CHAPTER 3
SOLUTIONS TO EXERCISES—SET B
EXERCISE 3-1B
1. False. Adjusting entries are necessary to update the accounting records
to the accrual basis.
2. True.
3. True.
EXERCISE 3-2B
(a) Cash received from revenue …………………………………… $140,000
Cash paid for expenses ………………………………………….. (110,000)
EXERCISE 3-3B
1. Prepaid expense.
2. Accrued expense.
EXERCISE 3-3B (Continued)
7. Accrued revenue.
8. Prepaid expense.
EXERCISE 3-4B
1. Interest Expense ……………………………………………. 900
Interest Payable
($30,000 X 12% X 3/12) …………………………... 900
4. Insurance Expense ………………………………………… 1,050
Prepaid Insurance
($2,520 X 5/12) ………………………………………. 1,050
EXERCISE 3-5B
Item
(a)
Type of Adjustment
(b)
Accounts before Adjustment
1.
Prepaid Expense
Assets Overstated
Expenses Understated
2.
Accrued Revenue
Assets Understated
Revenues Understated
3.
Unearned Revenue
Liabilities Overstated
Revenues Understated
4.
Accrued Expense
Expenses Understated
Liabilities Understated
5.
Prepaid Expense
Assets Overstated
Expenses Understated
EXERCISE 3-6B
1. Mar. 31 Depreciation Expense ($300 X 3) …………….. 900
Accumulated Depreciation—
Equipment …………………………..……… 900
2. 31 Unearned Rent Revenue ………………………… 10,800
Rent Revenue …………………………………. 10,800
EXERCISE 3-7B
1. Jan. 31 Accounts Receivable …………………………….. 1,280
Service Revenue …………………………….. 1,280
2. 31 Utilities Expense ……………………………………. 365
Utilities Payable …………………………..…. 365
EXERCISE 3-8B
1. Oct. 31 Supplies Expense ………………………………….. 1,600
Supplies ($2,500 – $900) ………………….. 1,600
2. 31 Insurance Expense ………………………………… 75
Prepaid Insurance …………………………... 75
EXERCISE 3-8B (Continued)
6. Oct. 31 Interest Expense ………………………………. 25
Interest Payable ………………………… 25
EXERCISE 3-9B
ACE CO.
Income Statement
For the Month Ended July 31, 2017
Revenues
Service revenue ($7,700 + $650) ……………………….. $8,350
Expenses
Salaries and wages expense ($2,500 + $350) …….. $2,850
Supplies expense ($1,700 – $250) …………………….. 1,450
EXERCISE 3-10B
Answer Computation
(a) Supplies balance = $500 Supplies expense $1,100
Add: Supplies (1/31) 900
Less: Supplies purchased (1,500)
Supplies (1/1) $ 500
EXERCISE 3-10B (Continued)
(c) Salaries and wages
payable = $1,850 Cash paid $4,500
Salaries payable (1/31/17) 1,000
5,500
EXERCISE 3-11B
(a) July 10 Supplies ……………………………………………….. 1,500
Cash ………………………………………………. 1,500
14 Cash …………………………………………………….. 3,300
Service Revenue …………………………….. 3,300
(b) July 31 Supplies Expense ………………………………….. 1,900
Supplies …………………………………………. 1,900
31 Accounts Receivable …………………………….. 900
Service Revenue …………………………….. 900
EXERCISE 3-12B
Aug. 31 Accounts Receivable ………………………………. 1,500
Service Revenue ……………………………… 1,500
31 Supplies Expense …………………………………… 1,900
Supplies ………………………………………….. 1,900
31 Insurance Expense …………………………………. 1,400
Prepaid Insurance ……………………………. 1,400
EXERCISE 3-13B
RAMIREZ COMPANY
Income Statement
For the Year Ended August 31, 2017
Revenues
Service revenue ………………………………………………. $39,500
Rent revenue …………………………………………………… 13,600
Total revenues ………………………………………….. $53,100
Expenses
Salaries and wages expense ……………………………. 17,200
Rent expense ………………………………………………….. 14,000
Supplies expense ……………………………………………. 1,900
EXERCISE 3-13B (Continued)
RAMIREZ COMPANY
Owner’s Equity Statement
For the Year Ended August 31, 2017
Owner’s Capital, September 1, 2016 ………………………………………. $14,700
RAMIREZ COMPANY
Balance Sheet
August 31, 2017
Assets
Cash ……………………………………………………………………… $ 7,700
Accounts receivable ………………………………………………. 13,500
Supplies ………………………………………………………………… 900
Liabilities and Owner’s Equity
Liabilities
Accounts payable ……………………………………………. $ 2,200
EXERCISE 3-14B
(a) 1. Cash …………………………………………………………. 17,000
Accounts Receivable ………………………….. 17,000
4. Accounts Receivable …………………………………. 119,000
Service Revenue
($161,000 – $22,000 – $20,000) …………. 119,000
5. Cash …………………………………………………………. 100,000
Accounts Receivable
($119,000 – $19,000) …………………………. 100,000
