SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Prepaid Rent
5,200
Cash
5,200
To record rent paid in advance.
Nov. 1
Prepaid Insurance
9,600
Cash
9,600
To record insurance paid in advance.
Dec. 1
5,400
Unearned Revenue
5,400
To record cash collected for future services.
Dec. 1
10,000
Unearned Revenue
10,000
To record cash collected for future services.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Rent Expense
2,600*
Prepaid Rent
2,600*
To record rent expense.
Dec. 31
Insurance Expense
3,200*
Prepaid Insurance
3,200*
To record insurance expense.
Dec. 31
Unearned Revenue
1,800
Service Revenue
1,800
advance.
Dec. 31
Unearned Revenue
2,000
Service Revenue
2,000
advance.
P3-44B, cont.
* Calculations:
Adjusting Journal Entry One:
Rent prepaid on November 1 for 4 months
Months
Rent expense per month
Rent expense per month
Months
Rent expense for November and December
Adjusting Journal Entry Two:
Insurance prepaid on November 1 for 6 months
Months
Insurance expense per month
Insurance expense per month
Months
Insurance expense for November and December
Requirement 3
Prepaid Rent
Rent Expense
Nov. 1 5,200
2,600 Dec. 31
Dec. 31 2,600
Bal. 2,600
Bal. 2,600
Insurance Expense
Nov. 1 9,600
3,200 Dec. 31
Dec. 31 3,200
Bal. 6,400
Bal. 3,200
Unearned Revenue
Dec. 31 1,800
5,400 Dec. 1
1,800 Dec. 31
Dec. 31 2,000
10,000 Dec. 1
2,000 Dec. 31
11,600 Bal.
3,800 Bal.
P3-44B, cont.
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Nov. 1
Rent Expense
5,200
Cash
5,200
To record rent paid in advance.
Nov. 1
Insurance Expense
9,600
Cash
9,600
To record insurance paid in advance.
Dec. 1
5,400
5,400
To record cash collected for future services.
Dec. 1
10,000
10,000
To record cash collected for future services.
Dec. 31
Prepaid Rent
2,600*
2,600*
To record prepaid rent.
Dec. 31
Prepaid Insurance
6,400*
6,400*
To record prepaid insurance.
Dec. 31
Service Revenue
3,600*
3,600*
To record unearned revenue.
Dec. 31
Service Revenue
8,000*
8,000*
To record unearned revenue.
P3-44B, cont.
* Calculations:
Adjusting Journal Entry One:
Rent prepaid on November 1 for 4 months
Months
Rent expense per month
Rent expense per month
months
Rent still prepaid on December 31
Adjusting Journal Entry Two:
Insurance prepaid on November 1 for 6 months
Months
Insurance expense per month
Insurance expense per month
months
Insurance still prepaid on December 31
Adjusting Journal Entry Three:
Collected in advance on December 1 for 3 months
Revenue earned during December
Revenue still unearned on December 31
Collected in advance on December 1 for 5 months
Revenue still unearned on December 31
P3-44B, cont.
Prepaid Rent
Rent Expense
Dec. 31 2,600
Nov. 1 5,200
2,600 Dec. 31
Bal. 2,600
Bal. 2,600
Insurance Expense
Dec. 31 6,400
Nov. 1 9,600
6,400 Dec. 31
Bal. 6,400
Bal. 3,200
Unearned Revenue
3,600 Dec. 31
5,400 Dec. 1
8,000 Dec. 31
10,000 Dec. 1
11,600 Bal.
3,800 Bal.
Requirement 5
Continuing Problem
P3-45 Preparing adjusting entries and preparing an adjusted trial balance
This problem continues the Daniels Consulting situation from Problem P2-41 of Chapter 2. You will
need to use the unadjusted trial balance and posted T-accounts that you prepared in Problem P2-41. The
unadjusted trial balance at December 31, 2016, is duplicated below:
At December 31, the business gathers the following information for the adjusting entries:
a. Accrued service revenue, $1,500.
Requirements
1. Journalize and post the adjusting entries using the T-accounts that you completed in Problem P2-41.
In the T-accounts, denote each adjusting amount as Adj. and an account balance as Balance.
2. Prepare an adjusted trial balance as of December 31, 2016.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Accounts Receivable
1,500
Service Revenue
1,500
To accrue service revenue.
