(10-20 min.) E 3-25A
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
20,980
Collections
20,800
End. bal.
470
Beg. bal.
Beg. bal.
End. bal.
(10-20 min.) E 3-26A
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Closing Entries
Dec.
31
Service Revenue ………………………………..
32,100
Other Revenue …………………………………..
200
Retained Earnings …………………………
32,300
31
Retained Earnings ………………………………
25,500
Cost of Services Sold …………………….
14,300
Selling, General, and Administrative
Expenses ………………………………….
Depreciation Expense ……………………
Income Tax Expense ……………………..
31
Retained Earnings ………………………………
Dividends ……………………………………..
Net income for 2016 was $6,800 ($32,300 − $25,500).
Retained Earnings
Revenues
Dec. 31, 2016
Dec. 31, 2015
2,400
(15-25 min.) E 3-27A
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Adjusting Entries
Dec.
31
Unearned Service Revenue ……………………….
6,300
Service Revenue ($19,900 − $13,600) …….
6,300
31
Salary Expense ($5,200 − $4,500) ……………….
Salary Payable……………………………………..
31
Rent Expense ($1,900 − $1,100) ………………….
Prepaid Rent ………………………………………..
31
Depreciation Expense−Equipment ($400 − $0)
Accumulated Depreciation−Equipment ….
31
Income Tax Expense ($1,200 − $0) ……………..
1,200
Income Tax Payable ……………………………..
1,200
Closing Entries
31
Service Revenue ……………………………………….
19,900
Retained Earnings ……………………………….
19,900
31
Retained Earnings …………………………………….
Salary Expense ……………………………………
Rent Expense ………………………………………
1,900
Depreciation Expense−Equipment ………..
Income Tax Expense…………………………….
1,200
31
Retained Earnings …………………………………….
1,300
Dividends …………………………………………….
(20-30 min.) E 3-28A
Req. 1
Winwood Production Company
Balance Sheet
December 31, Current Year
ASSETS
Current assets:
Cash …………………………………………………………………………
$13,300
Prepaid rent ($1,600 − $800) ……………………………………….
800
Total current assets ……………………………………………….
14,100
Plant assets:
Equipment …………………………..……………………
Less accumulated depreciation
($3,300 + $400) ………………………………………
Total assets ……………………………………………………………………
LIABILITIES
Current liabilities:
Accounts payable ………………………………………………………
$ 4,900
Salary payable ($5,200 − $4,500) …………………………………
700
Unearned service revenue ($9,200 − $6,300) ………………..
2,900
Income tax payable ……………………………………………………
Total current liabilities ……………………………………………
Note payable, long-term ………………………………………………….
Total liabilities ………………………………………………………………..
Retained earnings ($11,400 + $19,900 − $5,200 − $1,900 −
$400 − $1,200 − $1,300) ………………….
29,700
(continued) E 3-28A
Req. 2
Current
Year
Prior
Year
Net working
capital
=
Total current assets −
current liabilities
=
$14,100 −
$9,700
=
$4,400
$3,900
(30 min.) E 3-29A
(amounts in millions)
a.
Current ratio
=
$20
=
1.18
Debt ratio
=
$20 + $7
=
0.47
$10 + $7
$50 + $7
The purchase of equipment on account hurts both ratios.
b.
Current ratio
=
$20 − $10
=
1.00
Debt ratio
=
$20 − $10
=
0.25
$10
$50 − $10
The payment of long-term debt hurts the current ratio and improves
the debt ratio.
Collecting cash in advance hurts both ratios.
Accruing an expense hurts both ratios.
(5-10 min.) E 3-30B
Millions
a.
Revenue ……………………………………………………………….
$720
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 ……………………………………………………….
$520
Total expense ……………………………………………………….
$570
d.
The income statement reports revenues and expenses.
(15-20 min.) E 3-31B
Req. 1
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
CREDIT
a.
Insurance Expense …………………………………………..
1,400
Prepaid Insurance ($600 + $2,000 − $1,200) …..
1,400
b.
Interest Receivable …………………………………………..
2,100
Interest Revenue …………………………………………
2,100
c.
Unearned Service Revenue ($1,800 − $400) ……….
1,400
Service Revenue ………………………………………….
1,400
d.
Depreciation Expense ………………………………………
Accumulated Depreciation …………………………..
