CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-41
LO 5 PROBLEM 4-9 USE OF A TRIAL BALANCE TO RECORD ADJUSTING ENTRIES IN T
ACCOUNTS
1. and 2. T accounts:
Cash Video Inventory
Bal. 4,000 Bal. 25,600
2,460 (b)
Bal. 23,140
4-42 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-9 (Continued)
Retained Earnings Rental Revenue
22,170 Bal. 9,200 Bal.
Depreciation Expense Income Tax Expense
(c) 140 (f) 849
Explanations:
(a) $7,200/12 months
(b) $25,600 – $23,140
(c) ($8,900 – $500)/60 months
(f) Calculation of taxes due:
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-43
PROBLEM 4-9 (Concluded)
3. FOUR STAR VIDEO
ADJUSTED TRIAL BALANCE
MAY 31, 2016
Debits Credits
Cash …………………………………………………………….. $ 4,000
Prepaid Rent ………………………………………………….. 6,000
Video Inventory ………………………………………………. 23,140
Display Stands ……………………………………………….. 8,900
Accumulated Depreciation ……………………………….. $ 5,320
Accounts Payable …………………………………………… 3,260
4. On the basis of the information available, Four Star appears to be a profitable busi-
ness. Subscription revenue and rental revenue together total $11,640 for the month.
Net income for the month is $2,830 – $849 (taxes), or $1,981. This results in a profit
margin of $1,981/$11,640, or 17%.
4-44 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 4-10 EFFECTS OF ADJUSTING ENTRIES ON THE ACCOUNTING
EQUATION
Effects of adjusting entries on accounting equation:
Assets = Liabilities + Owners’ Equity
Video Prepaid Accumulated Wages and Salaries Taxes Customer Capital Retained
Inventory Rent Depreciation Payable Payable Subscriptions Stock Earnings
a. –600 –600
b. –2,460 –2,460
c. –140* –140
d. +1,450 –1,450
e. –2,440 +2,440
f. +849 –849
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-45
MULTI-CONCEPT PROBLEMS
LO 3,4,7 PROBLEM 4-11 REVENUE AND EXPENSE RECOGNITION AND CLOSING
ENTRIES
1. Income statements for the first two years:
DARBY DELIVERY SERVICE
INCOME STATEMENTS
Year 1 Year 2
Sales revenue (a) ……………………………………………. $23,000 $46,000
Expenses:
Explanations:
a. Let X = Year 1 sales
Year 1 sales + 2(Year 1 sales) = $69,000
3X = $69,000;
X = $23,000 = Year 1 sales
2X = $46,000 = Year 2 sales
d. Same rent for two years: $10,000/2 = $5,000
4-46 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-11 (Concluded)
2. Closing entries:
Year 1:
Sales ……………………………………………………………………… 23,000
Income Summary ……………………………………………….. 23,000
To close revenue account.
Year 2:
Sales ……………………………………………………………………… 46,000
Income Summary ……………………………………………….. 46,000
To close revenue account.
Income Summary …………………………………………………….. 30,500
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
LO 5,6,8 PROBLEM 4-12 TEN-COLUMN WORK SHEET (APPENDIX)
1., 2., and 3. ACE CONSULTING INC.
WORK SHEET
FOR THE MONTH ENDED JUNE 30, 2016
Unadjusted Adjusted Income Balance
Trial Balance Adjusting Entries Trial Balance Statement Sheet
Account Titles Debits Credits Debits Credits Debits Credits Debits Credits Debits Credits
Cash 6,320 6,320 6,320
Accounts Receivable 14,600 (e) 4,600 19,200 19,200
Supplies on Hand 800 (b) 250 550 550
Prepaid Rent 4,800 (d) 400 4,400 4,400
Furniture and Fixtures 18,000 18,000 18,000
4-48 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5,6,8 PROBLEM 4-13 MONTHLY TRANSACTIONS, TEN-COLUMN WORK SHEET, AND
FINANCIAL STATEMENTS (APPENDIX)
1. Journal entries:
Journal Jan. 2 Cash ……………………………………………………. 60,000
Entry Capital Stock ……………………………………. 60,000
Analysis To record issuance of stock to owners:
3 × $20,000.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Land 15,000
House 35,000
Cash (50,000)
Journal Jan. 3 Cash ……………………………………………………. 30,000
Entry Notes Payable …………………………………. 30,000
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-49
PROBLEM 4-13 (Continued)
Journal Jan. 5 Prepaid Insurance …………………………………. 6,000
Entry Cash ………………………………………………. 6,000
Analysis To record purchase of 24-month insurance
policy.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Prepaid Insur-
ance 6,000
Cash (6,000)
Journal Jan. 7 Cleaning Supplies …………………………………. 950
Entry Accounts Payable …………………………….. 950
Analysis To record purchase of cleaning supplies
on account.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cleaning Sup–
plies 950
Accounts Payable 950
4-50 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-13 (Continued)
Journal Jan. 31 Cash ………………………………………………………… 8,300
Entry Revenue from Rental of Rooms ………………. 8,300
Analysis To record cash receipts from rentals for January.
