3-21
EXERCISE 3-11 (20–25 Minutes)
(a) CAVAMANLIS CO.
Income Statement
For the Year Ended December 31, 2012
Revenues
Service revenue ……………………………………….
$12,590
(b) CAVAMANLIS CO.
Statement of Retained Earnings
For the Year Ended December 31, 2012
Retained earnings, January 1 …………………………..
$11,310
Add: Net income ……………………………………………………….
2,762
Less: Dividends ……………………………………………………….
3,000
Retained earnings, December 31 …………………………..
$11,072
(c) CAVAMANLIS CO.
Assets
Current Assets
Cash ……………………………………………………..
Accounts receivable ………………………………
Prepaid rent expense ……………………………..
Total current assets ………………………….
Property, plant, and equipment
Equipment ……………………………………………..
Expenses
Salaries and wages expense ……………………..
Rent expense …………………………………………..
Depreciation expense …………………………..
Interest expense ……………………………………….
EXERCISE 3-11 (Continued)
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable ……………………………………….
$ 5,700
Accounts payable ………………………………….
Interest payable …………………………………….
Total current liabilities ……………………..
Common stock ……………………………………..
Retained earnings …………………………..…….
EXERCISE 3-12 (20–25 Minutes)
(a) FLYNN DESIGN AGENCY
Income Statement
For the Year Ended December 31, 2012
Revenues
Service revenue ………………………………………
$58,500
Expenses
Salaries and wages expense …………………….
Depreciation expense …………………………..
Rent expense …………………………..……………..
Supplies expense ……………………………………
Insurance expense ………………………………….
Interest expense ……………………………………..
Total expenses ………………………………….
Retained earnings, January 1 …………………………..
Add: Net income ……………………………………………………….
3-23
EXERCISE 3-12 (Continued)
(a) (Continued) FLYNN DESIGN AGENCY
Balance Sheet
December 31, 2012
Assets
Cash ……………………………………………………………………..
$10,000
Accounts receivable ………………………………………………
21,500
Liabilities and Stockholders’ Equity
Liabilities
Notes payable ……………………………………………….
$ 5,000
Accounts payable ………………………………………….
8,000
Unearned service revenue ……………………………..
Salaries and wages payable …………………………..
1,300
Interest payable …………………………………………….
Total liabilities ………………………………………..
$20,050
Common stock ……………………………………………..
Retained earnings …………………………………………
(b) 1. Based on interest payable at December 31, 2012, interest is $25 per
month or .5% of the note payable. .5% X 12 = 6% interest per year.
2. Salaries and Wages Expense, $12,300 less Salaries and Wages Payable
Prepaid insurance ………………………………………………….
Equipment …………………………………………………………….
$60,000
EXERCISE 3-13 (10–15 Minutes)
(a)
Sales Revenue ……………………………………………………….
$800,000
Less: Sales returns and allowances …………………………..
$24,000
Sales discounts ……………………………………………………….
Net sales ………………………………………………………………………………..
(b)
Sales Revenue ……………………………………………………….
Income Summary ……………………………………………………….
Income Summary……………………………………………………….
Sales Returns and Allowances …………………………..
24,000
Sales Discounts ……………………………………………………….
12,000
EXERCISE 3-14 (10–15 minutes)
Sales Revenue ………………………………………………………………………..
340,000
Sales Returns and Allowances …………………………..
13,000
Sales Discounts ……………………………………………………….
8,000
Income Summary ……………………………………………………….
Income Summary ……………………………………………………….
Cost of Goods Sold ……………………………………………………….
Freight-out ……………………………………………………………………….
Insurance Expense ……………………………………………………….
Rent Expense ……………………………………………………….
20,000
Salaries and Wages Expense …………………………..………………..
61,000
Income Summary ……………………………………………………….
Retained Earnings ……………………………………………………….
17,000
EXERCISE 3-15 (10–15 minutes)
(a) $ 5,000 ($90,000 – $85,000) (d) $95,000 ($ 5,000 + $90,000)
3-25
EXERCISE 3-16 (10–15 minutes)
Sales Revenue ……………………………………………………….
390,000
Cost of Goods Sold……………………………………………………….
235,700
Sales Returns and Allowances …………………………..
12,000
(or)
Sales Revenue ……………………………………………………….
390,000
Income Summary ……………………………………………………….
390,000
Income Summary ……………………………………………………….
346,700
Cost of Goods Sold……………………………………………………….
235,700
Sales Returns and Allowances …………………………..
Sales Discounts ……………………………………………………….
15,000
Selling Expenses ……………………………………………………….
Administrative Expenses ………………………………………………….
Income Tax Expense ……………………………………………………….
30,000
Income Summary ……………………………………………………….
