Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-41
AP4–2.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
f.
Accrued expense
c.
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
a.
Insurance expense (+E, −SE) ………………………………..
1,600
Prepaid insurance (−A) ……………………………….
1,600
($3,200 ÷ 6 months x 3 months of coverage)
d.
Depreciation expense (+E, −SE) …………………………...
3,000
Accumulated depreciation (+XA, −A) ………………
3,000
e.
Unearned service revenue (−L) ……………………………..
700
Service revenue (+R, +SE) …………………………...
($4,200 ÷ 12 months x 2 months)
Interest expense (+E, −SE) ……………………………………
Interest payable (+L) ……………………………………..
($18,000 x .09 x 5/12)
g.
Property tax expense (+E, −SE) …………………………….
Property tax payable (+L) ………………………………
Accounts receivable (+A) ………………………………………
Service revenue (+R, +SE) …………………………..
b.
Unearned maintenance revenue (−L) ……………………..
Maintenance revenue (+R, +SE) ……………………
($450 ÷ 2 months x 1 month)
c.
Wage expense (+E, −SE) ……………………………………..
900
Wages payable (+L) …………………………………….
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-42
AP4–3.
Req. 1
a.
Deferred expense
e.
Deferred expense
Req. 2
a.
Supplies expense (+E, −SE) ………………………………….
1,250
Supplies (−A) ………………………………………………
1,250
(Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400)
Accounts receivable (+A) ………………………………………
Catering revenue (+R, +SE) ………………………….
c.
Insurance expense (+E, −SE) ………………………………..
200
Prepaid insurance (−A)………………………………..
($1,200 x 2/12 months of coverage)
d.
Repairs expense (+E, −SE) ……………………………………
600
Accounts payable (+L) …………………………………
600
e.
Rent expense (+E, −SE) ……………………………………….
700
Prepaid rent (−A) …………………………………………..
700
($2,100 x 1/3 months of rent used)
Depreciation expense (+E, −SE) …………………………….
Accumulated depreciation (+XA, −A) ………………
Interest receivable (+A) …………………………………………
Interest income (+R, +SE) ………………………………
($4,000 x .12 x 2/12)
h.
Income tax expense (+E, −SE) ………………………………
Income tax payable (+L) …………………………………
b.
Accrued revenue
Deferred expense
Deferred expense
Accrued revenue
d.
Accrued expense
h.
Accrued expense
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-43
AP4–4.
Req. 1
a.
Deferred expense
e.
Deferred revenue
b.
Deferred revenue
Accrued expense
Accrued expense
g.
Accrued expense
d.
Deferred expense
h.
Accrued revenue
Req. 2
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
–1,600
NE
–1,600
NE
+1,600
–1,600
b.
d.
–3,000
NE
–3,000
NE
+3,000
–3,000
e.
NE
NE
g.
NE
h.
+2,000
NE
+2,000
NE
Income tax expense $ 7,389
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-44
Computations:
a.
$3,200 prepaid insurance x 3/6 months of coverage = $1,600 used
b.
$450 unearned revenue x 1/2 months = $225 earned
AP4–5.
Req. 1
a.
Deferred expense
e.
Deferred expense
b.
Accrued revenue
Deferred expense
Deferred expense
g.
Accrued revenue
d.
Accrued expense
h.
Accrued expense
Req. 2
Balance Sheet
Income Statement
Transaction
Assets
Liabilities
Stockholders’
Equity
Revenues
Expenses
Net
Income
a.
–1,250
NE
–1,250
NE
+1,250
–1,250
b.
+7,500
NE
+7,500
+7,500
NE
+7,500
NE
NE
d.
NE
e.
NE
NE
–2,600
NE
–2,600
NE
–2,600
g.
NE
NE
h.
+7,389
–7,389
NE
+7,389
–7,389
c.
Amount is given.
d.
Amount is given.
e.
$4,200 unearned revenue x 2/12 months = $700 earned
g.
Amount is given.
h.
Amount is given.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
Computations:
a.
Beg. Inventory of $450 + Purchases $1,200 – Ending Inventory $400 = $1,250
used for the period.
b.
Amount is given.
$1,200 prepaid expense x 2/12 = $200 insurance used
d.
Amount is given.
e.
$2,100 x 1/3 = $700 rent used
Amount is given.
g.
$4,000 principal x .12 x 2/12 months = $80 interest earned
h.
Adjusted income = $22,400 – $1,250 + $7,500 – $200 – $600 – $700 – $2,600 + $80
= $24,630 x 30% tax rate = $7,389 income tax expense
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-46
AP4–6.
Req. 1
December 31, 2011, Adjusting Entries
(1)
Accounts receivable (+A) ………………………………….
1,500
(b)
Service revenue (+R, +SE) ………………………
1,500
(j)
To record service revenues earned, but not collected.