Dec. 31
Unearned Revenue
Service Revenue
advance.
Dec. 31
Supplies Expense
To record supplies used.
Dec. 31
Depreciation Expense— Equipment
Depreciation Expense—Furniture
To record depreciation on equipment and furniture.
Dec. 31
Salaries Expense
To accrue salaries expense.
* Calculations:
$800
Office Supplies prior to adjustment
(300)
Office Supplies remaining
$500
Supplies Expense (cost of supplies used)
P3-45, cont.
Requirement 1
Accounts Payable
2,000 Dec. 2
3,000 Dec. 4
3,600 Dec. 3
800 Dec. 5
150 Dec. 12
3,600 Balance
200 Dec. 26
1,000 Dec. 30
685 Adj.
685 Balance
Accounts Receivable
Unearned Revenue
Dec. 9 2,500
400 Dec. 28
Adj. 600
2,400 Dec. 21
Adj. 1,500
1,800 Balance
Balance 3,600
Dec. 5 800
500 Adj.
20,000 Dec. 2
Balance 300
20,000 Balance
Dec. 3 3,600
Balance 3,600
Balance 1,000
Furniture
Service Revenue
Dec. 4 3,000
2,500 Dec. 9
Balance 3,000
2,100 Dec. 18
1,500 Adj.
Accumulated Depreciation—Equipment
600 Adj.
60 Adj.
6,700 Balance
60 Balance
50 Adj.
Balance 2,000
50 Balance
P3-45, cont.
Supplies Expense
Adj. 500
Balance 500
Salaries Expense
Adj. 685
Balance 685
P3-45, cont.
Requirement 2
DANIELS CONSULTING
Adjusted Trial Balance
December 31, 2016
Account Title
Balance
Debit
Credit
Cash
$ 17,950
Accounts Receivable
3,600
Office Supplies
Equipment
3,600
Accumulated Depreciation—Equipment
Accumulated Depreciation—Furniture
50
Accounts Payable
Unearned Revenue
Salaries Payable
Common Stock
Dividends
1,000
Service Revenue
Rent Expense
2,000
Utilities Expense
Supplies Expense
Salaries Expense
Depreciation Expense—Equipment
Depreciation Expense—Furniture
Practice Set
P3-46 Preparing adjusting entries and preparing an adjusted trial balance
This problem continues the Crystal Clear Cleaning situation from Problem P2-42 of Chapter 2. Start
from the unadjusted trial balance that Crystal Clear Cleaning prepared at November 30, 2017:
Consider the following adjustment data:
a. Cleaning supplies on hand at the end of November were $30.
Requirements
1. Using the data provided from the trial balance, the previous adjustment information, and the
information from Chapter 2 (P2-42), prepare all required adjusting journal entries at November 30.
2. Prepare an adjusted trial balance as of November 30 for Crystal Clear Cleaning.
SOLUTION
Requirement 1
Date
Accounts and Explanation
Debit
Credit
Nov. 30
Supplies Expense
190*
Cleaning Supplies
190*
To record supplies used.
Nov. 30
Depreciation Expense
To record depreciation on depreciable assets.
Nov. 30
Rent Expense
500*
Prepaid Rent
500*
To record rent expense.
Nov. 30
Insurance Expense
150*
Prepaid Insurance
150*
To record insurance expense.
Nov. 30
Unearned Revenue
500*
500*
advance.
Nov. 30
Interest Expense
240*
Interest Payable
240*
To accrue interest expense.
* Calculations:
Adjusting Journal Entry One:
$220
Cleaning Supplies prior to adjustment
Cleaning Supplies remaining
$190
Supplies Expense (cost of supplies used)
P3-46, cont.
Adjusting Journal Entry Three:
$2,000
Rent prepaid on November 2 for 4 months
4
Months
$ 500
Rent expense for November
$1,800
Insurance prepaid on November 3 for 12 months
$ 150
Insurance expense for November
Collected in advance on November 16 for one year
Months
Service revenue earned per month
Thus,
$1,000
Service revenue earned per month
2
$ 500
Service revenue earned November 16 through November 30
Adjusting Journal Entry Six:
$96,000 borrowed on Nov. 20, 9% interest rate per year
Thus,
= $240 interest expense for Nov. 20 through Nov. 30
P3-46, cont.