Retained Earnings ……………………………………………………….
43,300
Retained Earnings ……………………………………………………….
Dividends ……………………………………………………….
18,000
Sales Discounts ……………………………………………………….
Selling Expenses ……………………………………………………….
Administrative Expenses ………………………………………………….
38,000
Income Tax Expense ……………………………………………………….
Income Summary ……………………………………………………….
3-26
EXERCISE 3-17 (10–15 minutes)
Mar.
1
Cash …………………………………………………………………….
60,000
Common Stock …………………………………………….
60,000
(Investment of cash in business)
3
Land ……………………………………………………………………..
10,000
Buildings …………………………..………………………………….
22,000
10
Equipment …………………………..………………………………..
2,500
Accounts Payable …………………………………………
2,500
(Purchased equipment on account)
18
Cash …………………………………………………………………….
1,200
Service Revenue …………………………………………..
1,200
(Received cash for services performed)
25
Dividends ……………………………………………………………..
1,000
Cash …………………………………………………………….
1,000
(Declared and paid a $1,000 cash dividend)
30
Salaries and Wages Expense …………………………………
Cash …………………………………………………………….
(Paid salaries and wages expense)
30
Accounts Payable …………………………………………………
2,500
Cash …………………………………………………………….
2,500
(Paid creditor on account)
31
Cash …………………………………………………………………….
Service Revenue …………………………………………..
Equipment …………………………..………………………………..
6,000
Cash …………………………………………………………….
38,000
(Purchased Michelle Wie’s Golf Land)
5
Advertising Expense ……………………………………………..
1,600
(Paid for advertising)
6
Prepaid Insurance …………………………………………………
1,480
Cash …………………………………………………………….
1,480
(Paid for one-year insurance policy)
3-27
*EXERCISE 3-18 (15–20 minutes)
CORINNE DUNBAR, M.D.
Conversion of Cash Basis to Accrual Basis
For the Year 2012
Excess of cash collected over cash disbursed
($142,600 – $60,470) …………………………………………………………….
$82,130
Alternate solution:
CORINNE DUNBAR, M.D.
Conversion of Income Statement Data
from Cash Basis to Accrual Basis
For the Year 2012
Cash
Adjustments
Accrual
Basis
Add
Deduct
Basis
Collections from customers:
$142,600
–Accounts receivable, Jan. 1
$11,250
+Accounts receivable, Dec. 31
$15,927
+Unearned service revenue, Jan. 1
–Unearned service revenue, Dec. 31
$146,006
Disbursements for expenses:
–Accrued liabilities, Jan. 1
+Accrued liabilities, Dec. 31
+Prepaid expenses, Jan. 1
–Prepaid expenses, Dec. 31
Operating expenses
57,828
Net income—cash basis
$ 82,130
Net income—accrual basis
$ 88,178
3-28
*EXERCISE 3-19 (10–15 minutes)
(a) LATTA CORP.
Income Statement (Cash Basis)
For the Year Ended December 31,
(b) LATTA CORP.
Income Statement (Accrual Basis)
For the Year Ended December 31,
2011
2012
Sales* …………………………………………………..
$480,000
$445,000
Expenses** …………………………………………..
277,000
265,000
$180,000
*EXERCISE 3-20 (20–25 minutes)
(a)
Adjusting Entries:
1.
Insurance Expense ($6,000 X 5/24) …………………………..
Prepaid Insurance …………………………..…………………………..
2.
Rent Revenue ($2,400 X 1/3) …………………………..
800
Unearned Rent Revenue …………………………..
800
3.
Supplies ……………………………………………………….
290
Advertising Expense ……………………………………………………….
290
4.
Interest Expense ……………………………………………………….
770
Interest Payable ……………………………………………………….
770
Sales ……………………………………………………
Net income ……………………………………………
3-29
*EXERCISE 3-20 (Continued)
(b)
Reversing Entries:
1.
No reversing entry required.
*EXERCISE 3-21 (10–15 minutes)
Accounts
Adjusted Trial
Balance
Income
Statement
Balance Sheet
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Sales Returns and
2.
Unearned Rent Revenue ……………………………………………………….
Rent Revenue ……………………………………………………….
3.
Advertising Expense ……………………………………………………….
Supplies ……………………………………………………….
4.
Interest Payable ……………………………………………………….
Interest Expense ……………………………………………………….
3-30
*EXERCISE 3-22 (20–25 minutes)
MADRASAH CO.
