Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 1 (concluded)
Sep. 1, 2018
Prepaid Rent
2,400
Cash
2,400
(Pay cash for one-year rental policy)
Sep. 21, 2018
Cash
Service Revenue (Clinic)
(Receive cash for rock climbing clinic)
Oct. 17, 2018
Cash
Service Revenue (Clinic)
(Receive cash for orienteering clinic)
Dec. 8, 2018
Miscellaneous Expense
1,200
Cash
1,200
(Pay cash for race permit)
Dec. 12, 2018
Supplies (Racing)
2,800
Accounts Payable
2,800
Dec. 15, 2018
Cash
(Receive cash for adventure race)
Dec. 16, 2018
Salaries Expense
2,000
(Pay cash for salary)
Dec. 31, 2018
Dividend
4,000
(Pay cash for dividend)
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 2
Debit
Credit
Depreciation Expense
8,000
Accumulated Depreciation
8,000
(Adjust accumulated depreciation)
Insurance Expense
2,400
Prepaid Insurance
2,400
(Adjust prepaid insurance)
Rent Expense
Prepaid Rent
(Adjust prepaid rent)
Supplies (Office)
1,500
(Adjust office supplies)
Dec. 31, 2018
Interest Expense
Interest Payable
(Adjust interest payable)
Supplies Expense (Racing)
Supplies (Racing)
2,600
Income Tax Expense
Income Tax Payable
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 3 (Note: adjusting entries in italics)
8,000
2,400
1,500
Interest Expense
750
14,000
2,600
Prepaid Insurance
4,800
2,400
2,400
1,600
2,800
2,600
200
300
4,000
8,000
Legal Fees Expense
1,500
1,500
4,000
Salaries Expense
2,000
700
1,000
Prepaid Rent
2,400
800
Service Revenue
(Racing)
Dividends
4,000
2,000
Supplies (Office)
1,800
1,500
800
Service Revenue
(Clinic)
52,900
Cash
10,000
10,500
13,200
17,900
4,800
2,400
1,200
2,000
Additional Perspective 3-1 (continued)
Requirement 4
Great Adventures, Inc.
Adjusted Trial Balance
December 31, 2018
Accounts
Debit
Credit
Cash
$ 64,200
Prepaid Insurance
2,400
Prepaid Rent
Supplies (Office)
Supplies (Racing)
Equipment (Bikes)
12,000
Equipment (Kayaks)
28,000
Accumulated Depreciation
$ 8,000
Accounts Payable
2,800
Income Tax Payable
14,000
Interest Payable
750
Notes Payable
30,000
Common Stock
20,000
Dividends
4,000
Service Revenue (Clinic)
52,900
Service Revenue (Racing)
20,000
Advertising Expense
Depreciation Expense
Income Tax Expense
Insurance Expense
Interest Expense
Legal Fees Expense
Miscellaneous Expense
Rent Expense
Salaries Expense
Supplies Expense (Office)
Supplies Expense (Racing)
$148,450
$148,450
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 5
Great Adventures, Inc.
Income Statement
For the period ended December 31, 2018
Revenues:
Service revenue (clinic)
$52,900
Expenses:
Advertising expense
1,000
Depreciation expense
8,000
Income tax expense
14,000
Insurance expense
2,400
Interest expense
Legal fees expense
1,500
Miscellaneous expense
1,200
Rent expense
Salaries expense
2,000
Supplies expense (office)
1,500
Supplies expense (racing)
2,600
Net income
Great Adventures, Inc.
Statement of Stockholders’ Equity
For the period ended December 31, 2018
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Balance at July 1
$ 0
$ 0
$ 0
Issuance of common stock
20,000
20,000
Add: Net income for 2018
37,150
37,150
Less: Dividends
Balance at December 31
$20,000
$33,150
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 5 (concluded)
Great Adventures, Inc.
Balance Sheet
December 31, 2018
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 64,200
Accounts payable
$ 2,800
Prepaid insurance
Interest payable
Prepaid rent
Income tax payable
Supplies (office)
Supplies (racing)
Notes payable
30,000
68,700
Long-term assets:
Stockholders’ Equity
Equipment (bikes)
12,000
Common stock
20,000
Equipment (kayaks)
28,000
Retained earnings
33,150
Accumulated depr.
53,150
Total assets
$100,700
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 6
Dec. 31, 2018
Debit
Credit
Service Revenue (Clinic)
52,900
Service Revenue (Racing)
20,000
Dec. 31, 2018
Retained Earnings
35,750
Advertising Expense
1,000
Depreciation Expense
8,000
Income Tax Expense
14,000
Insurance Expense
2,400
Interest Expense
Legal Fees Expense
1,500
Miscellaneous Expense
1,200
Rent Expense
Salaries Expense
2,000
Supplies Expense (Office)
1,500
Supplies Expense (Racing)
2,600
Dec. 31, 2018
Retained Earnings
4,000
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 7 (Note: closing entries in italics)
Prepaid Insurance
4,800
2,400
2,400
Equipment (Bikes)
12,000
12,000
2,800
4,000
0
Equipment (Kayaks)
28,000
28,000
2,800
2,600
200
Accum. Depr.
