Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
Chapter 3
Adjusting Accounts for
Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the accrual
basis reports revenues when they are earned. The cash basis reports expenses when
cash is paid while the accrual basis reports expenses when they are incurred and
matched with revenues they generated.
2. The accrual basis of accounting generally provides a better indication of company
performance and financial condition than does the cash basis. Also, the accrual basis
increases the comparability of financial statements from one period to the next. Thus,
business decision makers generally prefer the accrual basis.
3. Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is
reported as an asset on the balance sheet.
5. The Accumulated Depreciation contra asset account is used for depreciation. It
provides financial statement users with additional information about the relative age of
the assets. Without the contra account information, the reader would not be able to tell
whether the assets are new or in need of replacement.
9. Yes, an error would have occurred because a post-closing trial balance should only
include permanent accounts, and Depreciation Expense is a temporary account that
should have been closed. If an expense appears on the post-closing trial balance, the
amounts of net income, total assets, and total equity are all in error (overstated).
10. A company’s operating cycle is the normal time between paying cash for merchandise
inventory or for employee salaries in providing customer services and the receipt of
cash from customers in exchange for those products or services.
11. Assets on a typical classified balance sheet include current assets and noncurrent
assets—where noncurrent assets usually include long-term investments, plant assets,
and intangible assets. Liabilities are typically classified as current and noncurrent.
Note that the terms short-term and long-term are sometimes used for current and
noncurrent.
15. The five main categories of noncurrent assets on Apple’s balance sheet are: Long-term
marketable securities; Property, plant and equipment, net; Goodwill; Acquired
intangible assets, net; and Other non-current assets.
16. Google’s current liability accounts: Accounts payable; Accrued compensation and
benefits; Accrued expenses and other current liabilities; Accrued revenue share;
Deferred revenue; and Income taxes payable, net.
17. Google reports $42,383 million for property and equipment. For its adjusting entry, it
would need to record (debit) Depreciation Expense and record (credit) Accumulated
Depreciation—Property and Equipment. The account credited is a contra account to the
Property and Equipment account.
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
QUICK STUDIES
Quick Study 3-1 (10 minutes)
1. f Time period assumption 4. c Accrual basis accounting
Quick Study 3-2 (10 minutes)
Cash Accounting
Revenues (cash receipts) ……………………………………………… $37,000
Expenses (cash payments: $20,250 + $6,750) ………………… 27,000
Net income ………………………………………………………………….. $10,000
Accrual Accounting
Quick Study 3-3 (10 minutes)
a. UR Unearned revenue d. PE Prepaid expenses
b. AE Accrued expenses e. PE Prepaid expenses (Depreciation)
c. AR Accrued revenue
Quick Study 3-4 (15 minutes)
Adjusting entry
Debit
Credit
1.
Accrue salaries expense.
e
c
Quick Study 3-5 (15 minutes)
a. Step 1: Prepaid Insurance equals $4,700
Step 2: Prepaid Insurance should equal $900 (the unexpired part)
Step 3: Adjusting entry to get from Step 1 to Step 2
Insurance Expense …………………………………………………..
3,800
Prepaid Insurance …………………………………………………
3,800
Record insurance coverage that expired ($4,700 – $900).
Insurance Expense …………………………………………………..
1,040
Prepaid Insurance …………………………………………………
1,040
c. Step 1: Prepaid Rent equals $24,000
Step 2: Prepaid Rent should equal $20,000 (the unexpired part)*
Step 3: Adjusting entry to get from Step 1 to Step 2
Rent Expense …………………………………………………………..
4,000
Prepaid Rent …………………………………………………………
4,000
Quick Study 3-6 (15 minutes)
a. Step 1: Supplies equal $300 ($300 beginning + $0 purchased)
Supplies Expense …………………………………………………….
Supplies ……………………………………………………………….
Record supplies used
b. Step 1: Supplies equal $2,900 ($800 beginning + $2,100 purchased)
Step 2: Supplies should equal $650 (what’s left)
Step 3: Adjusting entry to get from Step 1 to Step 2 *
Supplies Expense …………………………………………………….
2,250
Supplies ……………………………………………………………….
2,250
Record supplies used
*$800 + $2,100 purchased – Supplies used = $650
c. Step 1: Supplies equal $13,400 ($4,000 beginning + $9,400 purchased)
Step 2: Supplies should equal $2,660 (what’s left)
Step 3: Adjusting entry to get from Step 1 to Step 2 *
Supplies Expense …………………………………………………….
10,740
Supplies ……………………………………………………………….
10,740
Record supplies used
*$4,000 + $9,400 purchased – Supplies used = $2,660
Quick Study 3-7 (10 minutes)
Quick Study 3-8 (15 minutes)
a. Step 1: Accumulated Depreciation equals $13,500
Step 2: Accumulated Depreciation should equal $28,100; adding current
period depreciation of $14,600*
Depreciation Expense ………………………………………………
b. Step 1: Accumulated Depreciation equals $0
Step 2: Accumulated Depreciation should equal $8,800; adding current
period depreciation of $8,800*
Step 3: Adjusting entry to get from Step 1 to Step 2
Depreciation Expense—Truck ………………………………….