Worksheet (Partial)
For the Month Ended April 30, 2012
Adjusted Trial
Balance
Income
Statement
Balance Sheet
Account Titles
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Cash
18,972
18,972
Accounts Receivable
6,920
6,920
Owner’s Capital
34,960
34,960
Owner’s Drawings
6,650
6,650
Service Revenue
12,590
12,590
Salaries and Wages
Expense
6,840
6,840
Rent Expense
2,760
2,760
Depreciation Expense
Interest Expense
Interest Payable
83
Net Income
Prepaid Rent Expense
2,280
2,280
Equipment
18,050
18,050
Notes Payable
5,700
5,700
Accounts Payable
4,472
4,472
3-31
*EXERCISE 3-22 (Continued)
MADRASAH CO.
Balance Sheet
April 30, 2012
Assets
Current Assets
Cash ……………………………………………………….
$18,972
Accounts receivable ………………………………..
6,920
Liabilities and Owners’ Equity
Current liabilities
Notes payable …………………………………………
$ 5,700
Accounts payable ……………………………………
Interest payable ………………………………………
83
Owner’s capital ……………………………………….
Prepaid rent expense ………………………………
2,280
Total current assets …………………………
$28,172
Property, plant, and equipment
3-32
*EXERCISE 3-23 (10–15 minutes)
LETTERMAN CO.
Worksheet (Partial)
For Month Ended February 28, 2012
Trial
Balance
Adjustments
Adjusted
Trial
Balance
Income
Statement
Balance Sheet
Account Titles
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
Supplies
1,756
(a)
1,241
515
515
Supplies
Expense
(a)
1,241
1,241
1,241
Interest
Depreciation
The following accounts and amounts would be shown in the February
income statement:
Interest
3-33
TIME AND PURPOSE OF PROBLEMS
Problem 3-1 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to post daily transactions to a “T” account ledger,
take a trial balance, prepare an income statement, a balance sheet and a statement of owners’ equity,
close the ledger, and take a post-closing trial balance. The problem deals with routine transactions of a
professional service firm and provides a good integration of the accounting process.
Problem 3-2 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries, and prepare financial
statements (income statement, balance sheet, and statement of retained earnings). The student also is
asked to analyze two transactions to find missing amounts.
Problem 3-3 (Time 25–30 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries. The adjusting entries
are fairly complex in nature.
Problem 3-4 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting entries and an adjusted trial
balance and then prepare an income statement, a retained earnings statement, and a balance sheet. In
addition, closing entries must be made and a post-closing trial balance prepared.
Problem 3-5 (Time 15–20 minutes)
Purpose—to provide the student with an opportunity to determine what adjusting entries need to be
made to specific accounts listed in a partial trial balance. The student is also required to determine the
amounts of certain revenue and expense items to be reported in the income statement.
Problem 3-6 (Time 25–35 minutes)
Purpose—to provide the student with an opportunity to prepare year-end adjusting entries from a trial
balance and related information presented. The problem also requires the student to prepare an
income statement, a balance sheet, and a statement of owners’ equity. The problem covers the basics
of the end-of-period adjusting process.
Problem 3-7 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were
made from a trial balance and an adjusted trial balance. The student is also required to prepare an
income statement, a statement of retained earnings, and a balance sheet. In addition, the student
needs to answer a number of questions related to specific accounts.
Problem 3-8 (Time 25–35 minutes)
Purpose—to provide an opportunity for the student to figure out the year-end adjusting entries that were
made from a trial balance and an adjusted trial balance. The student is also required to prepare an
income statement, a statement of retained earnings, and a balance sheet. In addition, the student
needs to answer a number of questions related to specific accounts.
Problem 3-9 (Time 30–40 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting, and closing entries. This
problem presents basic adjustments including a number of accruals and deferrals. It provides the
student with an integrated flow of the year-end accounting process.
Problem 3-10 (Time 30–35 minutes)
Purpose—to provide an opportunity for the student to prepare adjusting and closing entries from a trial
balance and related information. The student is also required to post the entries to “T” accounts.
Time and Purpose of Problems (Continued)
*Problem 3-11 (Time 35–40 minutes)
Purpose—to provide an opportunity for the student to prepare and compare (a) cash basis and accrual
basis income statements, (b) cash basis and accrual basis balance sheets, and (c) to discuss the
weak-nesses of cash basis accounting.
*Problem 3-12 (Time 40–50 minutes)
Purpose—to provide an opportunity for the student to complete a worksheet and then prepare a
classified balance sheet. In addition, adjusting and closing entries must be made and a post-closing
trial balance prepared.
3-35
SOLUTIONS TO PROBLEMS
PROBLEM 3-1
(a) (Explanations are omitted.) and (d)
Cash
Equipment
Sept.
1
20,000
Sept.
4
680
Sept.
2
17,280
Accounts Receivable
Sept.
14
5,820
Sept.
20
980
25
2,110
Accounts Payable
Bal.