(2)
Rent expense (+E, −SE) …………………………………..
400
(m)
Prepaid rent (−A) ……………………………………..
400
(c)
To record rent expired as an expense.
Req. 2
Amounts before
Adjusting Entries
Amounts after
Adjusting Entries
Revenues:
Service revenue
$83,000
$92,500
Expenses:
Salary expense
56,000
56,000
Depreciation expense
17,500
Rent expense
Income tax expense
Total expense
56,000
Net income
$ 27,000
(3)
Depreciation expense (+E, −SE) ………………………..
Accumulated depreciation (+XA, −A)
(e)
To record depreciation expense.
(4)
Unearned revenue (−L) …………………………………….
Service revenue (+R, +SE) ………………………
8,000
(j)
To record service revenue earned.
(5)
Income tax expense (+E, −SE) ………………………….
Income taxes payable (+L) ……………………….
6,500
To record income taxes for 2011.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
AP4–6. (continued)
Req. 3
Earnings per share = $12,100 net income 5,000 shares = $2.42 per share
Req. 4
Req. 5
Service revenue (−R) ………………………………………..
92,500
Retained earnings (+SE) …………………………….
Depreciation expense (−E) ………………………….
17,500
Income tax expense (−E) …………………………...
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-48
AP4–7.
Req. 1
December 31, 2011, Adjusting Entries:
(a) Depreciation expense (+E, −SE) …………………………. 3,000
Accumulated depreciation (+XA, −A) ………….. 3,000
Req. 2
SOUTH BEND REPAIR SERVICE CO.
Income Statement
For the Year Ended December 31, 2011
Operating Revenue:
Service revenue $48,000
Operating Expenses:
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-49
AP4–7. (continued)
SOUTH BEND REPAIR SERVICE CO.
Balance Sheet
At December 31, 2011
Assets
Liabilities and Stockholders’ Equity
Current Assets:
Current Liabilities:
Cash
$19,600
Accounts payable
$ 2,500
Accounts receivable
7,000
Wages payable
2,100
Supplies
800
Income tax payable
3,150
Total assets
$44,950
Total liabilities and
stockholders’ equity
$44,950
*Unadjusted balance, $10,300 + Net income, $5,900 = Ending balance, $16,200.
Req. 3
December 31, 2011, Closing Entry:
Service revenue (−R) ………………………………………….. 48,000
Retained earnings (+SE) ………………………….. 5,900
Prepaid insurance
450
Total current liabilities
7,750
Total current assets
Note payable, long term
5,000
Equipment
Total liabilities
Stockholders’ Equity
Other assets (not detailed)
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-50
COMPREHENSIVE PROBLEMS
COMP4–1.
Req. 1, 2, 3, and 5 T-accounts (in thousands)
Cash
Accounts Receivable
Supplies
Bal. 4
b 12
Bal. 7
Bal. 16
Land
Equipment
Accumulated
Depreciation
Bal. 0
Bal. 78
Bal. 8
b 12
m 8
Bal. 12
Bal. 78
Bal. 16
Other Assets
Accounts Payable
Income Tax Payable
Bal. 5
Bal. 0
Bal. 0
g 13
h 19
e 20
p 10
Bal. 18
Bal. 24
Bal. 10
Wages Payable
Interest Payable
LT Notes Payable
Bal. 0
Bal. 0
Bal. 0
o 16
n 1
a 12
Bal. 16
Bal. 1
Bal. 12
Contributed
Capital
Retained
Earnings
Service
Revenue
Bal. 85
Bal. 17
Bal. 0
d 4
c 208
CE 41
CE 208
Bal. 89
Bal. 36
Bal. 0
Depreciation
Expense
Income Tax
Expense
Interest
Expense
Bal. 0
Bal. 0
Bal. 0
CE 8
p 10
CE 10
CE 1
Bal. 0
Bal. 0
Bal. 0
a 12
e 91
l 21
g 13
d 4
h 19
k 22
Bal. 53
Bal. 25
Bal. 18
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-51
Supplies
Expense
Wages
Expense
Remaining
Expenses
Bal. 0
Bal. 0
Bal. 0
l 21
CE 21
o 16
CE 16
e 111
CE 111
Bal. 0
Bal. 0
Bal. 0
COMP4–1. (continued)
Req. 2
a.
Cash (+A) ………………………………………………….
12,000
Notes payable (+L) …………………………….
12,000
d.
Cash (+A) ………………………………………………….
4,000
Contributed capital (+SE) ……………………
4,000
e.
Remaining expenses (+E, −SE) ……………………
Accounts payable (+L) ………………………..
20,000
Cash (−A) …………………………………………
91,000
Cash (+A) ………………………………………………….
34,000
Accounts receivable (−A) …………………….
g.
Other assets (+A) ……………………………………….
