Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-19
HANDOUT 4 – 1 SOLUTION, continued
(d) The company had acquired equipment costing $40,000 on January 1 of the current year. Suppose that
the depreciation on this equipment was calculated to be $2,000 for the current year.
Debit and credit the accounts affected.
Dec. 31
Depreciation Expense (+E, –SE)
2,000
Accumulated Depreciation (+xA, –A)
2,000
Depreciation
Exp. (+E)
(e) On December 1 of the current year, the company had sold $500 in gift certificates for decorating
services to a customer. On December 31 of the current year, the accountant received an envelope
containing $400 worth of redeemed gift certificates, not yet recorded in the company’s books.
Debit and credit the accounts affected.
Dec. 31
Unearned Revenue (–L)
Decorating Revenue (+R, +SE)
=
+
(f) Investments owned by the company earned $1,200 in additional interest revenue for the year; the cash
will be received in January.
Debit and credit the accounts affected.
Dec. 31
Interest Receivable (+A)
1,200
Interest Revenue (+R, +SE)
=
+
Receivable
Revenue
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-20
HANDOUT 4 – 1 SOLUTION, continued
(g) The company borrowed using a note payable from the bank for $30,000 on January 1 of the current
year, due with all interest on June 30 of the following year. The note payable requires 10% interest.
Debit and credit the accounts affected.
Dec. 31
Interest Expense (+E, –SE)
3,000
Interest Payable (+L)
Ensure the equation still balances and debits = credits.
=
+
(h) The company calculated its income taxes as $26,110 for the current year ended December 31.
Debit and credit the accounts affected.
Dec. 31
Income Tax Expense (+E, –SE)
26,110
Income Taxes Payable (+L)
Ensure the equation still balances and debits = credits.
=
+
(i) On December 15 of the current year, the company declared a $750 dividend, payable January 15 of the
following year.
Debit and credit the accounts affected.
Dec. 31
Retained Earnings (–SE)
750
Dividend Payable (+L)
ensure the equation still balances and debits = credits.
=
+
i
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-21
HANDOUT 4 – 1 SOLUTION, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
Unadj.
Adj.
Unadj.
Adj.
Unadj.
750
Adj.
500
Unadj.
(e)
400
100
Adj.
Adj.
750
Unadj.
(e)
Adj.
1,200
(f)
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
Unadj.
3,500
(c)
Adj.
Unadj.
4,000
(b)
Adj.
8,000
Unadj.
3,000
(g)
3,000
Adj.
0
Unadj.
26,110
(h)
26,110
Adj.
Unadj.
(a)
1,000
(b)
4,000
+ Equipment –
Unadj.
40,000
Adj.
40,000
– Accumulated Depr. +
0
Unadj.
2,000
(d)
2,000
Adj.
Unadj.
20,000
Adj.
20,000
9,000
Adj.
– Accounts Payable +
250
Unadj.
– Short-Term
Note Payable +
30,000
Unadj.
– Interest Payable +
Stockholders’ Equity
– Common Stock +
1,000
Unadj.
1,000
Adj.
– Additional Paid-In
Capital +
9,000
Unadj.
– Retained Earnings +
0
Unadj.
(i)
750
+ Wage Expense –
Unadj.
32,000
+ Utilities Expense –
Unadj.
1,000
+ Insurance Expense –
(c)
3,500
+ Depreciation Expense –
(d)
2,000
+ Interest Expense –
(g)
3,000
+ Income Tax Expense –
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-22
HANDOUT 4 – 2
PREPARE AN ADJUSTED TRIAL BALANCE
Use the adjusted balances from the T-accounts in Handout 4-1 to prepare an adjusted trial balance for
Deana’s Decorators as of December 31 of the current year.
Deana’s Decorators
Adjusted Trial Balance
December 31, Current Year
Debit
Credit
Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Prepaid Rent
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Short-Term Notes Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-23
HANDOUT 4 – 2 SOLUTION
PREPARE AN ADJUSTED TRIAL BALANCE
Use the adjusted balances from the T-accounts in Handout 4-1 to prepare an adjusted trial balance for
Deana’s Decorators as of December 31 of the current year.