Balance Sheet Income Statement
ASSETS = LIABILITIES +
STOCKHOLDERS’
EQUITY REVENUES – EXPENSES =
NET
INCOME
Cash 8,300
8,300
Revenue from
Rental of
Rooms 8,300
8,300
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-51
PROBLEM 4-13 (Continued)
2. T accounts:
Cash Land
1/2 60,000 50,000 1/2 1/2 15,000
1/3 30,000 15,000 1/4
1/16 980 6,000 1/5
1/31 8,300 450 1/6
1/31 6,600 4,230 1/15
600 1/31
Bal. 29,600
Dividends Revenue from Rental of Rooms
1/31 600 8,300 1/31
4-52 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
© 2017 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
PROBLEM 4-13 (Continued)
3., 4., and 5. MOONLIGHT BAY INN
WORK SHEET
FOR THE MONTH ENDED JANUARY 31, 2016
Unadjusted Adjusted Income Balance
Trial Balance Adjusting Entries Trial Balance Statement Sheet
Notes Payable 30,000 30,000 30,000
Rent Received in Advance 980 (e) 490 490 490
Capital Stock 60,000 60,000 60,000
Advertising Expense 450 450 450
Wages Expense 4,230 (f) 5,120 9,350 9,350
Supplies Expense (g) 720 720 720
Utilities Expense (h) 740 740 740
Utilities Payable (h) 740 740 740
Income Tax Expense (i) 1,007 1,007 1,007
Income Tax Payable (i) 1,007 1,007 1,007
8,852 8,852 114,222 114,222 13,042 15,390 101,180 98,832
Net Income 2,348 2,348
15,390 15,390 101,180 101,180
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-53
PROBLEM 4-13 (Continued)
Explanations for adjusting entry amounts:
(a) ($35,000 – $5,000)/300 months = $100/month
(b) $15,000/120 months = $125/month
(c) $30,000 × 12% × 1/12 = $300/month
(d) $6,000/24 months = $250/month
4-54 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-13 (Continued)
6. Financial statements:
(a) MOONLIGHT BAY INN
INCOME STATEMENT
FOR THE MONTH ENDED JANUARY 31, 2016
Revenues:
From rental of rooms ………………………………………. $8,790
From restaurant ……………………………………………… 6,600
Total revenues ………………………………………….. $15,390
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-55
PROBLEM 4-13 (Concluded)
(c) MOONLIGHT BAY INN
BALANCE SHEET
JANUARY 31, 2016
Assets
Current assets:
Cash …………………………………………………………….. $29,600
Cleaning supplies …………………………………………… 230
Liabilities
Current liabilities:
Accounts payable …………………………………………… $ 950
Interest payable ……………………………………………… 300
Wages payable ……………………………………………… 5,120
7. The inn has shown the ability to make a profit. The profit margin is $2,348/$15,390,
or approximately 15%. This is an indication that the inn has been able to generate
revenues and control the necessary costs in the process. The balance sheet shows
4-56 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
ALTERNATE PROBLEMS
LO 5 PROBLEM 4-1A ADJUSTING ENTRIES
Adjusting entries on June 30, 2016:
Supplies
June 1 Beg. Bal. 475
Purchased in June 5,600 X (amount of supplies used)*
June 30 End. Bal. 507
*X = $475 + $5,600 – $507
= $5,568
CHAPTER 4 • INCOME MEASUEMENT AND ACCRUAL ACCOUNTING 4-57
PROBLEM 4-1A (Concluded)
c.
Journal Depreciation Expense …………………………………………. 3,500
Entry Accumulated Depreciation—Machinery …………… 3,500
Analysis To record depreciation: ($170,000 – $2,000) × 1/48.
Journal Rent Expense ……………………………………………………. 1,550
Entry Prepaid Rent ……………………………………………….. 1,550
Analysis To record rent expense: $4,650/3.
Balance Sheet Income Statement
Wages Payable 4,000 (4,000) Wages Expense 4,000 (4,000)
f.
Journal Income Tax Expense ………………………………………….. 2,900
Entry Income Tax Payable ……………………………………… 2,900
Analysis To record estimated income taxes.
Balance Sheet Income Statement
4-58 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
LO 5 PROBLEM 4-2A EFFECTS OF ADJUSTING ENTRIES ON THE ACCOUNTING
EQUATION
1. Effects of adjusting entries on the accounting equation:
Owners’
Assets = Liabilities + Equity
Office Income
2. Unadjusted net income ………………………………………………………. $35,000
(a) Interest revenue …………………………………………………………. 33
(b) Supplies expense ………………………………………………………. (5,568)
1. Adjusting entries:
a.
Journal Depreciation Expense …………………………………………. 3,000
Entry Accumulated Depreciation ……………………………. 3,000
Analysis To record annual depreciation expense:
($25,000 – $4,000)/7 years.
PROBLEM 4-3A (Continued)
b.
Journal Supplies Expense ………………………………………………. 13,200
Entry Office Supplies on Hand ………………………………… 13,200
Analysis To record supplies used during year:
$1,200 + $12,900 – $900.
Balance Sheet Income Statement
c.
Journal Customer Deposits …………………………………………….. 6,600
Entry Fees Revenue ……………………………………………… 6,600
Analysis To record customer deposits between July
and December: ($8,800/8 months) × 6 months.
4-60 FINANCIAL ACCOUNTING SOLUTIONS MANUAL
PROBLEM 4-3A (Concluded)
e.
Journal Interest Expense ………………………………………………… 300
Entry Interest Payable …………………………………………… 300
Analysis To accrue interest payable on note:
$30,000 × 6% × 60/360.
Balance Sheet Income Statement
2. Net increase (decrease) in net income from adjustments:
a. Depreciation expense ……………………………………………………. $ (3,000)
b. Supplies expense …………………………………………………………. (13,200)
c. Fees revenue ……………………………………………………………….. 6,600
d. Rent expense ………………………………………………………………. (16,000)
e. Interest expense …………………………………………………………… (300)
f. Wages expense ……………………………………………………………. (830)
Overstatement of 2016 net income ………………………………………. $(26,730)