FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-37B
(10-20 min.)
Solution:
DATE DEBIT CREDIT
Dec. 31 Service Revenue 32,300
Other Revenue 1,000
Dec. 31, 2016
8,900
2,100
Prepare the closing entries from the following selected accounts from the records of
Hector, Inc., at December 31, 2016. How much net income did Hector earn during
2016? Prepare a T-account for Retained Earnings to show the December 31, 2016,
balance of Retained Earnings.
Closing Entries
Journal
ACCOUNT TITLES
Retained Earnings
Dec. 31, 2015
Chapter 3: Accrual Accounting and Income Page 41 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-38B
(15-25 min.)
Requirement
Solution:
DATE DEBIT CREDIT
Dec. 31 Unearned Service Revenue 6,300
Service Revenue ($19,700 − $13,400) 6,300
Journal
ACCOUNT TITLES
1. Journalize the adjusting and closing entries of Emerson Production Company at
December 31. There was only one adjustment to Service Revenue.
Adjusting Entries
Chapter 3: Accrual Accounting and Income Page 42 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-39B
(20-30 min.)
Requirements
Solution:
Req. 1
Current assets:
Cash 13,690$
Prepaid rent ($1,500 − $500) 1,000
Total current assets 14,690
1. Use the data in the partial worksheet to prepare Emerson Production Company’s
classified balance sheet at December 31 of the current year. Use the report format. First
you must compute the adjusted balance for several of the balance-sheet accounts.
2. Compute Emerson Production Company’s net working capital, current ratio, and debt
ratio at December 31. A year ago, the net working capital was $5,790, the current ratio
was 1.61, and the debt ratio was 0.23. Indicate whether the company’s ability to pay its
debts—both current and total—improved or deteriorated during the current year.
Emerson Production Company
Balance Sheet
December 31, 2016
ASSETS
Chapter 3: Accrual Accounting and Income Page 43 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Current Prior
Year Year
Net working
Total current assets −
14,690 −
Chapter 3: Accrual Accounting and Income Page 44 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-40B
(30 min.)
Solution:
a.
Determine whether each transaction improved or hurt the business’s current
ratio and debt ratio.
Current
ratio
Debt
ratio
=
0.62
=
$40
$30 + $8
=
1.05
=
$40 + $8
$70 + $8
Chapter 3: Accrual Accounting and Income Page 45 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
E3-41
(3 hours)
Requirements
Solution:
Aug. 2 10,000 Aug. 2 600 Aug. 18 1,900 Aug. 28 1,900
9 1,400 3 2,700 Bal. –
Cash
1. Journalize the transactions of August 21 through 31.
2. Post the August 21 to 31 transactions to the T-accounts, keying all items by date.
3. Prepare an Excel spreadsheet showing the unadjusted trial balance at August 31.
4. At August 31, Miracle gathers the following information for the adjusting entries:
a. Accrued service revenue, $1,800
b. Earned $900 of the service revenue collected in advance on August 21
c. Supplies on hand, $400
d. Depreciation expense equipment, $45; furniture, $75
e. Accrued expense for secretary’s salary, $600
Refer to the Excel spreadsheet you prepared in requirement 3. Make these adjustments in the
adjustments columns and complete the adjusted trial balance at August 31.
5. Journalize and post the adjusting entries. Denote each adjusting amount as Adj and an
account balance as Bal.
6. Prepare the single step income statement and statement of retained earnings of Barbara
Miracle, Certified Public Accountant, P.C., for the month ended August 31 and the classified
balance sheet at that date.
7. Journalize and post the closing entries at August 31. Denote each closing amount as Clo
and an account balance as Bal.
8. Compute the net working capital, current ratio, and the debt ratio of Barbara Miracle,
Certified Public Accountant, P.C., and evaluate these values as indicative of a strong or weak
financial position.
Reqs. 2, 5, and 7
Accounts Receivable
Chapter 3: Accrual Accounting and Income Page 46 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Aug. 9 1,400
Aug. 31 1,400 Clo. 1,400 18 1,900
Supplies Expense
Salary Expense
Dividends
Service Revenue
Rent Expense
Utilities Expense
Furniture
Accumulated Depreciation – Equipment
Common Stock
Retained Earnings
Accounts Payable
Salary Payable
Unearned Service Revenue
Chapter 3: Accrual Accounting and Income Page 47 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 1
August 2 through 18 entries are repeated from Solution to E 2-39.