Deana’s Decorators
Adjusted Trial Balance
December 31, Current Year
Debit
Credit
Cash
$ 43,450
Accounts Receivable
4,000
Interest Receivable
1,200
Supplies
800
Prepaid Insurance
2,500
Prepaid Rent
8,000
Equipment
Accumulated Depreciation
$ 2,000
Long-Term Investments
Accounts Payable
Dividend Payable
750
Unearned Revenue
Short-Term Notes Payable
Interest Payable
3,000
Income Taxes Payable
26,110
Common Stock ($1 par value)
1,000
Additional Paid-in Capital
9,000
Retained Earnings
750
Decorating Revenue
120,400
Investment Income
1,200
Wage Expense
Utilities Expense
1,000
Telephone Expense
500
Supplies Expense
1,000
Rent Expense
4,000
Insurance Expense
3,500
Depreciation Expense
2,000
Interest Expense
3,000
Income Tax Expense
26,110
Totals
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-24
HANDOUT 4 – 3
FINANCIAL STATEMENTS
Use the balances from the trial balance in Handout 4-2 to prepare (1) an income statement for Deana’s
Deana’s Decorators
Income Statement
For the year ended December 31, Current Year
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-25
HANDOUT 4 – 3, continued
Deana’s Decorators
Balance Sheet
December 31, Current Year
Assets
Liabilities
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-26
HANDOUT 4 – 3 SOLUTION
FINANCIAL STATEMENTS
Use the balances from the trial balance in Handout 4-2 to prepare (1) an income statement for Deana’s
Decorators for the year ended December 31 of the current year and (2) a balance sheet as of December 31
of the current year.
Deana’s Decorators
Income Statement
For the year ended December 31, Current Year
Operating revenues:
Decorating revenue
$120,400
Operating expenses:
Wage expense
32,000
Utilities expense
Telephone expense
Supplies expense
Rent expense
Insurance expense
Depreciation expense
Interest expense
Total operating expenses
47,000
Operating income (or Income from operations)
73,400
Other items:
Interest revenue
Income before income taxes (or Pretax income)
74,600
Income tax expense
26,110
Net income
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-27
HANDOUT 4 – 3 SOLUTION, continued
Deana’s Decorators
Balance Sheet
December 31, Current Year
Assets
Current Assets
Cash
$ 43,450
Accounts receivable
4,000
Interest receivables
1,200
Supplies
Prepaid insurance
2,500
Prepaid rent
Total Current Assets
Property, Plant & Equipment:
Equipment
Accumulated depreciation
Net Property, Plant, and Equipment
2,000
Long-term investments
20,000
Total Assets
Liabilities
Current Liabilities:
Accounts payable
$ 250
Dividends payable
Unearned revenue
Short-term note payable
Interest payable
3,000
Income taxes payable
26 110
Total Current Liabilities
Stockholders’ Equity
Common stock ($1 per share)
1,000
Additional paid-in capital
9,000
Retained earnings*
Total Stockholders’ Equity
57,740
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-28
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
What it measures and how to interpret:
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-29
HANDOUT 4 – 4
TOTAL ASSET TURNOVER RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Deana’s
Decorators for the year ending December 31of the current year. Assume that assets totaled $110,000 at
January 1 of the current year. Then, indicate what this ratio measures and how you would interpret the
results.
Calculation:
Average Total Assets = (Beginning balance + Ending balance) ÷ 2
What it measures and how to interpret:
The total asset turnover ratio measures the sales generated per dollar of assets. Deana’s Decorators
generated $1.06 of sales per dollar of assets.
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-30
HANDOUT 4 – 5
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,
PREPARATION OF POST-CLOSING TRIAL BALANCE
Refer to the adjusted trial balance in Handout 4-2 for Deana’s Decorators and prepare the required closing
Date
Accounts
Debit
Credit
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-31
HANDOUT 4 – 5, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
Unadj.
Adj.
Unadj.
0
1,200
Adj.
1,200
Unadj.
750
(i)
750
Adj.
Unadj.
(e)
120,400
Adj.
Unadj.
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
+ Prepaid Insurance –
Unadj.
3,500
(c)
Adj.
Unadj.
12,000
4,000
(b)
Adj.
0
Unadj.
3,000
(g)
3,000
Adj.
Unadj.
26,110
(h)
26,110
Adj.
Unadj.
(a)
1,000
+ Equipment –
Unadj.
40,000
Adj.
40,000
– Accumulated Depreciation +
0
Unadj.
2,000
(d)
2,000
Unadj.
20,000
Adj.
20,000
(g)
3,000
(h)
26,110
– Accounts Payable +
250
Unadj.
– Notes Payable +
30,000
Unadj.
30,000
Adj.
– Interest Payable +
Stockholders’ Equity
– Common Stock +
1,000
Adj.
– Additional Paid-in
Capital +
– Decorating Revenue +
120,000
Unadj.
400
(e)
+ Utilities Expense –
Unadj.