5,200
Salary Expense ($18,000 × 2/5) ………………………….
Salary Payable …………………………………………….
7,200
Income Tax Expense ($25,000 × .35) ………………….
8,750
Income Tax Payable …………………………………….
8,750
Req. 2
Net income understated by omission of:
Interest revenue …………………………………………….
$ 2,100
Service revenue …………………………………………….
1,400
Total understatement……………………………………..
$ (3,500)
Net income overstated by omission of:
Insurance expense …………………………………………
$ 1,400
Depreciation expense …………………………………….
Salary expense …………………………..………………….
Income tax expense ……………………………………….
Total overstatement ……………………………………….
(10-15 min.) E 3-32B
Missing amounts in italics.
1
2
3
4
Beginning Supplies
$2,400
$ 700
$ 600
$ 600
Add: Purchases of supplies
during the year
1,000
400
1,400
900
Less: Ending Supplies
(1,020)
Supplies Expense
$2,380
Journal entries:
Situation 1:
Supplies……………………………………..
1,000
Cash or Accounts Payable ………
1,000
Situation 2:
Supplies Expense ……………………….
300
Supplies ………………………………..
300
(10-20 min.) E 3-33B
Adjusting Entries
DATE
ACCOUNT TITLES
DEBIT
CREDIT
a.
Interest Expense ………………………………………………
3,300
Interest Payable …………………………………………..
3,300
b.
Interest Receivable …………………………………………..
4,500
Interest Revenue …………………………………………
4,500
c.
Unearned Rent Revenue ($13,900 / 2 × 6/12) ………
Rent Revenue ……………………………………………..
d.
Salary Expense ($5,500 × 4) ………………………………
Salary Payable …………………………………………….
e.
Supplies Expense …………………………………………….
(10-15 min.) E 3-34B
Prepaid Rent at December 31:
a.
Unadjusted amount …………………………………………..
$36,000
b.
Adjusted amount ($36,000 − $12,000) …………………
24,000
Rent Expense at December 31:
d.
Adjusted amount ($36,000 / 3) …………………………...
(20-30 min.) E 3-35B
Req. 1
Marshall, Inc.
Income Statement
Year Ended December 31, 2016
Thousands
Revenues:
Sales revenue …………………………..
$42,400
Expenses:
Selling, administrative, and
general expenses ………………….
Total expenses …………………..
Income before tax …………………………
Income tax expense ………………………
Net income ……………………………………
Marshall, Inc.
Statement of Retained Earnings
Year Ended December 31, 2016
Thousands
Retained earnings, December 31, 2015 ………….
$ 5,100
Add: Net income …………………………..……………..
4,200
Subtotal
9,300
Less: Dividends declared ……………………………..
(continued) E 3-35B
Marshall, Inc.
Balance Sheet
December 31, 2016
Thousands
ASSETS
LIABILITIES
Cash ………………………………..
$ 4,300
Accounts payable …………
$ 7,500
Accounts receivable …………
1,400
Income tax payable ………
Inventories ……………………….
2,400
Other liabilities……………..
2,700
Prepaid expenses ……………..
1,600
Total liabilities ……………..
Prop., plant, equip.
$16,700
STOCKHOLDERS’
Less: Accum.
EQUITY
deprec ……
(2,400)
14,300
Common stock……………..
14,500
Other assets …………………….
9,300
Retained earnings ………..
7,800
Total stockholders’ equity
22,300
Total liabilities and
Total assets ……………………..
$33,300
(10-20 min.) E 3-36B
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
20,770
Collections
20,600
End. bal.
460
Prepaid Insurance
Beg. bal.
450
Payment
480
Insurance expense
610
End. bal.
320
Beg. bal.
610
End. bal.
730
(10-20 min.) E 3-37B
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Closing Entries
Dec.
31
Service Revenue ……………………………………
32,300
Other Revenue ………………………………………
1,000
Retained Earnings …………………………..…
33,300
31
Retained Earnings ………………………………….
Cost of Services Sold ………………………..
14,600
Selling, General, and Administrative
Expenses ……………………………………..
6,500
Depreciation Expense ………………………..
4,100
Income Tax Expense ………………………….
31
Retained Earnings ………………………………….
700
Dividends ………………………………………….