8,800
Accumulated Depreciation—Truck ………………………
8,800
Record depreciation expense for the period
*($44,000 – $0) / 5 years
c. Step 1: Accumulated Depreciation equals $0
Depreciation Expense—Equipment …………………………..
4,000
Accumulated Depreciation—Equipment ………………
4,000
Quick Study 3-9 (10 minutes)
a. Depreciation Expense—Equipment ………………………. 3,600
Accumulated Depreciation—Equipment …………. 3,600
Record depreciation expense for the year.
($20,000 – $2,000) / 5 years = $3,600
Quick Study 3-10 (15 minutes)
a. Step 1: Unearned Rent Revenue equals $6,000
Step 2: Unearned Rent Revenue should equal $5,000; adjusted by current
period earned revenue of $1,000*
Unearned Rent Revenue ………………………………………….
Rent Revenue ………………………………………………………
Record earned portion of rent received in advance.
b. Step 1: Unearned Services Revenue equals $300
Step 2: Unearned Services Revenue should equal $75; adjusted by current
period earned revenue of $225*
Step 3: Adjusting entry to get from Step 1 to Step 2
Unearned Services Revenue ……………………………………
225
Services Revenue ………………………………………………..
225
Record earned portion of revenue received in advance.
*$75 x 3 treatments = Services revenue
Unearned Rent Revenue ………………………………………….
Rent Revenue ………………………………………………………
Record earned portion of rent received in advance.
Quick Study 3-11 (15 minutes)
a. Unearned Revenue ……………………………………………….. 7,500
Legal Revenue ………………………………………………. 7,500
Recognize legal revenue earned (10,000 x 3/4).
Quick Study 3-12 (15 minutes)
a. Step 1: Salaries Payable equals $0
Step 2: Salaries Payable should equal $15,500 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
Salaries Expense ……………………………………………………..
15,500
Salaries Payable …………………………………………………..
15,500
Record employee salaries earned but not yet paid.
Interest Expense ………………………………………………………
250
Interest Payable ……………………………………………………
250
Record interest incurred but not yet paid.
c. Step 1: Interest Payable equals $0
Step 2: Interest Payable should equal $875 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
Interest Expense ………………………………………………………
875
Interest Payable ……………………………………………………
875
Record interest incurred but not yet paid.
Quick Study 3-13 (10 minutes)
Quick Study 3-14 (15 minutes)
a. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $19,000 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
Accounts Receivable ……………………………………………….
19,000
Services Revenue ………………………………………………..
19,000
Record services revenue earned but not yet received.
Interest Revenue ………………………………………………….
Record interest earned but not yet received.
c. Step 1: Accounts Receivable equals $0
Step 2: Accounts Receivable should equal $1,300 (not yet recorded)
Step 3: Adjusting entry to get from Step 1 to Step 2
Accounts Receivable ……………………………………………….
1,300
Services Revenue ………………………………………………..
1,300
Record services revenue earned but not yet received.
Quick Study 3-15 (15 minutes)
Accounts Debited and Credited
Financial Statement
a.
Debit
Unearned Revenue
Balance Sheet
Credit
Revenue
Income Statement
b.
Debit
Wages Expense
Income Statement
Credit
Wages Payable
Balance Sheet
c.
Debit
Accounts Receivable
Balance Sheet
Credit
Revenue
Income Statement
d.
Debit
Insurance Expense
Income Statement
Credit
Balance Sheet
e.
Debit
Depreciation Expense
Income Statement
Credit
Accumulated Depreciation
Balance Sheet
Quick Study 3-16 (15 minutes)
The answer is b.
Explanation:
Assets
=
Liabilities
+
Equity
Equity explanation
1. Forgot to
reduce
$3,200 in
Prepaid
Overstated
$3,200
=
$0
+
Overstated
$3,200
• Forgot to reduce Prepaid
Insur.→ Asset overstated.
• Forgot to record Insur.
Expense→ Expense
understated.
Quick Study 3-17 (15 minutes)
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash………………………………..
$8,000
$8,000
106
Accounts receivable ………..
2,000
$4,000
6,000
126
Supplies ………………………….
4,500
$2,500
2,000
209
Salaries payable ………………
307
Common stock ………………..
318
Retained earnings……………
403
Consulting revenue …………
11,000
4,000
15,000
622
Salaries expense ……………..
5,500
400
5,900
652
Supplies expense ……………
0
2,500
2,500
Quick Study 3-18 (15 minutes)
Dec. 31 Services Revenue ………………………………….. 13,000
Income Summary ……………………………. 13,000
Close revenue account.
31 Income Summary ………………………………….. 10,000
Wages Expense………………………………. 8,400
Rent Expense …………………………………. 1,600
Close expense accounts.
Quick Study 3-19 (5 minutes)
a.
Included
c.
Included
e.
Excluded
Quick Study 3-20 (5 minutes)
1. (e) Analyzing transactions and events.
2. (h) Journalizing transactions and events.
3. (a) Posting the journal entries.
4. (g) Preparing the unadjusted trial balance.
