30 Minutes, Medium
Sept.
30 600
Prepaid Costume Rental 600
30 300
Accumulated Depreciation: Fixtures and Equip. 300
30 1,062
Interest Payable 1,062
30 500
Admissions Revenue 500
30 4,600
Concessions Revenue 4,600
Interest expense accrued in September.
(5)
(4)
To record earned revenue from nursing homes.
September.
Unearned Admissions Revenue
Interest Expense
(6)
To record accrued concessions revenue in
Concessions Revenue Receivable
30 2,200
Salaries Payable 2,200
30 3,600
30
No adjusting entry required.
To record income taxes accrued in September.
(9)
Income Taxes Expense
(8)
OFF-CAMPUS PLAYHOUSE
PROBLEM 4.4B
Current Yr.
Costume Rental Expense
Costume rental expense incurred in September.
months).
a.
(Adjusting Entries)
(1)
(3)
General Journal
To record accrued salary expense in September.
Salaries Expense
Depreciation Expense: Fixtures and Equipment
To record September depreciation ($18,000 ÷ 60
(7)
30 500
Accumulated Depreciation: Buildings 500
To record September depreciation expense
($150,000 ÷ 300 months).
(2)
Depreciation Expense: Buildings
b.
c.
Nine months (bills received January through September). Utility bills are recorded as
PROBLEM 4.4B
OFF-CAMPUS PLAYHOUSE (concluded)
Corporations must pay income taxes in several installments throughout the year. The
(1)
30 Minutes, Medium
Dec. 31 3,200
Lesson Revenue Earned 3,200
31 1,500
Prepaid Rent 1,500
31 250
Sheet Music Supplies 250
31 3,000
Accum. Depreciation: Music Equipment 3,000
31 25
Interest Payable 25
31 3,500
Salaries Payable 3,500
31 8,155
Income Taxes Payable 8,155
(7)
($5,000 x 6% x 1/12).
Income Taxes Expense
To record accrued salaries expense in December.
To record interest accrued in December
Interest Expense
(8)
($180,000 ÷ 60 mo.).
To record income taxes accrued in December.
Depreciation Expense: Music Equipment
To record December depreciation expense
(9)
Salaries Expense
PROBLEM 4.5B
(4)
(6)
MARVELOUS MUSIC
To record Dec. rent expense ($9,000 ÷ 6 mo.).
Accounts Receivable
To record accrued but uncollected revenue.
Year 1
Sheet Music Supplies Expense
($450 – $200).
a.
(Adjusting Entries)
(1)
General Journal
To record offices supplies used in December
Rent Expense
(5)
Lesson Revenue Earned 800
31 400
Unexpired Insurance 400
To convert previously unearned revenue to
Insurance Expense
To record Dec. insur. expense ($4,800 ÷ 12 mo.).
(2)
(3)
Unearned Lesson Revenue
earned revenue.
1. $ 154,375
3,200
800
$ 158,375
4. $ 16,500
1,500
18,000$
5. $ 780
250
$ 1,030
6. 5,000$
7. $ 33,000
$ 36,000
Add: Adjusting entry #6
Equipment depreciation expense in Year 1
Utilities expense (no adjustment required)
Depreciation expense: music equipment
8. 25$
25
$ 50
9. $ 27,500
3,500
Salaries expense (unadjusted)
Add: Adjusting entry #8
Salaries expense incurred in Year 1
Income taxes expense (unadjusted)
Add: Adjusting entry #9
Income taxes expense incurred in Year 1
c.
The unadjusted trial balance reports dividends payable of $1,000. Thus, none of the
$1,000 dividend has been paid.
Add: Adjusting entry #4
Rent expense incurred in Year 1
Rent expense (unadjusted)
Interest expense (unadjusted)
Interest expense incurred in Year 1
Add: Adjusting entry #1
Add: Adjusting entry #7
Sheet music supplies expense (unadjusted)
Add: Adjusting entry #5
Sheet music expense incurred in Year 1
Adjusting entry #2
Fees Earned in Year 1
Lesson revenue earned (unadjusted)
PROBLEM 4.5B
b.
