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30 Minutes, Medium
Sept.
30 600
Prepaid Costume Rental 600
30 300
Accumulated Depreciation: Fixtures and Equip. 300
30 2,200
Salaries Payable 2,200
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)
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
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)
1. $ 154,375
3,200
800
$ 158,375
4. $ 16,500
1,500
18,000$
5. $ 780
250
$ 1,030
8. 25$
25
$ 50
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)
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
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
1. $ 203,400
4. $ 2,592
(2,064)
528$
5. 129,600$
9. -$
12,600
$ 12,600
10. $ 8,100
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)
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
(5)
($1,080 x 1/12).
Rent Expense
To record office rent in December ($1,800 x 1/6).
(6)
(7)
To record December insurance expense
Insurance Expense
PROBLEM 4.7B
Unearned Retainer Fees
To record advance collections earned in December.
STILLMORE INVESTIGATIONS
Accounts Receivable
a.
(Adjusting Entries)
(1)
(2)
(3)
Year 1
General Journal
To record accrued revenue in December.
b.
40,585$
3,500
110
900
1,000
1,900
30,000
8,000
1,000
64,000
700
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
c.
64,000$
700$
9,000
d.
6,075$
e.
1,100$
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).
g.
Net Owners'
Revenue - Expenses = Income Assets = Liabilities + Equity
INE I I NE I
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.
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.
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:
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