8,000
8,000
64,200
Common Stock
20,000
30,000
750
14,000
10,000
Legal Fees Expense
1,500
1,500
0
Advertising Expense
Salaries Expense
2,000
2,000
0
Rent Expense
800
0
0
Notes Payable
30,000
Prepaid Rent
2,400
800
1,600
Service Revenue
(Racing)
20,000
20,000
0
Dividends
4,000
4,000
0
Supplies (Office)
1,800
1,500
300
Interest Payable
750
Depr. Expense
8,000
8,000
0
Insurance Expense
2,400
2,400
0
Supplies Expense
(Office)
1,500
1,500
0
Supplies Expense
(Racing)
2,600
2,600
0
Interest Expense
750
0
14,000
0
33,150
1,200
Income Tax Payable
14,000
Income Tax Expense
Service Revenue
(Clinic)
52,900
2,000
2,300
7,000
Retained Earnings
Miscellaneous Expense
Cash
10,000
10,000
2,000
2,300
4,800
1,500
300
12,000
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-1 (concluded)
Requirement 8
Great Adventures, Inc.
Post-closing Trial Balance
December 31, 2018
Accounts
Debit
Credit
Cash
$ 64,200
Prepaid Insurance
2,400
Prepaid Rent
Supplies (Office)
Supplies (Racing)
Equipment (Bikes)
12,000
Equipment (Kayaks)
28,000
Accumulated Depreciation
$ 8,000
Accounts Payable
2,800
Income Tax Payable
14,000
Interest Payable
750
Notes Payable
30,000
Common Stock
Retained Earnings
33,150
$108,700
$108,700
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-2
Requirement 1
Current assets equal $890,513 thousand. Current assets include cash and cash
equivalents, short-term investments, merchandise inventory, accounts receivable,
Requirement 2
Current liabilities equal $459,093 thousand. Current liabilities include accounts
payable, accrued compensation and payroll taxes, accrued rent, accrued income and
Requirement 3
Requirement 4
Requirement 6
The change in retained earnings typically represents net income for the year less
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-3
Requirement 1
Current assets equal $324,589 thousand. Current assets include cash and cash
Requirement 2
Current liabilities equal $122,271 thousand. Current liabilities include accounts
Requirement 3
Requirement 4
Requirement 6
The change in retained earnings represents net income for the year less dividends. If
the change in retained earnings is -$14,040 thousand and net income equals $162,564
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-4
Requirement 1
For American Eagle, the ratio of current assets to total assets is 0.52 (= $890,513 /
$1,696,908). For Buckle, the ratio of current assets to total assets is 0.60 (= $324,589 /
Requirement 2
For American Eagle, the ratio of current liabilities to total liabilities is 0.82 (=
$459,093 / $557,162). For Buckle, the ratio of current liabilities to total liabilities is
Requirement 3
For American Eagle, the dividend payout ratio is 1.24 (= $99,585 / $80,322). For
Buckle, the dividend payout ratio is 1.09 (= $176,604 / $162,564). A higher ratio
indicates that a higher portion of the company’s net income is paid in dividends. More
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-5
What is the issue?
By reporting the $80,000 as Service Revenue instead of Deferred Revenue, before-tax
profit will increase from $280,000 to $360,000. This adjustment would make it appear
Who are the parties affected?
As the assistant controller (accountant), you should understand that your
What factors should you consider in making your decision?
Because you are new to the position, you might not be sure that it’s right for you to
question any decision of the company’s president. You have just been assigned and
don’t want to lose your job. If you do make the adjustment, then the company’s
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-6
(Note to instructor: Answers are based on McDonald’s December 2014 annual report,
and dollar amounts are in millions.)
Requirement 1
Requirement 2
Requirement 3
Current assets include cash and equivalents, accounts and notes receivable,
Requirement 4
Current liabilities include accounts payable, income taxes, other taxes, accrued
Requirement 5
Chapter 3 – The Accounting Cycle: End of the Period
Additional Perspective 3-7
Requirement 1
Prepaid revenues occur when cash is received before the related revenues are reported.
Prepaid expenses occur when cash (or an obligation to pay cash) is paid before the
related expenses and liabilities are reported.
Requirement 2
The adjusting entry for prepaid expenses includes a debit to an expense and a credit to
an asset. The adjusting entry for Deferred revenue includes a debit to Deferred
Requirement 3
The adjusting entry for accrued expenses includes a debit to an expense and a credit to
a liability. The adjusting entry for accrued revenues includes a debit to an asset and a