30
6,950
Sept.
18
3,600
Sept.
2
17,280
Bal.
30
13,680
Rent Expense
Sept.
Sept.
Sept.
5
Sept.
30
Sept.
30
9,620
Sept.
Bal.
30
2,110
Sept.
Sept.
Sept.
30
Salaries and Wages Expense
Sept.
30
1,800
Sept.
30
1,800
5
10
19
Sept.
19
Sept.
1
30
30
6,007
30
Bal.
30
30
Bal
12,133
PROBLEM 3-1 (Continued)
Depreciation Expense
Income Summary
Sept.
30
288
Sept.
30
288
Sept.
30
680
Sept.
30
9,620
30
515
30
330
30
288
(b) YASUNARI KAWABATA, D.D.S.
Trial Balance
September 30
Debit
Credit
Cash …………………………………………………………………………….
$12,133
Accounts Receivable …………………………………………………….
6,950
Supplies ……………………………………………………………………….
Equipment ……………………………………………………….
Accumulated Depreciation—Equipment …………………………
Accounts Payable …………………………..…………………………..
Service Revenue ……………………………………………………….
Rent Expense ……………………………………………………….
Office Expense ……………………………………………………….
Salaries and Wages Expense …………………………………………
1,800
Supplies Expense …………………………..…………………………..
Depreciation Expense ……………………………………………………
3-37
PROBLEM 3-1 (Continued)
(c) YASUNARI KAWABATA, D.D.S.
Income Statement
For the Month of September
Service revenue ……………………………………………………….
$9,620
YASUNARI KAWABATA, D.D.S.
Statement of Owners’ Equity
For the Month of September
Owner’s Capital September 1 ……………………………………………..
$20,000
Add: Net income for September ……………………………………….
6,007
26,007
Less: Withdrawal by owner ……………………………………………….
Cash …………………………..
Accounts receivable ……….
Supplies …………………………
Equipment. …………………….
Expenses:
Salaries and wages expense…………………………
$1,800
Rent expense ………………………………………………
Supplies expense ………………………………………..
Depreciation expense …………………………..
Office expense …………………………………………….
Total expenses…………………………………………
PROBLEM 3-1 (Continued)
(d) YASUNARI KAWABATA, D.D.S.
Post-Closing Trial Balance
September 30
Debit
Credit
Cash ……………………………………………………….
$12,133
Accounts Receivable ………………………………………
Accumulated Depreciation—Equipment …………..
3-39
PROBLEM 3-2
(a)
Dec. 31
Accounts Receivable ……………………………………………………….
3,500
Service Revenue ……………………………………………………….
3,500
31
Unearned Service Revenue …………………………..
1,400
Service Revenue ……………………………………………………….
1,400
(b) MASON ADVERTISING AGENCY
Income Statement
For the Year Ended December 31, 2012
Revenues
Service revenue ………………………………………………
$63,500
Insurance expense …………………………..
31
Supplies Expense ……………………………………………………….
5,400
Supplies ……………………………………………………….
5,400
31
Depreciation Expense …………………………..…………………………..
5,000
31
Interest Expense ……………………………………………………….
Interest Payable ……………………………………………………….
31
Insurance Expense ……………………………………………………….
Prepaid Insurance ……………………………………………………….
31
Salaries and Wages Expense …………………………..
1,300
Salaries and Wages Payable …………………………..
PROBLEM 3-2 (Continued)
MASON ADVERTISING AGENCY
Statement of Retained Earnings
For the Year Ended December 31, 2012
Retained earnings, January 1 ……………………………………………………
Add: Net income……………………………………………………….
MASON ADVERTISING AGENCY
Balance Sheet
December 31, 2012
Assets
Cash …………………………..……………………………………………
$11,000
Accounts receivable …………………………………………………
Supplies …………………………………………………………………..
Prepaid insurance …………………………..………………………..
Equipment ……………………………………………………………….
$60,000
Less: Accumulated depreciation—equipment …………..
Liabilities and Stockholders’ Equity
Liabilities
Notes payable………………………………………………….
$ 5,000
Accounts payable ……………………………………………
5,000
Unearned service revenue …………………………..
5,600
Salaries and wages payable …………………………..
1,300
Interest payable ……………………………………………….
Total liabilities …………………………………………..
Common stock ………………………………………………..
Retained earnings ……………………………………………
(c) 1. Interest is $50 per month or 1% of the note payable. 1% X 12 = 12%
interest per year.
2. Salaries and Wages Expense, $11,300 less Salaries and Wages
Payable 12/31/12, $1,300 = $10,000. Total Payments, $12,500 –
$10,000 = $2,500 Salaries and Wages Payable 12/31/11.