*EXERCISE 3-15B
1. Prepaid Insurance …………………………………………… 2,100
Insurance Expense ($3,600 X 7/12) …………….. 2,100
*EXERCISE 3-16B
(a) Jan. 2 Insurance Expense ……………………………….. 3,000
Cash ……………………………………………… 3,000
Insurance Expense
Supplies Expense
1/2 3,000
1/10 2,100
(b) Jan. 31 Prepaid Insurance ($250 X 11 months) …… 2,750
Insurance Expense ………………………… 2,750
Insurance Expense
Supplies Expense
Service Revenue
1/2 3,000
1/31 2,750
1/10 2,100
1/31 900
1/31 3,000
1/15 7,500
Bal. 250
Bal. 1,200
Bal. 4,500
Prepaid Insurance
Supplies
Unearned Service
Revenue
1/31 2,750
1/31 900
1/31 3,000
(c) Insurance expense …………………………………………….. $ 250 (debit)
Supplies expense ………………………………………………. 1,200 (debit)
*EXERCISE 3-17B
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
*EXERCISE 3-18B
1. Incorrect. The historical cost principle requires that assets be recorded
and reported at their cost.
*EXERCISE 3-19B
1. Historical cost principle
2. Consistency
3. Economic entity assumption
4. Full disclosure principle
*EXERCISE 3-20B
(a) The primary objective of financial reporting is to provide information
useful for decision making. Since Unruh’s shares appear to be actively
traded, investors must be capable of using the information made
available by Unruh to make decisions about the company.
*EXERCISE 3-21
(a) Accounting information is the compilation and presentation of financial
information for a company. It provides information in the form of finan-
cial statements and additional disclosures that is useful for decision
making.
(b) Kim is correct in her understanding that the low success rate for new
biotech products will be a cause of concern for investors. Her
suggestion that detailed scientific findings be reported to prospective
investors might offset some of their concerns but it probably won’t
SOLUTIONS TO PROBLEMS—SET C
PROBLEM 3-1C
(a)
J4
Date
Account Titles
Ref.
Debit
Credit
2017
May 31
Supplies Expense ………………………….
Supplies ………………………………..
631
126
500
500
31
Insurance Expense …………………………
($4,800 ÷ 24 months) …………..
722
130
200
200
31
Unearned Service Revenue …………….
Service Revenue
($3,000 – $1,000) …………………
209
400
2,000
2,000
31
Salaries and Wages Expense ………….
Salaries and Wages Payable
[(3/5 X $700) X 2 employees] …
726
212
840
840
(b)
Cash No. 101
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
Balance
7,700
PROBLEM 3-1C (Continued)
Accounts Receivable No. 112
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
31
Balance
Adjusting
J4
1,000
4,000
5,000
Supplies No. 126
Date
Ref.
Debit
Credit
Prepaid Insurance No. 130
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
31
Balance
Adjusting
J4
200
4,800
4,600
Equipment No. 149
Date
Explanation
Ref.
Debit
Credit
Balance
Accumulated Depreciation—Equipment No. 150
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
Adjusting
J4
160
160
Accounts Payable No. 201
Date
Explanation
Ref.
Debit
Credit
Balance
PROBLEM 3-1C (Continued)
Unearned Service Revenue No. 209
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
31
Balance
Adjusting
J4
2,000
3,000
1,000
Service Revenue No. 400
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
31
31
Balance
Adjusting
Adjusting
J4
J4
2,000
1,000
6,000
8,000
9,000
Date
Ref.
Debit
Credit
PROBLEM 3-1C (Continued)
Depreciation Expense No. 717
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
Adjusting
J4
160
160
Date
Explanation
Ref.
Debit
Credit
Balance
2017
Date
Explanation
Ref.
Debit
Credit
Balance
Rent Expense No. 729
Date
Explanation
Ref.
Debit
Credit
Balance
2017
May 31
Balance
1,000
Date
Explanation
Ref.
Debit
Credit
2017
PROBLEM 3-1C (Continued)
(c) ALTOM CONSULTING
Adjusted Trial Balance
May 31, 2017
Debit
Credit
Cash …………………………………………………………..
Accounts Receivable …………………………………..
Supplies ……………………………………………………..
Prepaid Insurance ……………………………………….
Equipment …………………………………………………..
$ 7,700
5,000
1,000
4,600
9,600