MARVELOUS MUSIC (concluded)
2. $ 7,400
3. 4,400$
400
$ 4,800
Advertising expense (no adjustment required)
Insurance expense incurred in Year 1
Insurance expense (unadjusted)
Add: Adjusting entry #3
30 Minutes, Medium
Dec. 31 25,200
Client Fees Earned 25,200
31 2,064
Office Supplies 2,064
31 3,600
Accumulated Dep.: Computer Equip. 3,600
31 900
Interest Payable 900
31 12,600
Salaries Payable 12,600
31 2,400
Income Taxes Payable 2,400
To record incomes taxes accrued in December.
Interest Expense
(7)
($108,000 x 10% x 1/12).
To record interest accrued in December
Income Taxes Expense
To record salaries accrued in December.
Salaries Expense
(6)
PROBLEM 4.6B
Office Supplies Expense
MATE EASE
(4)
a.
Year 1
General Journal
Unearned Member Dues
To record office supplies used in December
To record December depreciation expense
(5)
Depreciation Expense: Computer Equip.
($2,592 – $528).
($129,600 ÷ 36 mo.).
(Adjusting Entries)
(1)
(2)
earned revenue.
To convert previously unearned revenue to
Unexpired Insurance 3,840
Prepaid Rent 8,760
Rent Expense
To record Dec. insur. exp. ($23,040 ÷ 6 mo.).
(3)
To record Dec. rent expense ($26,280 ÷ 3 mo.).
Insurance Expense
1. $ 203,400
4. $ 2,592
(2,064)
528$
5. 129,600$
6. $ 64,800
$ 68,400
7. $ 5,160
8. $ 108,000
Acc. Deprec.: computer equip. (unadjusted)
Add: Adjusting entry #5
Accum. Depreciation at December 31, Year 1
Accounts payable (no adjustment necessary)
Notes payable (no adjustment necessary)
9. –$
12,600
$ 12,600
10. $ 8,100
900
11. $ 9,000
$ 11,400
12. $ 43,200
$ 18,000
Add: Adjusting entry #6
Interest payable at December 31, Year 1
Unearned client revenue at December 31, Year 1
Less: Adjusting entry #1
Unearned member dues (unadjusted)
Income taxes payable (unadjusted)
Add: Adjusting entry #8
Income taxes payable at December 31, Year 1
Cash (no adjustment required)
PROBLEM 4.6B
b.
MATE EASE (continued)
Interest payable (unadjusted)
Computer equip. (no adjustment necessary)
Less: Adjusting entry #4
Office supplies at December 31, Year 1
Office supplies (unadjusted)
Salaries payable at December 31, Year 1
Add: Adjusting entry #7
Salaries payable (unadjusted)
2. 15,360
3. 17,520$
(8,760)
$ 8,760
Prepaid rent (unadjusted rent)
Less: Adjusting entry #2
Unexpired insurance at December 31, Year 1
Unexpired insurance (unadjusted)
Less: Adjusting entry #3
Prepaid rent at December 31, Year 1
c.
The company is following the realization principle requiring that revenue not
PROBLEM 4.6A
MATE EASE (concluded)
60 Minutes, Strong
Dec. 31 1,500
Client Fees Earned 1,500
31 2,500
Client Fees Earned 2,500
31 300
Prepaid Rent 300
31 90
Unexpired Insurance 90
31 1,900
Salaries Payable 1,900
31 60
Interest Payable 60
31 600
Income Taxes Payable 600
Interest Expense
To record salaries expense accrued in December.
Salaries Expense
($7,500 – $6,900).
Income Taxes Expense
To record income taxes accrued in December
(8)
To record accrued interest expense in December.
($9,000 x 8% x 1/12).
(9)
(5)
($1,080 x 1/12).
Rent Expense
To record office rent in December ($1,800 x 1/6).
(6)
(7)
To record December insurance expense
Insurance Expense
PROBLEM 4.7B
Unearned Retainer Fees
To record advance collections earned in December.
STILLMORE INVESTIGATIONS
Accounts Receivable
a.
(Adjusting Entries)
(1)
(2)
(3)
Year 1
General Journal
To record accrued revenue in December.
Office Supplies 95
31 750
To record depreciation expense in December
Depreciation Expense: Office Equipment
($54,000 x 1/72).
(4)
Office Supplies Expense
To record supplies used in Dec. ($205 – $110).
b.
