Balances, January 1, 20Y5
$50,000
$128,100
$178,100
Issued common stock
25,000
25,000
Net income
137,400
137,400
Dividends
(10,000)
(10,000)
Balances, December 31, 20Y5
$75,000
$255,500
$330,500