Quick Study 3-21 (10 minutes)
1. Land held for future expansion B Long-term investments
2. Notes payable (due in 5 years) F Long-term liabilities
3. Accounts receivable A Current assets
4. Trademarks D Intangible assets
Quick Study 3-22 (15 minutes)
SIERRA COMPANY
Income Statement
For Year Ended December 31
Consulting revenue …………………………………………….. $9,500
Expenses
Wages expense ……………………………………………… $3,500
SIERRA COMPANY
Statement of Retained Earnings
For Year Ended December 31
Retained earnings, December 31 prior year end …… $ 5,500
Add: Net income ……………………………………………….. 2,500
Quick Study 3-23 (15 minutes)
SIERRA COMPANY
Balance Sheet
December 31
Assets
Current assets
Cash ………………………………………………………. $ 5,000
Prepaid insurance ………………………………….. 500
Total current assets ……………………………….. 5,500
Long-term investments
Liabilities
Current liabilities
Accounts payable …………………………………… $ 2,500
Long-term liabilities
Notes payable (due in 3 years) ………………… 3,000
Total liabilities …………………………………………. 5,500
Equity
Quick Study 3-24 (10 minutes)
Profit margin = $48,025 / $425,000 = 11.3%
Quick Study 3-25 (5 minutes)
Current assets
Cash ……………………………………………………
$ 7,000
Accounts receivable …………………………..
18,000
Office supplies …………………………………….
2,800
Prepaid insurance ……………………………….
3,560
Total current assets …………………………..
$31,360
Accounts payable ………………………………..
$11,000
Unearned services revenue ………………….
3,000
Total current liabilities …………………………
$14,000
Quick Study 3-26A (20 minutes)
a. Recording prepayment of an expense in an asset account and recording
prepayment of revenue received in a liability account
Jan. 1 Prepaid Insurance ………………………………………….. 6,000
Cash ……………………………………………………….. 6,000
Record advance cash payment of insurance.
Dec. 31 Unearned Revenue …………………………………………. 2,000
Revenue ………………………………………………….. 2,000
Record services provided ($2,400 x 5/6).
b. Recording a prepayment of an expense in an expense account and
recording prepayments of revenue received in a revenue account
Jan. 1 Insurance Expense …………………………………………. 6,000
Cash ……………………………………………………….. 6,000
Record advance cash payment of insurance.
Quick Study 3-27B (20 minutes)
Planta Company
Work Sheet
Adjusted
Trial Balance
Income
Statement
Balance Sheet
No.
Account
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
101
Cash………………………………..
7,000
7,000
106
Accounts receivable ………..
27,200
27,200
153
Trucks …………………………..
42,000
42,000
17,500
17,500
183
Land ………………………………..
32,000
32,000
201
Accounts payable ……………
15,000
15,000
209
Salaries payable ………………
4,200
4,200
233
Unearned fees …………………
3,600
3,600
307
Common stock ………………..
20,000
20,000
318
Retained earnings……………
45,500
45,500
319
Dividends ………………………..
15,400
15,400
401
Plumbing fees earned ……..
84,000
84,000
611
Depreciation expense—
Trucks …………………………..
6,500
6,500
622
Salaries expense ……………..
38,000
38,000
640
Rent expense…………………..
13,000
13,000
677
Miscellaneous expense …..
Totals ………………………………
189,800
66,200
84,000
Net income ………………………
17,800
Quick Study 3-28C (10 minutes)
a.
Dec. 31 Accounts Receivable …………………………………………. 12,000
Consulting Revenue ……………………………………. 12,000
Record accrued revenue.
b.
Jan. 1 Consulting Revenue …………………………………………… 12,000
Accounts Receivable ………………………………….. 12,000
Wild and Shaw, Financial & Managerial Accounting, 8e Solutions Manual: Chapter 3
EXERCISES
Exercise 3-1 (25 minutes)
a.
Depreciation Expense—Equipment …………………………..
18,000
Accumulated Depreciation—Equipment ……………..
18,000
Record depreciation expense for the year.
b.
Insurance Expense …………………………………………………..
4,900
Prepaid Insurance* …………………………………………….
4,900
Record insurance coverage that expired
($6,000 – $1,100).
c.
Supplies Expense …………………………………………………….
3,880
3,880
Record office supplies used ($700 + $3,480 – $300).
d.
Unearned Revenue ……………………………………………………
10,000
Revenue …………………………………………………………….
10,000
Record earned portion of fee received in advance
e.
Rent Expense …………………………………………………………..
5,800
Prepaid Rent ……………………………………………………..
5,800
Record rental coverage that expired.
f.
Wages Expense ……………………………………………………….
3,200
Wages Payable ………………………………………………….
3,200
Record wages accrued but not yet paid.
Beg. Bal.
Purch.
Used
Used
Exercise 3-2 (15 minutes)
a. Adjusting entry:
Dec. 31
Wages Expense……………………………………………………..
1,250
Wages Payable ………………………………………………
1,250
Record accrued wages for one day.
(5 workers x $250)
b. Payday entry:
Jan. 4
Wages Expense……………………………………………………..
3,750
Wages Payable ………………………………………………………
1,250
5,000
Wages expense = 5 workers x 3 days x $250