40,585$
3,500
110
900
1,000
1,900
30,000
8,000
1,000
64,000
700
9,000
6,075
1,100
7,500
Salaries expense
Depreciation expense: Office equipment
Rent expense
Insurance expense
Income tax expense
Interest expense
Salaries payable
Unearned retainer fees
Retained earnings
Dividends
Client fees earned
Office supplies expense
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (continued)
STILLMORE INVESTIGATIONS
December 31, Year 1
Cash
Capital stock
Adjusted Trial Balance
Accounts receivable
Office supplies
Prepaid rent
180
2,350
9,000
Income taxes payable
Note payable
Accumulated depreciation: Office equipment
Interest payable
Accounts payable
Unexpired insurance
Office Equipment
c.
64,000$
700$
9,000
d.
6,075$
Average monthly rent expense for Jan. – Sept.
@ $300 per month
e.
1,100$
December @ $90/month
Insurance expense for January through February
Average insurance expense for Jan. and Feb.
Insurance expense for 12 months ended Dec. 31, Year 1
Rent expense of $300/month in the last 3 months of the year was $275/month less
than the average monthly cost in the first 9 months of the year ($575 – $300).
Rent expense for 12 months ended December 31, Year 1
Less: Rent expense in October through December
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (continued)
STILLMORE INVESTIGATIONS
For the Year Ended December 31, Year 1
Income Statement
Office supplies expense
Client fees earned
Depreciation expense: office equipment
Less: Insurance expense from March through
Insurance expense of $90/month in the last 10 months of the year was $10/month
less than the average monthly cost in the first 2 months of the year ($100 – $90).
6,075
1,100
7,500
Salaries expense
Rent expense
Insurance expense
Interest expense
Income taxes expense
Net Income
Total Expenses
g.
Net Owners’
Revenue – Expenses = Income Assets = Liabilities + Equity
INE I I NE I
INE INE D I
2.
3.
1.
Adjustment
PROBLEM 4.7B
STILLMORE INVESTIGATIONS (concluded)
Income Statement
Balance Sheet
20 Minutes, Strong
a. NE NE NE U U NE
Total
Assets
Total
Liabilities
Owners’
Equity
PROBLEM 4.8B
STEPHEN CORPORATION
Error
Total
Revenue
Total
Expenses
Net
Income
Recorded a declared
but unpaid dividend by
debiting dividends and
crediting Cash.
g. NE U O NE U O
Purchased equipment
and debited supplies
expense and credited
Recorded the sale of
capital stock as a debit
to cash and a credit to
30 Minutes, Medium
a.
b.
c.
f.
SOLUTIONS TO CRITICAL THINKING CASES
YEAR-END ADJUSTMENTS
Management services rendered in December, but which are not billed to customers until
CASE 4.1
Not recording salaries and wages expense until payroll dates is a common practice. However,
No adjusting entry is needed, because although the revenue was collected in advance on
Three months’ revenue was collected in advance on December 1 and was credited to an
the period. Of course, recognizing revenue also increases owners’ equity.
e.
An adjusting entry should be made to record depreciation expense on all equipment owned.
25 Minutes, Medium
a. (1)
(2)
(3)
b.
CASE 4.2
AVIS RENT-A-CAR
THE CONCEPT OF MATERIALITY:
The concept of materiality does mean that financial statements are not precise “down to
The concept of materiality would not permit Avis to charge the purchase of new
automobiles for its rental fleet directly to expense. Although the cost of each individual
An event or transaction is “material” when knowledge of the item reasonably may be
expected to influence the decisions of users of financial statements. One
In evaluating the “materiality” of an event or transaction, accountants should consider:
However, charging the purchases of new cars directly to expense would definitely cause a
10 Minutes, Easy
a.
b.
Note to instructor: It is likely that the bank would insist upon receiving a set of audited financial
The decision by management to wait three years before converting the $40,000 capitalized
advertising expenditure to advertising expense clearly violates generally accepted
ETHICS, FRAUD & CORPORATE GOVERNANCE
CASE 4.3
The decision to capitalize the $40,000 advertising expenditure for three years certainly
has ethical implications if management’s intent was to purposely inflate profitability, and
EXPENSE MANIPULATION
10 Minutes, Easy
1.
CASE 4.4
IDENTIFYING ACCOUNTS
Accounts from Hershey’s balance sheet likely to have required an adjusting entry are:
Accounts Receivable–Trade
INTERNET
2.
3.
4.
7.