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CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-21
LO 5 EXERCISE 4-24 THE EFFECT OF ADJUSTING ENTRIES ON THE ACCOUNTING
EQUATION
Assets = Liabilities + Stockholders’ Equity
1. D NE D
LO 5 EXERCISE 4-25 RECONSTRUCTION OF ADJUSTING ENTRIES FROM UNADJUSTED
AND ADJUSTED TRIAL BALANCES
1. Adjusting entries:
Journal May 31 Accounts Receivable .................................... 2,350
Entry Service Revenue .................................... 2,350
Analysis To accrue revenue during May.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Accounts
Receiv-
able 2,350
2,350
Service Rev-
enue 2,350
2,350
Journal May 31 Rent Expense............................................... 200
Entry Prepaid Rent ........................................... 200
Analysis To record rent expense for the month of May.
Balance Sheet Income Statement
4-22 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 4-25 (Concluded)
Journal May 31 Depreciation Expense .................................. 400
Entry Accumulated Depreciation ...................... 400
Analysis To record depreciation for the month of May.
Balance Sheet Income Statement
Journal May 31 Wage Expense ............................................. 1,100
Entry Wages Payable ....................................... 1,100
Analysis To accrue wages payable at May 31.
Balance Sheet Income Statement
LO 6 EXERCISE 4-26 THE ACCOUNTING CYCLE
4 Prepare a work sheet.
7 Close the accounts.
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-23
LO 5 EXERCISE 4-27 TRIAL BALANCE
HADLEY REALTY CORPORATION
ADJUSTED TRIAL BALANCE
DECEMBER 31
Debits Credits
Cash ............................................................................. $ 2,460
Accounts Receivable .................................................... 21,230
Office Supplies ............................................................. 1,680
Interest Payable ........................................................... 200
Wages and Salaries Payable ....................................... 470
Notes Payable .............................................................. 20,000
Capital Stock ................................................................ 25,000
Retained Earnings ........................................................ 85,445
Dividends .................................................................... 1,500
4-24 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 7 EXERCISE 4-28 CLOSING ENTRIES
1. Closing entries:
Advertising Fees Revenue ................................................ 58,500
Interest Revenue ............................................................... 2,700
Income Summary ........................................................ 61,200
To close revenue accounts.
2. If the accountant forgets to close the revenue and expense accounts at the end of
the year, the net income of the following year will be overstated by the amount of net
income of the current year, $4,950. In addition, all the revenue and expense account
balances will carry over to the following year making it very hard to compare finan-
cial statements from one year to the next.
LO 7 EXERCISE 4-29 PREPARATION OF A STATEMENT OF RETAINED EARNINGS
FROM CLOSING ENTRIES
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-25
LO 7 EXERCISE 4-30 RECONSTRUCTION OF CLOSING ENTRIES
Dec. 31 Maintenance Revenue ........................................... 90,000
Income Summary .............................................. 90,000
To close revenue account.
LO 7 EXERCISE 4-31 CLOSING ENTRIES FOR NORDSTROM
Net Sales ................................................................................ 12,166
Credit Card Revenues ............................................................ 374
Income Summary .............................................................. 12,540
To close Net Sales and Credit Card Revenues accounts.
4-26 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 7 EXERCISE 4-32 CLOSING ENTRIES
1. Closing entries:
Commissions Revenue ..................................................... 54,000
Income Summary ........................................................ 54,000
To close revenue account.
2. Closing entries serve two purposes. First, the balances in revenue, expense, and
dividend accounts are returned to zero to start the following period. Second, the net
income and the dividends of the period are transferred to Retained Earnings. Clos-
ing entries are recorded at the end of the period.