1,000
+ Telephone Expense –
(b)
4,000
+ Insurance Expense –
(c)
3,500
+ Depreciation Expense –
(d)
2,000
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-32
HANDOUT 4 – 5, continued
Deana’s Decorators
Post-Closing Trial Balance
December 31, Current Year
Account
Debit
Credit
Cash
Accounts Receivable
Interest Receivable
Supplies
Prepaid Insurance
Equipment
Accumulated Depreciation
Long-Term Investments
Accounts Payable
Dividend Payable
Unearned Revenue
Notes Payable
Interest Payable
Income Taxes Payable
Common Stock ($1 par value)
Additional Paid-in Capital
Retained Earnings
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-33
HANDOUT 4 – 5 SOLUTION
CLOSING ENTRIES, POSTING TO T-ACCOUNTS,
PREPARATION OF POST-CLOSING TRIAL BALANCE
Refer to the adjusted trial balance in Handout 4-2 for Deana’s Decorators and prepare the required closing
entries as of December 31 of the current year. Post the entries to the T-accounts shown on the next page.
Then, prepare a post-closing trial balance as of December 31 of the current year.
Date
Accounts
Debit
Credit
Dec. 31
Decorating Revenue (–R)
120,400
Interest Revenue (–R)
1,200
Utilities Expense (–E)
1,000
Supplies Expense (–E)
1,000
Insurance Expense (–E)
3,500
Depreciation Expense (–E)
2,000
Income Tax Expense (–E)
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
4-34
HANDOUT 4 – 5 SOLUTION, continued
Assets
Liabilities
Stockholders’ Equity
+ Cash –
Unadj.
43,450
Unadj.
Adj.
Unadj.
750
(i)
750
Adj.
Close
120,400
120,400
Adj.
0
Bal
+ Interest Receivable –
Unadj.
0
(f)
1,200
Adj.
1,200
+ Supplies –
Unadj.
1,800
1,000
(a)
Adj.
800
Unadj.
6,000
3,500
(c)
Adj.
2,500
Unadj.
12,000
4,000
(b)
0
Unadj.
3,000
(g)
3,000
Adj.
Unadj.
26,110
(h)
26,110
Adj.
Unadj.
500
Close
Bal
0
(a)
1,000
1,000
Close
Bal
0
Adj.
8,000
+ Equipment –
Unadj.
40,000
Adj.
40,000
0
Unadj.
2,000
(d)
2,000
Unadj.
20,000
Adj.
20,000
750
48,490
Close
47,740
Bal
0
(d)
2,000
2,000
Close
Bal
0
(g)
3,000
3,000
Close
Bal
0
(h)
26,110
26,110
Close
Bal
0
– Accounts Payable +
250
Unadj.
– Unearned Revenue +
500
Unadj.
(e)
400
100
Adj.
– Notes Payable +
30,000
Unadj.
30,000
Adj.
– Interest Payable +
Stockholders’ Equity
– Common Stock +
1,000
Adj.
– Decorating Revenue +
120,000
Unadj.
400
(e)
Close
1,200
1,200
(f)
0
Bal
+ Wage Expense –
Unadj.
32,000
32,000
Close
Bal
0
+ Utilities Expense –
Unadj.
1,000
1,000
Close
Bal
0
+ Rent Expense –
(b)
4,000
4,000
Close
Bal
0
+ Insurance Expense –
(c)
3,500
3,500
Close
Chapter 04 – Adjustments, Financial Statements, and the Quality of Earnings
HANDOUT 4 – 5 SOLUTION, continued
Deana’s Decorators
Post-Closing Trial Balance
December 31, Current Year
Account
Debit
Credit
Cash
$ 43,450
Accounts Receivable
4,000
Interest Receivable
1,200
Supplies
800
Prepaid Insurance
2,500
Equipment
Accumulated Depreciation
$ 2,000
Long-Term Investments
Accounts Payable
250
Dividend Payable
750
Unearned Revenue
100
Notes Payable
30,000
Interest Payable
3,000
Income Taxes Payable
26,110
Common Stock ($1 par value)
1,000
Additional Paid-in Capital
9,000
Retained Earnings
47,740
Decorating Revenue
Investment Income
Wage Expense
Utilities Expense
Telephone Expense
Supplies Expense
Rent Expense
Insurance Expense
Depreciation Expense
Interest Expense
Income Tax Expense
Totals
$119,950
$119,950
Note:
Revenue and expense accounts are listed here for illustrative purposes only. Often, a post-closing trial
balance will list only balance sheet accounts with balances.