700
Net income for 2016 was $7,500 ($33,300 − $25,800).
Revenues
Dec. 31, 2016
(15-25 min.) E 3-38B
Req. 1
Journal
DATE
ACCOUNT TITLES
DEBIT
CREDIT
Adjusting Entries
Dec.
31
Unearned Service Revenue …………………………
6,300
Service Revenue ($19,700 − $13,400) ……….
6,300
31
Salary Expense ($5,300 − $4,500) …………………
800
Salary Payable ……………………………………….
800
31
Rent Expense ($1,800 − $1,300) ……………………
500
Prepaid Rent ………………………………………….
500
31
Depreciation Expense−Equipment ($800 − $0)
Accumulated Depreciation−Equipment ……
31
Income Tax Expense ($1,400 − $0) ……………….
1,400
Income Tax Payable ……………………………….
1,400
31
Service Revenue …………………………………………
Retained Earnings ………………………………….
31
Retained Earnings ………………………………………
9,300
Salary Expense ………………………………………
5,300
Rent Expense …………………………………………
1,800
Depreciation Expense−Equipment …………..
Income Tax Expense ………………………………
1,400
Dividends ………………………………………………
1,400
(20-30 min.) E 3-39B
Req. 1
Emerson Production Company
Balance Sheet
December 31, Current Year
ASSETS
Current assets:
Cash ………………………………………………………………………….
$13,690
Prepaid rent ($1,500 − $500)………………………………………..
1,000
Total current assets ……………………………………………….
14,690
Plant assets:
Equipment …………………………..……………………..
Less accumulated depreciation
($3,200 + $800) ………………………………………..
Total assets …………………………………………………………………..
LIABILITIES
Current liabilities:
Accounts payable ……………………………………………………..
$ 4,300
Salary payable ($5,300 − $4,500) ………………………………..
800
Unearned service revenue ($9,100 − $6,300) ……………….
2,800
Income tax payable …………………………………………………..
Total current liabilities ………………………………………….
Note payable, long-term …………………………………………………
Total liabilities ……………………………………………………………….
Common stock ………………………………………………………………
8,300
Total stockholders’ equity ………………………………………………
(continued) E 3-39B
Req. 2
Current
Year
Prior
Year
Net working
capital
=
Total current assets −
current liabilities
=
$14,690 −
$9,300
=
$5,390
$5,790
Current
ratio
=
Total current assets
=
$14,690
=
1.58
1.61
Total current liabilities
$9,300
=
=
(30 min.) E 3-40B
a.
Current ratio
=
$40
=
1.05
Debt ratio
=
$40 + $8
=
0.62
$30 + $8
$70 + $8
The purchase of equipment on account hurts both ratios.
Current ratio
=
=
1.00
Debt ratio
=
=
0.50
$30
c.
Current ratio
=
$40 + $5
=
1.29
Debt ratio
=
$40 + $5
=
0.60
$30 + $5
$70 + $5
Collecting cash in advance hurts both ratios.
$40
Accruing an expense hurts both ratios.
e.
Current ratio
=
=
1.73
Debt ratio
=
$40
=
0.49
$30
A cash sale improves both ratios.
Serial Exercise
(3 hours) E 3-41
Reqs. 2, 5, and 7
Cash
Accounts Receivable
Aug. 2
10,000
Aug. 2
600
Aug. 18
1,900
Aug. 28
1,900
9
1,400
3
2,700
Bal.
0
300
Adj. (a)
1,800
800
Bal.
1,800
Bal.
Supplies
Equipment
Aug. 5
800
Adj. (c)
400
Aug. 3
2,700
Bal.
400
Bal.
2,700
Equipment
Aug. 4
Bal.
Bal.
4,500
Aug. 26
Aug. 4
Bal.
(continued) E 3-41
Reqs. 2, 5, and 7
Salary Payable
Unearned Service Revenue
Adj. (e)
600
Adj. (b)
900
Aug. 21
2,700
Bal.
600
Bal.
1,800
Retained Earnings
Aug. 31
Clo.
Aug. 9
1,400
18
1,900
Bal.
3,300
Adj. (a)
1,800
Adj. (b)
900
Clo.
6,000
Bal.
6,000
Rent Expense
Utilities Expense
Aug. 2
600
Clo.
600
Aug. 12
300
Clo.
300