LO 8 EXERCISE 4-33 THE DIFFERENCE BETWEEN A FINANCIAL STATEMENT AND A
WORK SHEET (APPENDIX)
Total debits on the work sheet .......................................................... $255,000
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-27
LO 8 EXERCISE 4-34 TEN-COLUMN WORK SHEET (APPENDIX)
1. BS—C 6. BS—D 11. BS—D
MULTI-CONCEPT EXERCISES
LO 1,2,3 EXERCISE 4-35 REVENUE RECOGNITION, CASH AND ACCRUAL BASES
1. Accrual-basis income statements:
HATHAWAY HEALTH CLUB
INCOME STATEMENTS
Year 1 Year 2 Year 3
Sales* .......................................................... $122,000 $152,000 $182,000
Expenses:
Depreciation** ......................................... $ 33,000 $ 33,000 $ 33,000
4-28 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
EXERCISE 4-35 (Concluded)
2. Under the revenue recognition principle, revenue is recognized not when cash is re-
ceived but rather when the performance obligation is satisfied. It is satisfied with the
LO 4,5 EXERCISE 4-36 DEPRECIATION EXPENSE
1. Depreciation expense for 2016:
2. Certainly, it would be less costly in terms of the time spent by the accountant to ex-
pense all costs rather than treat certain ones as assets to be written off over their
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-29
LO 4,5 EXERCISE 4-37 ACCRUAL OF INTEREST ON A LOAN
1.
Journal July 1 Cash ............................................................. 50,000
Entry Notes Payable ........................................ 50,000
Analysis To record two-month, 12% bank loan.
Balance Sheet Income Statement
Journal Aug. 31 Interest Payable ........................................... 500
Entry Notes Payable .............................................. 50,000
Analysis Interest Expense .......................................... 500
Cash ....................................................... 51,000
To record repayment of principal and
interest on bank loan.
Balance Sheet Income Statement
4-30 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEMS
LO 5 PROBLEM 4-1 ADJUSTING ENTRIES
Adjusting entries on March 31, 2016:
a.
b.
Journal Supplies Expense ....................................................... 660
Entry Office Supplies on Hand ....................................... 660
Analysis To record supplies used: $1,280 + $750 – $1,370.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Office
Supplies on
Hand (660)
(660)
Supplies
Expense 660*
(660)
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-31
PROBLEM 4-1 (Continued)
c.
Journal Depreciation Expense—Office Equipment .................. 800
Entry Accumulated Depreciation—Office Equipment .... 800
Analysis To record depreciation: ($62,600 – $5,000) × 1/72.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
d.
Journal Wages Expense ......................................................... 3,800
Entry Wages Payable .................................................... 3,800
Analysis To accrue wages: $950 × 4 days = $3,800.
Balance Sheet Income Statement
e.
Journal Rent Collected in Advance ......................................... 2,500
Entry Rent Revenue ...................................................... 2,500
Analysis To recognize rent.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Rent Collected in
Advance (2,500)
2,500
Rent Rev-
enue 2,500
2,500
f.
4-32 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-1 (Concluded)
g.
Journal Income Tax Expense .................................................. 3,900
Entry Income Tax Payable ............................................. 3,900
Analysis To record estimated income taxes.
LO 5 PROBLEM 4-2 EFFECTS OF ADJUSTING ENTRIES ON THE ACCOUNTING
EQUATION
1. Effects of adjusting entries on the accounting equation:
Owners’
Assets = Liabilities + Equity
Rent
Office Accumulated Interest Wages Income Tax Collected Customer Capital Retained
Supplies Depreciation Payable Payable Payable in Advance Deposits Stock Earnings
a. +100 –100
b. –660 –660
2. Unadjusted net income $23,000 (Amount given in problem)
Effect of adjustments:
a. Interest expense (100)
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-33
LO 5 PROBLEM 4-3 ADJUSTING ENTRIES—ANNUAL ADJUSTMENTS
1. Adjusting entries:
a.
Journal Depreciation Expense—Computer ............................. 2,950
Entry Accumulated Depreciation—Computer ................ 2,950
Analysis To record annual depreciation expense:
($15,000 – $250)/5 years.
Balance Sheet Income Statement
b.
Journal Supplies Expense ....................................................... 19,350
Entry Office Supplies on Hand ....................................... 19,350
Analysis To record supplies used during year:
$3,600 + $17,600 – $1,850.
Balance Sheet Income Statement
4-34 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-3 (Continued)
c.
Journal Customer Deposits ..................................................... 20,000
Entry Fees Revenue ...................................................... 20,000
Analysis To record customer deposits between August
and December: ($24,000/6 months) × 5 months.
d.