Requirement 2
CRYSTAL CLEAR CLEANING
Adjusted Trial Balance
November 30, 2017
Account Title
Balance
Debit
Credit
Cash
$ 138,150
Accounts Receivable
2,600
Cleaning Supplies
Prepaid Rent
1,500
Prepaid Insurance
1,650
Equipment
3,200
Truck
7,000
Accumulated Depreciation
Accounts Payable
1,470
Unearned Revenue
Interest Payable
Notes Payable
Common Stock
Dividends
Service Revenue
5,300
Salaries Expense
Advertising Expense
Utilities Expense
Supplies Expense
Depreciation Expense
Rent Expense
Insurance Expense
Interest Expense
Critical Thinking
Decision Case 3-1
One year ago, Tyler Stasney founded Swift Classified Ads. Stasney remembers that you took an
accounting course while in college and comes to you for advice. He wishes to know how much net
income his business earned during the past year in order to decide whether to keep the company going.
His accounting records consist of the T-accounts from his ledger, which were prepared by an accountant
who moved to another city. The ledger at December 31 follows. The accounts have not been adjusted.
Stasney indicates that at year-end, customers owe the business $1,600 for accrued service revenue.
These revenues have not been recorded. During the year, Swift Classified Ads collected $4,000 service
revenue in advance from customers, but the business earned only $900 of that amount. Rent expense for
the year was $2,400, and the business used up $1,700 of the supplies. Swift determines that depreciation
SOLUTION
Swift Classified Ads
Income Statement
Year Ended December 31
Revenues:
Service Revenue [$59,500 + $1,600 adj + $900 adj]
$ 62,000
Expenses:
Salaries Expense [$17,000 + $1,200 adj]
$ 18,200
Depreciation Expense [adj]
Rent Expense [adj]
Utilities Expense
Supplies Expense [adj]
Ethical Issue 3-1
The net income of Steinbach & Sons, a landscaping company, decreased sharply during 2016. Mort
Steinbach, owner and manager of the company, anticipates the need for a bank loan in 2017. Late in
2016, Steinbach instructs the company’s accountant to record $2,000 service revenue for landscape
services for the Steinbach family, even though the services will not be performed until January 2017.
Steinbach also tells the accountant not to make the following December 31, 2016, adjusting entries:
Requirements
1. Compute the overall effects of these transactions on the company’s reported net income for 2016.
2. Why is Steinbach taking this action? Is his action ethical? Give your reason, identifying the parties
helped and the parties harmed by Steinbach’s action.
3. As a personal friend, what advice would you give the accountant?
SOLUTION
Requirement 1
Net income is overstated by $3,300.
Requirement 2
Students’ responses will vary. Illustrative answers follow.
Requirement 3
Students’ responses will vary. Illustrative answers follow.
Fraud Case 3-1
XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics
manufacturers. One very complex device was partially completed at the end of 2016. Barb McLauren,
head engineer, knew the experimental technology was a failure and XM would not be able to complete
the $20,000,000 contract next year. However, the corporation was getting ready to be sold in January.
She told the controller that the device was 80% complete at year-end and on track for successful
completion the following spring; the controller accrued 80% of the contract revenue at December 31,
2016. McLauren sold the company in January 2017 and retired. By mid-year, it became apparent that
XM would not be able to complete the project successfully and the new owner would never recoup his
investment.
Requirements
1. For complex, high-tech contracts, how does a company determine the percentage of completion and
the amount of revenue to accrue?
2. What action do you think was taken by XM in 2017 with regard to the revenue that had been accrued
the previous year?
SOLUTION
Requirement 1
Financial Statement Case 3-1
Starbucks Corporation—like all other businesses—makes adjusting entries at year-end in order to
measure assets, liabilities, revenues, and expenses properly.
Requirements
1. Which asset accounts might Starbucks record adjusting entries for?
2. Which liability accounts might Starbucks record adjusting entries for?
3. Review Note 1 (Property, Plant, and Equipment) in the Notes to Consolidated Financial Statements.
How are property, plant, and equipment carried on the balance sheet? How is depreciation of these
assets calculated? What is the range of useful lives used when depreciating these assets?
SOLUTION
Requirement 1
Starbucks Corporation might record adjusting entries for the following assets: Accounts receivables,
Communication Activity 3-1
In 75 words or fewer, explain adjusting journal entries.
SOLUTION
Under accrual basis accounting, adjusting entries are completed at the end of the accounting period to