CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-57
PROBLEM 3-11A (Concluded)
(c) Wages and salaries paid:
Total wage and salary expense $ 24,600
Not yet paid, salaries and wages payable (10,000)
Cash paid $ 14,600
LO 3,5,6 PROBLEM 3-12A JOURNAL ENTRIES
1. Journal entries:
Journal Feb. 15 Cash ………………………………………………. 8,000
Entry Accounts Receivable …………………… 8,000
Analysis Received cash on open accounts.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 8,000
Accounts
Receivable
(8,000
)
3-58 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 3-12A (Continued)
Journal Feb. 28 Wages Expense ………………………………. 400
Entry Cash …………………………………………. 400
Analysis Paid wages to employees for the month.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (400
)
(400) Wages Expense 400 (400)
Journal Feb. 28 Advertising Expense ………………………… 3,230
Entry Cash …………………………………………. 3,230
Analysis Paid for advertising used in February.
Balance Sheet Income Statement
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-59
PROBLEM 3-12A (Concluded)
2. Under the accrual basis of accounting, expenses are recognized when incurred.
Therefore, even though no cash was paid on February 27, an expense would be
recognized in February because the company used the gas and oil during the
month.
LO 3,5,6 PROBLEM 3-13A JOURNAL ENTRIES AND A BALANCE SHEET
1. Journal entries:
Journal July 2 Cash ………………………………………………. 18,000
Entry Capital Stock ………………………………. 18,000
Analysis Issued capital stock to six owners
in exchange for $3,000 each.
Journal July 5 Equipment ………………………………………. 18,000
Entry Cash …………………………………………. 5,000
Analysis Accounts Payable ……………………….. 13,000
Purchased equipment with down payment;
balance due in 30 days.
Balance Sheet Income Statement
3-60 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 3-13A (Continued)
Journal July 17 Advertising Expense ………………………… 200
Entry Cash …………………………………………. 200
Analysis Paid for door-to-door advertising.
Balance Sheet Income Statement
Journal July 28 Prepaid Rent …………………………………… 1,000
Entry Utilities Expense ………………………………. 450
Analysis Cash …………………………………………. 1,450
Paid August rent and July utilities.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash (1,450
)
Prepaid
Rent 1,000
(450)
Utilities Expense 450
(450)
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-61
PROBLEM 3-13A (Concluded)
2. KRITTERSBEGONE INC.
BALANCE SHEET
JULY 31
Assets
Current assets:
Cash …………………………………………………………………. $ 8,850*
Accounts receivable ……………………………………………. 7,500
Prepaid rent ……………………………………………………….. 1,000
Total current assets …………………………………………………. $17,350
Property, plant, and equipment:
Equipment …………………………………………………………. 18,000
Total assets ……………………………………………………………. $35,350
3-62 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASES
READING AND INTERPRETING FINANCIAL STATEMENTS
LO 4 DECISION CASE 3-1 COMPARING TWO COMPANIES IN THE SAME INDUSTRY:
CHIPOTLE AND PANERA BREAD
1. Chipotle’s largest expense is its food, beverage, and packaging costs of
$1,420,994,000. Because Chipotle operates restaurants, it would not be unusual for
2. The ratio of general and administrative expense to total revenues, for each company
is as follows (amounts in thousands of dollars):
3. The ratio of income tax expense, or provision for income taxes, to income before in-
come tax for each company is as follows (amounts in thousands of dollars):
Chipotle Panera Bread
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-63
LO 3,5,6 DECISION CASE 3-2 READING AND INTERPRETING PANERA BREAD’S
STATEMENT OF CASH FLOWS
1. $224,217,000
Journal entry:
Journal Property and Equipment …………………………. 224,217,000
Entry Cash ………………………………………………. 224,217,000
Analysis Purchased property and equipment.
Balance Sheet Income Statement
2. $100,000,000
Journal entry:
Journal Cash ……………………………………………………. 100,000,000
Entry Long-term Debt ……………………………….. 100,000,000
Analysis Long-term borrowings.
3-64 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 1,3,5,6 DECISION CASE 3-3 READING AND INTERPRETING CARNIVAL CORPORA-
TION’S BALANCE SHEET
1. Carnival regularly sells cruise ship tickets, together with other activities like shore
2. The effect on the accounting equation from a customer deposit is as follows:
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Increase Increase
3. Journal entry to record a deposit of $1,000 by a customer on a future cruise:
4. The liability Customer Deposits is reduced when the passenger returns from the
cruise (for cruises longer than ten nights revenue is recognized on a pro rata basis).