DATE DEBIT CREDIT
Aug. 2
Cash 10,000
Common Stock 10,000
12 Utilities Expense 300
Cash 300
18 Accounts Receivable 1,900
Service Revenue 1,900
21 Cash 2,700
Unearned Service Revenue 2,700
21 No entry; no transaction yet
26 Accounts Payable 800
Cash 800
28 Cash 1,900
Accounts Receivable 1,900
31 Dividends 1,400
Cash 1,400
Journal
ACCOUNT TITLES
Chapter 3: Accrual Accounting and Income Page 48 of 105
Cash 600
Cash 2,700
Accounts Payable 4,500
Accounts Payable 800
Service Revenue 1,400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Reqs. 3 and 4
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 10,200 10,200
Accounts receivable —(a) 1,800 1,800
ADJUSTED TRIAL
BALANCE
Barbara Miracle, Certified Public Accountant, P.C.
Adjusted Trial Balance
August 31, 2016
TRIAL BALANCE
ADJUSTMENTS
Chapter 3: Accrual Accounting and Income Page 49 of 105
Accounts payable 4,500 4,500
Salary payable —(e) 600 600
Unearned service revenue 2,700 (b) 900 1,800
Common stock 10,000 10,000
Retained earnings — —
Service revenue 3,300 (a)1,800 6,000
Rent expense 600 600
Utilities expense 300 300
Salary expense (e) 600 600
Supplies expense (c) 400 400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 5
DATE DEBIT CREDIT
Adjusting Entries
ACCOUNT TITLES
Journal
Chapter 3: Accrual Accounting and Income Page 50 of 105
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 6
Revenues:
Service revenue $6,000
Expenses:
Rent expense $600
Salary expense 600
Retained earnings, August 1, 2016 0$
Add: Net income 3,980
Less: Dividends declared (1,400)
Current assets: Current liabilities:
Cash 10,200$ Accounts payable $ 4,500
Total current assets 12,400 Total current liabilities 6,900
Plant assets:
Less: accum. depr. (45) 2,655 Common stock 10,000
Less: accum. depr. (75) 4,425
Total assets $ 19,480 stockholders’ equity $ 19,480
Balance Sheet
ASSETS
LIABILITIES
August 31, 2016
Statement of Retained Earnings
Month Ended August 31, 2016
Barbara Miracle, Certified Public Accountant, P.C
Barbara Miracle, Certified Public Accountant, P.C.
Income Statement
Month Ended August 31, 2016
Barbara Miracle, Certified Public Accountant, P.C.
Chapter 3: Accrual Accounting and Income Page 51 of 105
Supplies expense 400
Utilities expense 300
Total expenses 2,020
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 7
DATE DEBIT CREDIT
Aug. 31 Service Revenue 6,000
Retained Earnings 6,000
31 Retained Earnings 2,020
Req. 8
Total current assets –
= $12,400 –
current liabilities $ 6,900
Total current assets $ 12,400
=
Total current
=
Net working =
capital
ACCOUNT TITLES
Journal
=
Adjusting Entries
$ 5,500
Chapter 3: Accrual Accounting and Income Page 52 of 105
Rent Expense 600
Utilities Expense 300
Salary Expense 600
Supplies Expense 400
Dividends 1,400
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Quiz
Q3-42 a
Q3-43 d
Chapter 3: Accrual Accounting and Income Page 53 of 105
Q3-44 b
Q3-45 a
Q3-46 d
Q3-47 d
Q3-48 c
Q3-49 d
Q3-52 b
Q3-53 b
Q3-54 d
Q3-55 d
Q3-56 b
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-59A
(20-30 min.)
Requirements
Solution:
Req. 1 & 2
Date Cash Basis Accrual Basis
Oct. 1
Expense (3,900) 0$
4 Expense (4,500) 0
5 Revenue 1,000 1,000
Req. 3
Masters Consulting
Amount of Revenue (Expense) for October
The accrual-basis measure of net income is preferable because it accounts for
revenues and expenses when they occur, not when they are received or paid in cash.
1. Show how each transaction would be handled (in terms of recognizing revenues
and expenses) using the cash basis and the accrual basis.
2. Compute October income (loss) before tax under each accounting method.
3. Indicate which measure of net income or net loss is preferable. Use the
transactions on October 11 and October 24 to explain.
Chapter 3: Accrual Accounting and Income Page 54 of 105
8 Expense (500) (500)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-60A
(10-20 min.)
Solution:
DATE DEBIT CREDIT
Dec. 31 a. Insurance Expense 4,700*
Prepaid Insurance 4,700
To record insurance expense.