Journal Rent Expense ............................................................. 5,400
Entry Prepaid Rent ........................................................ 5,400
Analysis To record rent expense for November through
December: $2,700 × 2.
Balance Sheet Income Statement
PROBLEM 4-3 (Concluded)
f.
Journal Wage Expense ........................................................... 500
Entry Wages Payable .................................................... 500
Analysis To accrue wages payable at year-end for one day:
Friday.
Balance Sheet Income Statement
LO 5 PROBLEM 4-4 RECURRING AND ADJUSTING ENTRIES
Debit Credit Debit Credit
a. 1 12, 13 i. 8 1
b. 5 1 j. 17 9
4-36 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 4-5 USE OF ACCOUNT BALANCES AS A BASIS FOR ADJUSTING
ENTRIES—ANNUAL ADJUSTMENTS
1. Adjusting entries on December 31, 2016:
a.
b.
Journal Rent Collected in Advance ......................................... 3,500
Entry Rent Revenue ...................................................... 3,500
Analysis To recognize rent: $6,000 × 7/12.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Rent Collected in
Advance (3,500)
3,500
Rent Rev-
enue 3,500
3,500
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-37
LO 5 PROBLEM 4-6 USE OF A TRIAL BALANCE AS A BASIS FOR ADJUSTING ENTRIES
1. Adjusting entries on April 30, 2016:
a.
Journal Insurance Expense ..................................................... 50
Entry Prepaid Insurance ................................................ 50
Analysis To recognize one month’s insurance expense.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Prepaid Insur-
ance (50)
(50)
Insurance
Expense 50
(50)
c.
Journal Depreciation Expense ................................................. 417
Entry Accumulated Depreciation—Office Equipment .... 417
Analysis To record depreciation: $50,000 × 1/120.
Balance Sheet Income Statement
4-38 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-6 (Continued)
d.
Journal Depreciation Expense ................................................. 200
Entry Accumulated Depreciation—Auto ........................ 200
Analysis To record depreciation: $12,000 × 1/60.
e.
Journal Deferred Commissions ............................................... 4,500
Entry Commissions Revenue ........................................ 4,500
Analysis To record commissions revenue: $9,500 – $5,000.
Balance Sheet Income Statement
g.
Journal Interest Expense ......................................................... 20
Entry Interest Payable ................................................... 20
Analysis To record interest on note payable.
Balance Sheet Income Statement
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-39
PROBLEM 4-6 (Concluded)
h.
Journal Salaries Expense ........................................................ 2,500
Entry Salaries Payable .................................................. 2,500
Analysis To record salaries not yet paid.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Salaries Payable 2,500
(2,500)
Salaries
Expense 2,500
(2,500)
2. The office equipment was purchased on April 1, 2015, and has been depreciated for
LO 5 PROBLEM 4-7 EFFECTS OF ADJUSTING ENTRIES ON THE ACCOUNTING
EQUATION
1. Effects of adjusting entries on accounting equation:
Assets = Liabilities + Equity
Accounts Office Prepaid Accumulated Deferred Interest Salaries Capital Retained
Receivable Supplies Insurance Depreciation Commissions Payable Payable Stock Earnings
a. –50 –50
b. –70 –70
2. Net increase (decrease) in net income from adjustments:
a. ............................................................................................... $ (50)
b. ............................................................................................... (70)
4-40 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 4-8 RECONSTRUCTION OF ADJUSTING ENTRIES FROM ACCOUNT
BALANCES
1.
Journal June 30 Insurance Expense ........................................... 150
Entry Prepaid Insurance ........................................ 150
2. Cost of policy was $150 × 36 months = $5,400.
3.
Journal June 30 Depreciation Expense ............................................ 80
Entry Accumulated Depreciation—Equipment ........... 80
Analysis To record depreciation expense: $1,360 – $1,280.
4. Estimated useful life in months: $9,600/$80 month = 120 months.
5.
Journal June 30 Interest Expense .......................................... 144
6. Interest rate: ($144 per month × 12 months)/$9,600 = 18%. The monthly rate is
18%/12 months = 1.5%.