At this point, Carnival has satisfied its obligation and so it will reduce the liability
account, Customer Deposits, and credit a revenue account. This is an internal event.
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-65
MAKING FINANCIAL DECISIONS
LO 2,3 DECISION CASE 3-4 CASH FLOW VERSUS NET INCOME
1. YOUNG PROPERTIES
INCOME STATEMENT
FOR THE MONTH OF JANUARY
Commission revenue ……………………………………………….. $30,000*
Expenses:
Commissions ……………………………………………………… $16,000**
2. YOUNG PROPERTIES
STATEMENT OF CASH FLOWS
FOR THE MONTH OF JANUARY
Cash flows from operating activities:
Cash collected in commissions ……………………………… $22,000
Cash paid for:
3-66 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASE 3-4 (Concluded)
3. TO: Shelia Young
FROM: Student’s name
DATE: January 31
SUBJECT: First month’s results
As you requested, I reviewed the results of your operations for the first month of
business. Fortunately, your concerns about being “in the hole” are really not justified.
You did in fact have a good first month of sales and have every reason to be
4. Assets are essentially unexpired costs and represent future benefits. Once those
benefits have been used up, the costs become expired and the asset is no longer of
any value. In accounting, the periodic process of recognizing the expiration of bene-
1. It appears that Simon took the $20,000 cash he originally contributed to the business
and used it to buy mowing equipment and a truck. The entry would be:
Journal Mowing Equipment ……………………………………… 5,000
Entry Truck …………………………………………………………. 15,000
Analysis Cash ……………………………………………………. 20,000
To record purchase of mowing equipment and
truck for cash.
Cash (20,000
)
2. FRASER LANDSCAPING
INCOME STATEMENT
FOR THE SIX MONTHS ENDED SEPTEMBER 30
Revenues:
Landscaping ………………………………………………………. $33,400
Lawn care ………………………………………………………….. 24,000 $57,400
3. Both the mowing equipment and the truck will benefit Fraser’s business for several
years, and he should allocate their cost over their estimated useful lives. He has
3-68 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
DECISION CASE 3-5 (Continued)
4. FRASER LANDSCAPING
BALANCE SHEET
SEPTEMBER 30
Assets
Current assets:
Cash …………………………………………………………………. $ 1,200
Accounts receivable ……………………………………………. 23,000
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable ……………………………………………….. $13,000
Capital stock …………………………………………………………… $20,000
Retained earnings ……………………………………………………. 11,200
Total stockholders’ equity …………………………………….. 31,200*
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-69
DECISION CASE 3-5 (Concluded)
5. Memorandum to the request for a loan:
TO: Simon Fraser
FROM: Student’s name
DATE: October 15
SUBJECT: Loan request
assets, depreciation expense would equal $4,000 for the year.
The balance sheet also presents some concerns to me. First, 40% of your ac-
counts receivable remain uncollected at the end of the season. Before extending a
loan, I would need assurances that a very high percentage of this amount will be
realized in the near future. Second, you have a sizeable amount of accounts payable
outstanding at the present time. Given the small cash balance of $1,200, your ability
to repay the creditors is very directly tied to whether you will be able to collect the
amounts due from your customers.
3-70 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ETHICAL DECISION MAKING
LO 3,5,6 DECISION CASE 3-6 DELAY IN THE POSTING OF A JOURNAL ENTRY
1. Recognize an ethical dilemma:
Entries entered into the journal but not posted to the ledger accounts will not be re-
2. Analyze the key elements in the situation:
a. The controller is not correct in saying that the omission of the expense entry “will
not hurt anyone.” You and your boss would personally benefit, and stockholders
and other outside constituents may be harmed.
d. The personal interests of those responsible for preparing the financial statements
are in conflict with those who have a right to fair and accurate presentation in
those statements.
e. Your responsibility, and that of the controller, are to present financial statements
that give a fair and accurate picture of the company’s operations.
3. List alternatives and evaluate the impact of each on those affected:
Your options are to either ignore the expense journal entry, as requested by your
boss, or confront him or her with your concerns. You have a definite moral and
CHAPTER 3 • PROCESSING ACCOUNTING INFORMATION 3-71
DECISION CASE 3-6 (Concluded)
4. Select the best alternative:
You should point out to your boss that this suggestion not only violates accounting
principles but also is a very serious violation of the trust shown in both individuals by
LO 5,6 DECISION CASE 3-7 DEBITS AND CREDITS
1. No, the bookkeeper did not prepare the correct journal entry to account for the
2. As controller for the firm, you are responsible for the accuracy and fairness of the
financial statements. You do have a moral and ethical responsibility to correct the