13,000
Cash (−A) …………………………………………
13,000
h.
Accounts payable (−L) …………………………………
19,000
Cash (−A) …………………………………………
19,000
Supplies (+A) ……………………………………………..
23,000
Accounts payable (+L) ………………………..
23,000
No entry required; no revenue earned in 2012.
Retained earnings (−SE) ……………………………..
22,000
Cash (−A) …………………………………………
22,000
b.
Land (+A) …………………………………………………..
12,000
Cash (−A) …………………………………………
c.
Cash (+A) ………………………………………………….
52,000
Service revenue (+R, +SE) ………………….
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-52
COMP4–1. (continued)
Req. 3
l.
Supplies expense (+E, −SE) …………………………
21,000
Supplies (−A) ……………………………………..
21,000
($39,000 in account – $18,000 at year end)
m.
Depreciation expense (+E, −SE) …………………..
8,000
Accumulated depreciation (+XA, −A) ……..
8,000
Req. 4
H & H TOOL, INC.
Income Statement
For the Year Ended December 31, 2012
Operating Revenues:
Service revenue
$208,000
Operating Expenses:
Depreciation expense
8,000
21,000
16,000
Remaining expenses
111,000
Total operating expenses
156,000
Operating Income
52,000
Other Item:
Interest expense
1,000
Pretax income
51,000
Income tax expense
10,000
Net Income
$41,000
[$41,000 ÷ 89,000 shares all year]
Interest expense (+E, −SE) ………………………….
1,000
Interest payable (+L) …………………………...
($12,000 x .10 x 10/12)
Wages expense (+E, −SE) …………………………..
Wages payable (+L) …………………………...
Income tax expense (+E, −SE) ……………………..
10,000
Income taxes payable (+L) …………………..
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-53
COMP4–1. (continued)
H & H TOOL, INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2012
Contributed
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balance, January 1, 2012
$85,000
$ 17,000
$102,000
H & H TOOL, INC.
Balance Sheet
At December 31, 2012
Assets
Liabilities and Stockholders’ Equity
Current Assets:
Current Liabilities:
Cash
$ 53,000
Accounts payable
$ 24,000
Accounts receivable
25,000
Interest payable
1,000
Supplies
18,000
Wages payable
16,000
96,000
Income taxes payable
10,000
Land
12,000
51,000
Equipment
78,000
Notes payable
12,000
Less: Accumulated deprec.
Other assets
18,000
Stockholders’ Equity:
89,000
equity
125,000
Total assets
$188,000
Total liabilities and
stockholders’ equity
$188,000
Balance, December 31, 2012
$89,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-54
COMP4–1. (continued)
H & H TOOL, INC.
Statement of Cash Flows
For the Year Ended December 31, 2012
Cash from Operating Activities:
Cash collected from customers (c + f)
$190,000
Cash from Financing Activities:
Borrowing from bank (a)
12,000
Issuance of stock (d)
4,000
Payment of dividends (k)
(22,000)
Cash used for financing activities
(6,000)
Change in cash
Beginning cash balance, January 1, 2012
Ending cash balance, December 31, 2012
$ 53,000
Req. 5
December 31, 2012, Closing Entry
Service revenue (−R) …………………………………..
208,000
Retained earnings (+SE) …………………….
Interest expense (−E) …………………………
Wages expense (−E) ………………………….
Income tax expense (−E) …………………….
Cash paid to suppliers and employees (e +h)
(110,000)
Cash provided by operations
Cash from Investing Activities:
Purchase of land (b)
Purchase of other assets (g)
Cash used for investing activities
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-55
COMP4–1. (continued)
Req. 6
(a) Current ratio = Current assets Current liabilities
= $96,000 $51,000
= 1.88
This suggests that H & H Tool, Inc., generated $1.43 for every dollar of assets.
(c) Net profit margin = Net income Sales
= $41,000 $208,000
= 0.197 or 19.7%
COMP4-2.
Req. 1, 2, 3, and 5 T-accounts (in thousands)
Cash
Accounts
Receivable
Supplies
Bal. 5
Bal. 4
Bal. 2
a 20
b 18
d 14
g 8
i 10
l 8
e 28
d 56
g 8
h 11
k 10
Bal. 10
Bal. 4
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-56
Small Tools
Equipment
Accumulated
Depreciation
Bal. 6
Bal. 0
Bal. 0
Other Assets
Accounts Payable
Notes Payable
Bal. 9
Bal. 7
Bal. 0
h 11
Bal. 9
Bal. 13
Bal. 20
Wages Payable
Interest Payable
Income Taxes
Payable
Bal. 0
Bal. 0
Bal. 0
o 3
n 1
p 4
Bal. 3
Bal. 1
Bal. 4
Unearned
Revenue
Contributed
Capital
Retained
Earnings
Bal. 0
Bal. 15
k 10
Bal. 4
j 3
c 5
CE 16
Bal. 3
Bal. 20
Bal. 10
Service Revenue
Income Tax Expense
Interest Expense
Bal. 0
Bal. 0
Bal. 0
CE 70
CE 4
CE 1
Depreciation Expense
Wages Expense
Remaining Expenses
Bal. 0
Bal. 0
Bal. 0
CE 2
CE 3
CE 44
Bal. 0
Bal. 0
Bal. 0
l 1
m 2
Bal. 8
Bal. 18
Bal. 2
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-57
COMP4-2. (continued)
Req. 2
a.