Journal
ACCOUNT TITLES
Journalize the adjusting entry needed on December 31, end of the current
accounting period, for each of the following independent cases affecting Woolton
Corporation Include an explanation for each entry.
Chapter 3: Accrual Accounting and Income Page 55 of 105
Interest Revenue 500
To accrue interest revenue.
Supplies 7,000
To record supplies expense.
($11,400 × 60%)
Service Revenue 6,840
To record revenue collected in advance.
To record depreciation expense.
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-61A
(45-60 min.)
Requirements
Solution:
Req. 1
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 8,300 8,300
Accounts receivable 1,400 (a) 3,960 5,360
Prepaid rent 3,000 (b) 1,000* 2,000
Spateness, Inc.
Adjusted Trial Balance
December 31, 2016
ADJUSTED TRIAL
BALANCE
TRIAL BALANCE
ADJUSTMENTS
1. Prepare the adjusted trial balance of Spateness, Inc., at December 31, 2016.
2. Prepare the single step monthly income statement, the statement of retained earnings, and
the classified balance sheet.
Chapter 3: Accrual Accounting and Income Page 56 of 105
Supplies 2,200 (c) 1,880 320
Salary payable (e)12,000*** 12,000
Common stock 13,000 13,000
Retained earnings 29,070 29,070
Service revenue 27,400 (a) 3,960 31,360
Salary expense 3,000 (e)12,000*** 15,000
Rent expense (b) 1,000* 1,000
Utilities expense 470 470
Supplies expense (c) 1,880 ______ 1,880
* $3,000 ÷ 3 = $1,000
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Revenues: $31,360
Service revenue
Expenses:
Salary expense $15,000
Retained earnings, December 1, 2016 29,070$
Add: Net income 12,110
Less: Dividends declared (3,900)
Current assets: Current liabilities:
Cash $8,300 Accounts payable $3,600
Accounts receivable 5,360 Salary payable 12,000
Prepaid rent 2,000 Total current liabilities 15,600
Furniture 54,000$
Less: Accum. Common stock 13,000
Balance Sheet
Spateness, Inc.
Income Statement
Month Ended December 31, 2016
LIABILITIES
ASSETS
31-Dec-16
Spateness, Inc.
Statement of Retained Earnings
Month Ended December 31, 2016
Spateness, Inc.
Chapter 3: Accrual Accounting and Income Page 57 of 105
Supplies expense 1,880
Rent expense 1,000
Depreciation expense, furniture 900
Utilities expense 470
Total expenses 19,250
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-62A
(10-20 min.)
Requirements
Solution:
Req. 1
DEBIT CREDIT
June 30 Accounts Receivable ($6,810 − $6,000) 810
Rental Revenue 810
ACCOUNT TITLES AND EXPLANATION
Journal
1. Make the adjusting entries that account for the differences between the two trial
balances.
2. Compute Lemontree Rental’s total assets, total liabilities, net income, and total equity.
Chapter 3: Accrual Accounting and Income Page 58 of 105
Accumulated Depreciation
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
Req. 2
Total assets = 74,710$ ($8,000 + $6,810 + $300 + $4,500 +
$700 + $900 + $63,000 − $9,500)
Chapter 3: Accrual Accounting and Income Page 59 of 105
Total liabilities = 8,720$ ($6,500 + $840 + $1,380)
FINANCIAL ACCOUNTING – Eleventh Edition Solutions Manual
P3-63A
(20-30 min.)
Requirements
Solution:
Req. 1
Revenues:
Service revenue 93,200$
Expenses:
Salary expense 40,500$
Retained earnings, October 31, 2015 2,900$
Add: Net income 24,200
Less: Dividends declared (4,000)
Nicholl Corporation
Income Statement
Year Ended October 31, 2016
Nicholl Corporation
Statement of Retained Earnings
Year Ended October 31, 2016
1. Prepare Nicholl Corporation’s 2016 single step income statement, statement of
retained earnings, and balance sheet. List expenses (except for income tax) in
decreasing order on the income statement, and show total liabilities on the balance
sheet. Draw arrows linking the three financial statements.
2. Nicholl’s lenders require that the company maintain a debt ratio no higher than
0.50. Compute Nicholl’s debt ratio at October 31, 2016, to determine whether the
company is in compliance with this debt restriction. If not, suggest a way that Nicholl
could have avoided this difficult situation
Chapter 3: Accrual Accounting and Income Page 60 of 105
Supplies expense 2,500
Depreciation expense, equipment 1,700 61,500
Income before tax 31,700
Income tax expense 7,500