CHAPTER 4
SOLUTIONS TO EXERCISES—SET B
EXERCISE 4-1B
(a) Since the sales effort is not complete until the flight actually occurs,
revenue should not be recognized until December. American Airlines
should recognize the revenue in December when the customer has
been provided with the flight.
(b) Sales revenue should be recognized at the time of delivery.
EXERCISE 4-2B
(a) 8. Going concern assumption.
(b) 1. Economic entity assumption.
EXERCISE 4-3B
(a) Revenue recognition principle.
EXERCISE 4-4B
$ 23,640
Cash basis earnings.
+ 3,400
Accounts receivable arise from sales that have been made,
thus revenue must be recognized for balance outstanding at
the end of the current year.
– 2,800
Accounts receivable collected in current year, for sales made
in previous year must be deducted from earnings.
+ 1,300
rather than expensed, this increases earnings.
Supplies on hand at the end of the previous year should be
expensed this year, this decreases earnings.
– 2,700
Wages owing at the end of the current year should be
accrued, thus reducing earnings.
+ 2,400
Wages owed at the end of the previous year should not be
earnings.
– 1,400
Other unpaid amounts owed at the end of the current year
should be accrued, thus reducing earnings.
+ 1,100
Other unpaid amounts owed at the end of the previous year
increasing earnings.
$ 23,480
Accrual basis earnings.
Supplies on hand at year end should be set up as an asset
EXERCISE 4-5B
(a)
Cash Basis
Net Income
Service Revenue
$29,000
(b) The accrual basis of accounting provides more useful information for
EXERCISE 4-6B
(a) HOBIE COMPANY
Income Statement
For the Six Months Ended April 30, 2014
Revenue
Service revenue ($32,150 + $420) ……………….. $32,570
Expenses
(b) HOBIE COMPANY
Balance Sheet
April 30, 2014
Assets
Current Assets
Cash ………………………………………………………. $25,780
Accounts receivable ……………………………….. 420
Liabilities and Stockholders’ Equity
Current Liabilities
Salaries and wages payable …………………… $ 420
Stockholders’ equity
Common stock ………………………………………. $20,000
EXERCISE 4-7B
(a) Event
Cash Accounting
Accrual Accounting
180-day
financing for
large customers
Revenue is recorded
as cash is received.
revenue (and a receivable)
as soon as services are
provided but may wait up
to 180 days to receive
cash.
Revenue is recorded when
the performance obligation
is satisfied. ViKid records
Payment to
equipment
suppliers upon
delivery of goods
Equipment expense is
recorded as an
expense as soon as
equipment is received
and paid for.
Equipment is recorded as
an asset and depreciated.
Prepayment for
2 years of
coverage
Insurance expense is
recorded as soon as
Prepayment is recorded as
an asset and recognized
passes.
salaries owed at
recorded until salaries
are paid.
as employees perform
work. Amounts owed at
recorded as a liability.
EXERCISE 4-7B (Continued)
(b) Accrual accounting rules require that revenue be recognized as a
company sells products or performs services and expenses be
matched with the revenue they help produce. Receipt or payment of
cash does not influence the calculation of net income.
(c) ViKid has violated the historical cost principle by carrying inventory
at its fair value of $110,000 rather than its historical cost of $100,000.
EXERCISE 4-8B
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Accrued Revenues
Assets Understated
Revenues Understated
(b)
Prepaid Expenses
Assets Overstated
Expenses Understated
Liabilities Understated
(d)
Unearned Revenues
Liabilities Overstated
Revenues Understated
(e)
Accrued Expenses
Expenses Understated
Liabilities Understated
Expenses Understated
EXERCISE 4-9B
1. Mar. 31 Depreciation Expense ($300 X 3)……………… 900
2. 31 Unearned Rent Revenue …………………………. 3,100
Rent Revenue ($12,400 X 1/4) …………… 3,100
4. 31 Supplies Expense …………………………………… 1,800
Supplies ($3,000 – $1,200) ………………… 1,800
EXERCISE 4-10B
2. 31 Utilities Expense …………………………………….. 950
Accounts Payable ……………………………. 950
3. 31 Depreciation Expense …………………………….. 400
Accumulated Depreciation—
5. 31 Supplies Expense ($1,750 – $550) ……………. 1,200
Supplies ………………………………………….. 1,200
EXERCISE 4-11B
2. 31 Insurance Expense …………………………………. 80
Prepaid Insurance …………………………... 80
3. 31 Depreciation Expense …………………………….. 100
5. 31 Accounts Receivable ……………………………… 400
Service Revenue ……………………………… 400
7. 31 Salaries and Wages Expense ………………….. 2,300
Salaries and Wages Payable ……………. 2,300
EXERCISE 4-12B
BISCAN CO.
Income Statement
For the Month Ended July 31, 2014
Revenues
Service revenue ($5,500 + $600) ………………………… $6,100
Expenses
Salaries and wages expense ($2,100 + $260) ……… $2,360
EXERCISE 4-13B
Answer Computation
(a) Supplies balance = $1,350 Supplies expense $ 950
Add: Supplies (1/31) 700
(b) Total premium = $6,240 Total premium = Monthly premium X
12; $520 X 12 = $6,240
Purchase date = May 1, 2013 Purchase date: On Jan. 31, there are 3
months coverage remaining ($520 X 3).
(c) Salaries and wages
payable = $1,960 Cash paid $2,500
Salaries and wages
payable (1/31/14) 1,060
(d) Unearned service
revenue = $1,950 Service revenue $3,000
Unearned revenue (1/31/14) 750
EXERCISE 4-14B
Jan. 31 Service Revenue …………………………………………… 3,000
Income Summary …………………………………… 3,000
EXERCISE 4-15B
(a) July 10 Supplies ………………………………………………… 300
Cash ……………………………………………….. 300
(b) July 31 Supplies Expense …………………………………… 750
Supplies ………………………………………….. 750
EXERCISE 4-16B
Aug. 31 Accounts Receivable …………………………………….. 1,300
Service Revenue…………………………………….. 1,300
31 Supplies Expense …………………………………………. 2,000
EXERCISE 4-17B
JACK COMPANY
Income Statement
For the Year Ended August 31, 2014
Revenues
Service revenue …………………………………………….. $35,300
EXERCISE 4-17B (Continued)
JACK COMPANY
Retained Earnings Statement
For the Year Ended August 31, 2014
Retained earnings, September 1, 2013 ……………………………………. $ 5,500
JACK COMPANY
Balance Sheet
August 31, 2014
Assets
Current Assets
Cash ………………………………………………………………. $10,900
Accounts receivable ……………………………………….. 10,100
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable …………………………………………… $ 5,800
Salaries and wages payable ……………………………. 1,100
EXERCISE 4-18B
Aug. 31 Service Revenue ………………………………………. 35,300
Rent Revenue …………………………………………… 13,100
Income Summary ………………………………. 48,400
31 Income Summary ……………………………………… 33,300