CP4–5. (continued)
Req. 3
Closing Entry on December 31 of the Current Year:
Service revenue (from the adjusted trial balance) (−R) ……… 224,000
Retained earnings (+SE) …………………………………….. 40,480
Expenses (from the adjusted trial balance) (−E) ……… 183,520
Req. 4
Financial Accounting, 10/e 4-73
CP4–6.
Transaction (a):
1. This transaction will affect Carey’s financial statements for 14 years (from the
2. Income statement:
Depreciation expense, as given $1,000 each year
3. Balance sheet at December 31, 2021:
Assets:
4. An adjusting entry each year over the life of the asset would be recorded to reflect
the allocation of the cost of the asset when used to generate revenues:
Transaction (b):
1. This transaction will affect Carey’s financial statements for 2 years—2021 and 2022–
2. The 2021 income statement should report rent revenue earned of $20,000 ($30,000
x 4/6). Occupancy was provided for only 4 months in 2021. This is in conformity
with the revenue principle.
CP4–6. (continued)
Transaction (c):
1. This transaction will directly affect Carey’s financial statements for two years, with
the expense incurred in 2021 and the cash payment in 2022.
2. The $7,500 should be reported as wage expense on the 2021 income statement
and as a liability Wages Payable on the 2021 balance sheet. On January 5, 2022,
3. Yes, an adjusting entry must be made to (a) record the $7,500 as an expense in
2021 (following the expense recognition (matching) principle) and (b) to record the
Transaction (d):
1. Yes, service revenue of $45,000 (i.e., $60,000 x 3/4) should be recorded as earned
2. Recognition of revenue earned but not collected by the end of 2021 requires an
adjusting entry. This adjusting entry is necessary to (a) record the revenue earned
3. February 15, 2022—Completion of the last phase of the service contract and cash
collected in full:
Financial Accounting, 10/e 4-75
CP4–7.
Req. 1
LISA’S DAY SPA AND SALON, INC.
Income Statement
For the Year Ended December 31, 2021
Items
Cash
Basis Per
Lisa’s
Statement
Explanation of Changes
Corrected
Basis
Revenues:
Spa fees
$1,215,000
See * below.
$1,102,000
Expenses:
Office rent
Exclude rent for Jan. 2022 ($130,000 ÷ 13) (g)
Utilities
No change
Telephone
See ** below.
Salaries
Add December 2021 salary ($24,000 ÷ 12) (e)
Supplies
See *** below.
Miscellaneous
No change
Depreciation
Given for 2021 (c)
Total expenses
Net income
*
Cash collected for spa fees
$1,215,000
Fees earned in prior years (a)
-142,000
Fees earned in 2021 but not yet collected (b)
+ 29,000
Fees earned in 2021
$1,102,000
Beg. 3,125
End. 5,200
CP4–7. (continued)
Req. 2
Memo to Lisa Knight should include the following:
(1) Net income was overstated by $123,025 because of inappropriate recognition of
revenue (overstated by $113,000) and expenses (understated by $10,025).
(2) Some other items the parties should consider in the pricing decision:
(a) A correct balance sheet at December 31, 2021.
(b) Collectability of any receivables (if they are to be sold with the business).
(g) Expected future cash flows of the business.
Financial Accounting, 10/e 4-77
CRITICAL THINKING CASES
CP4–8.
Req. 1
2020
Adjusting Entries
Debit
Credit
12/31
(a)
Supplies expense (+E, −SE)…………………
2,200
Supplies (−A)……………………………….
(b)
Insurance expense (+E, −SE)…………………….
3,000
Prepaid insurance (−A)……………………
(c)
Depreciation expense (+E, −SE)…………………
8,000
Accumulated depreciation (+XA, −A)…….
(d)
Salaries expense (+E, −SE)…………………………
3,200
Salaries payable (+L)………………………
3,200
(e)
Transportation revenue (−R, −SE) ………
7,000
Unearned transportation revenue (+L)……
7,000
Transportation revenue is too high and needs to be
reduced and an unearned revenue account
created for the appropriate amount.
Income tax expense (+E, −SE)……………………
Income tax payable (+L)……………………
To record 2020 income tax computation:
Transportation revenue: $85,000 − $7,000 = $78,000
Expenses: $47,000 + $2,200 + $3,000
CP4–8. (continued)
Req. 2
ZOLAR MOVING CO.
Corrections to 2020 Financial Statements
Items
Amounts
Reported
Changes
Debit Credit
Corrected
Amounts
2020 Income Statement:
Revenue:
Transportation revenue
$ 85,000
e
7,000
$ 78,000
Expenses:
Salaries expense
17,000
d
3,200
Supplies expense
12,000
a
2,200
Other expenses
18,000
Insurance expense
0
b
3,000
3,000
Depreciation expense
0
8,000
8,000
Income tax expense
0
Total expenses
Net income
$ 38,000
December 31, 2020, Balance Sheet
Assets:
Current Assets:
Cash
$ 2,000
$ 2,000
Supplies
a
2,200
Prepaid insurance
b
3,000
3,000
Total current assets
15,000
9,800
Equipment
40,000
Less: Accumulated deprec.
0
8,000
Other assets
27,000
27,000
Total assets
$82,000
$68,800
Liabilities:
Current Liabilities:
Accounts payable
$ 9,000
$ 9,000
Salaries payable
0
d
3,200
3,200
Unearned transportation revenue
0
e
7,000
7,000
Income tax payable
0
3,650
Total current liabilities
9,000
Stockholders’ Equity:
Common stock
30,000
Retained earnings
15,950
Total stockholders’ equity
45,950
equity
$68,800
Financial Accounting, 10/e 4-79
CP4–8. (continued)
Req. 3
Omission of the adjusting entries caused:
(a) Net income to be overstated by $27,050.
Req. 4
(a) Earnings per share:
Unadjusted — $38,000 net income 10,000 shares = $3.80 per share
Adjusted — $10,950 net income 10,000 shares = $1.10 per share (rounded)
(b) Total asset turnover:
Each of the ratios was affected by inclusion of the adjustments with net income,
revenue, and assets decreasing.
• For earnings per share, the numerator net income decreased while the
CP4–8. (continued)
Req. 5
To the Stockholders of Zolar Moving Co.:
We regret to inform you that your request for a $30,000 loan has been denied.
Our review showed that various adjustments were required to the original set of
financial statements provided to us. The original (unadjusted) financial statements
A review of key financial ratios indicates that the adjustments caused earnings per
share to decline, although total asset turnover increased from 1.32 to 1.35. The
adjusted ratios, however, would need to be compared to those of other start-up
companies in the same industry.
We require that there be sufficient collateral pledged against the loan before we can
consider it. The current market value of the equipment may be able to provide
CP4–9.
Req. 1 Cash from Operations: $36,000
Financial Accounting, 10/e 4-81
CP4–9. (continued)
Req. 4
Adjusting entry (cash receipt credited to Unearned Subscriptions Revenue):
Unearned Subscriptions Revenue (L)
Subscriptions Revenue (R)
Req. 5
a. $9,000 revenue target based on cash sales:
This target is not clearly defined. Does management mean any cash
subscriptions received during the period? Your region generated $36,000 in
cash subscriptions. By this assumption, your region far exceeded the company’s
target. You may be entitled to a generous bonus due to your strong
performance.
FINANCIAL REPORTING AND ANALYSIS TEAM PROJECT
CP4–10.
The solutions to this project will depend on the company and/or accounting period
selected for analysis.