Cash (+A) ………………………………………………….
20,000
Notes payable (+L) …………………………….
20,000
b.
Equipment (+A) ………………………………………….
18,000
Cash (−A) …………………………………………
18,000
f.
Small tools (+A) ………………………………………….
3,000
Cash (−A) …………………………………………
3,000
g.
Cash (+A) ………………………………………………….
8,000
Accounts receivable (−A) …………………….
8,000
Accounts payable (−L) …………………………………
Cash (−A) ………………………………………..
11,000
Supplies (+A) ……………………………………………..
10,000
Accounts payable (+L) ………………………..
10,000
Cash (+A) ………………………………………………….
3,000
Unearned revenue (+L) ……………………..
3,000
k.
Retained earnings (−SE) ……………………………..
c.
Cash (+A) ………………………………………………….
5,000
Contributed capital (+SE) ……………………
5,000
d.
Cash (+A) ………………………………………………….
56,000
Accounts receivable (+A) ……………………………..
14,000
Service revenue (+R, +SE) ………………….
70,000
Remaining expenses (+E, −SE) ……………………
Accounts payable (+L) ………………………..
7,000
Cash (−A) …………………………………………
28,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-58
COMP4-2. (continued)
Req. 3
l.
Remaining expenses (+E, −SE) ……………………
9,000
Supplies (−A) ……………………………………..
8,000
Small tools (−A) ………………………………….
1,000
[Supplies used ($12 – 4) and small tools used
($9 – 8)]
o.
Wages expense (+E, −SE) …………………………..
3,000
Wages payable (+L) …………………………...
3,000
Income tax expense (+E, −SE) ……………………..
4,000
Income taxes payable (+L) …………………..
4,000
Req. 4
FURNITURE REFINISHERS, INC.
Income Statement
For the Year Ended December 31, 2013
Operating Revenues:
Service revenue
$70 000
Operating Expenses:
Depreciation expense
2,000
Remaining expenses
Total operating expenses
Operating Income
Other Item:
Pretax income
Income tax expense
Net Income
Depreciation expense (+E, −SE) …………………..
2,000
Accumulated depreciation (+XA, −A) ……..
2,000
Interest payable (+L) …………………………...
1,000
($20,000 principal x .10 x 6/12)
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-59
COMP4-2. (continued)
FURNITURE REFINISHERS, INC.
Statement of Stockholders’ Equity
For the Year Ended December 31, 2013
Contributed
Capital
Retained
Earnings
Total
Stockholders’
Equity
Balance, January 1, 2013
$15,000
$ 4,000
$19,000
FURNITURE REFINISHERS, INC.
Balance Sheet
At December 31, 2013
Assets
Liabilities and Stockholders’ Equity
Current Assets:
Current Liabilities:
Cash
$27,000
Accounts payable
$13,000
Accounts receivable
10,000
Notes payable
20,000
Supplies
4,000
Wages payable
3,000
Small tools
8,000
Interest payable
1,000
Total current assets
49,000
Income taxes payable
4,000
Equipment
18,000
Unearned revenue
3,000
Less: Accum. deprec.
Total current liabilities
Other assets
9,000
20,000
10,000
30,000
Balance, December 31, 2013
$20,000
$ 10,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
COMP4-2. (continued)
FURNITURE REFINISHERS, INC.
Statement of Cash Flows
For the Period Ended December 31, 2013
Cash from Operating Activities:
Cash collected from customers (d + g + j)
$ 67,000
Cash paid to suppliers and employees (e + h)
Cash provided by operations
28,000
Cash from Investing Activities:
Purchase of equipment (b)
Purchase of small tools (f)
Cash used in investing activities
Cash from Financing Activities:
Borrowing from bank (a)
20,000
Issuance of stock (c)
5,000
Payment of dividends (k)
(10,000)
Cash provided by financing activities
15,000
Change in cash
Beginning cash balance, January 1, 2013
Ending cash balance, December 31, 2013
$ 27,000
Req. 5
December 31, 2013, Closing Entry
Service revenue (−R) …………………………………..
70,000
Retained earnings (+SE) …………………….
16,000
Interest expense (−E) …………………………
Remaining expenses (−E) …………………..