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Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 1 (continued)
July 22, 2021
Cash
2,300
Service Revenue (Clinic)
2,300
(Receive cash for mountain bike clinic)
Aug. 1, 2021
Debit
Credit
Cash
30,000
Notes Payable
30,000
(Obtain loan from city council)
Aug. 4, 2021
Equipment (Kayaks)
28,000
Cash
28,000
(Pay cash for kayaks)
Chapter 3 - The Accounting Cycle: End of the Period
3-118 Financial Accounting, 5e
Additional Perspective 3-1 (continued)
Requirement 1 (concluded)
Dec. 8, 2021
Miscellaneous Expense
1,200
Cash
1,200
(Pay cash for race permit)
Dec. 12, 2021
Supplies (Racing)
2,800
Accounts Payable
2,800
(Purchase racing supplies on account)
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 2
Dec. 31, 2021
Debit
Credit
Depreciation Expense
8,000
Accumulated Depreciation
8,000
Dec. 31, 2021
Supplies Expense (Office)
1,500
Supplies (Office)
1,500
(Office supplies used; $1,800 – $300 =
$1,500)
Chapter 3 - The Accounting Cycle: End of the Period
3-120 Financial Accounting, 5e
Additional Perspective 3-1 (continued)
Requirement 3 (Note: adjusting entries in italics)
Prepaid Insurance
4,800
2,400
2,400
Common Stock
10,000
10,000
20,000
Legal Fees Expense
1,500
Notes Payable
30,000
30,000
Prepaid Rent
2,400
800
1,600
Service Revenue
(Racing)
20,000
Dividends
4,000
4,000
Supplies (Office)
1,800
1,500
300
Interest Payable
750
750
Depr. Expense
8,000
8,000
Insurance Expense
2,400
2,400
Supplies Expense
(Office)
1,500
1,500
Income Tax Payable
14,000
14,000
Service Revenue
(Clinic)
2,000
Supplies Expense
(Racing)
2,600
2,600
Cash
10,000
10,000
4,800
1,500
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 4
Great Adventures, Inc.
Adjusted Trial Balance
December 31, 2021
Accounts
Debit
Credit
Cash
$ 64,200
Prepaid Insurance
2,400
Prepaid Rent
1,600
Common Stock
20,000
Dividends
4,000
Service Revenue (Clinic)
52,900
Service Revenue (Racing)
20,000
Advertising Expense
1,000
Depreciation Expense
8,000
Chapter 3 - The Accounting Cycle: End of the Period
3-122 Financial Accounting, 5e
Additional Perspective 3-1 (continued)
Requirement 5
Great Adventures, Inc.
Income Statement
For the period ended December 31, 2021
Revenues:
Service revenue (clinic)
$52,900
Service revenue (racing)
20,000
Total revenues
$72,900
Expenses:
Advertising expense
1,000
Depreciation expense
8,000
Great Adventures, Inc.
Statement of Stockholders’ Equity
For the period ended December 31, 2021
Common
Stock
Retained
Earnings
Total
Stockholders’
Equity
Balance at July 1
$ 0
$ 0
$ 0
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-1 (continued)
Requirement 5 (concluded)
Great Adventures, Inc.
Balance Sheet
December 31, 2021
Assets
Liabilities
Current assets:
Current liabilities:
Cash
$ 64,200
Accounts payable
$ 2,800
Prepaid insurance
2,400
Interest payable
750
Chapter 3 - The Accounting Cycle: End of the Period
3-124 Financial Accounting, 5e
Additional Perspective 3-1 (continued)
Requirement 6
Dec. 31, 2021
Debit
Credit
Service Revenue (Clinic)
52,900
Service Revenue (Racing)
20,000
Retained Earnings
72,900
(Close revenue accounts)
Dec. 31, 2021
Retained Earnings
35,750
Advertising Expense
1,000
Depreciation Expense
8,000
Income Tax Expense
14,000
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
2,800
Common Stock
10,000
10,000
20,000
Legal Fees Expense
1,500
1,500
Notes Payable
30,000
30,000
Prepaid Rent
2,400
800
1,600
Service Revenue
(Racing)
20,000
20,000
Dividends
4,000
4,000
0
Supplies (Office)
1,800
1,500
300
Interest Payable
750
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
Income Tax Payable
14,000
14,000
Service Revenue
(Clinic)
52,900
2,000
Cash
10,000
10,000
2,000
4,800
1,500
300
Chapter 3 - The Accounting Cycle: End of the Period
3-126 Financial Accounting, 5e
Additional Perspective 3-1 (concluded)
Requirement 8
Great Adventures, Inc.
Post-closing Trial Balance
December 31, 2021
Accounts
Debit
Credit
Cash
$ 64,200
Prepaid Insurance
2,400
Prepaid Rent
1,600
Supplies (Office)
300
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-2
American Eagle
($ in thousands)
Requirement 1
Requirement 3
The change in retained earnings is $107,817 (= $1,883,592 − $1,775,775).
Requirement 4
The amount of net income is $204,163.
Requirement 5
The change in retained earnings typically represents net income for the year less
Chapter 3 - The Accounting Cycle: End of the Period
3-128 Financial Accounting, 5e
Additional Perspective 3-3
Buckle
($ in thousands)
Requirement 1
0.67 (= $97,906 / $146,868).
Requirement 3
The change in retained earnings is $(44,167) (= $246,570 − $290,737).
Requirement 4
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-4
Compare American Eagle and Buckle
Requirement 1
Buckle has the higher ratio of current assets to total assets. For American Eagle, the
Requirement 2
American Eagle has the higher ratio of current liabilities to total liabilities. For
Requirement 3
Buckle has a higher dividend payout ratio. For American Eagle, the dividend payout
ratio is 0.45 (= $90,858 / $204,163). For Buckle, the dividend payout ratio is 1.49 (=
Chapter 3 - The Accounting Cycle: End of the Period
3-130 Financial Accounting, 5e
Additional Perspective 3-5
1. Profits are overstated.
2. Liability.
3. Yes.
Next year the $80,000 cannot be counted again in pretax profits, likely causing a big
4. No.
As the assistant controller (accountant), you should understand that your
responsibilities include accurately recording and reporting the company’s activities.
Chapter 3 - The Accounting Cycle: End of the Period
Additional Perspective 3-6
(Note to instructor: Answers are based on McDonald’s December 2016 annual report,
and dollar amounts are in millions.)
Requirement 1
Revenues exceed expenses because the company reports net income of $4,686.5 (in
millions).
Requirement 2
Requirement 4
Current liabilities include accounts payable, income taxes, other taxes, accrued
interest, and accrued payroll and other liabilities. Other liabilities include liabilities
that are due in more than one year.
Requirement 5
Retained earnings increased $1,628.2, from $44,594.5 to $46,222.7.
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.
Requirement 2
The adjusting entry for prepaid expenses includes a debit to an expense and a credit to
Requirement 3
The adjusting entry for accrued expenses includes a debit to an expense and a credit to
