【answers】Chapter 4

Adjustments, Financial Statements, and

Financial Results

【ungraded practice】

- MC: all, M: 5,6,9,10,20- E: 12,19, CP: 2,4,5, S: 1, CC1

·for answers to the multiple choice questions see the appendix of the text book, page Q1. M4-5 a b Prepaid Insurance c Accumulated Depreciation (+xA)

a $2,400 ÷ 3 months = $800 per month b $1,200 ÷ 24 months = $50 for one month M4-6 a.

dr Unearned Revenue (L).................................. cr Rent Revenue (+R, +SE) .................... ($800 = 1/3 x $2,400)

800

800

Assets = = 50 400 Liabilities Revenue + Stockholders’ Equity Rent +800 Revenue (+R) Insurance Expense (+E) Depreciation Expense (+E) 400 50 Unearned 800 = =

b. dr Insurance Expense (+E, SE) ......................... cr Prepaid Insurance (A) ....................... ($50 = 1/24 x $1,200)

c. dr Depreciation Expense (+E, SE) .................... cr Accumulated Depreciation (+xA, A) .. ($400 = 1/12 x $4,800)

M4-9 a)

Sept. 30 dr Prepaid Rent (+A)

cr Cash (-A)

Oct. 31 AJE dr Rent Expense (+E –SE)

cr Prepaid Rent (-A)

b)

Sept. 30 dr Cash (+A)

cr Unearned Revenue (+L)

Oct. 31 AJE dr Unearned Revenue (-L)

cr Admissions Revenue (+R +SE)

c)

Sept. 30 dr Prepaid Insurance (+A)

cr Cash (-A)

Oct. 31 AJE dr Insurance Expense (+E –SE)

cr Prepaid Insurance (-A)

50 400

4,000

2,000

16,000

8,000

3,000

1,000

50 400

4,000

2,000 16,000 8,000

3,000 1,000

M4-10 a)

Dec. 31 dr Cash (+A) 12,000

cr Unearned Revenue (+L)

12,000

Jan. 31 AJE dr Unearned Revenue (-L) 1,000

cr Subscriptions Revenue (+R +SE)

1,000

b)

Dec. 31 dr Supplies (+A) 1,200

cr Cash (-A)

1,200

Jan. 31 AJE dr Supplies Expense (+E -SE) 200

cr Supplies (-A)

200 c)

Dec. 31 dr Cash (+A)

3,000

cr Unearned Revenue (+L)

3,000

Jan. 31 AJE dr Unearned Revenue (-L) 1,000

cr Service Revenue (+R +SE)

1,000 M4-20 dr Insurance Expense (+E, SE) ............................... 1,800

cr Prepaid Insurance (A) ........................

($1,800 = $7,200 total x 6/24 used)

1,800

+ Prepaid Insurance (A)  Bal. 7,200 AJE 1,800 End. 5,400 E4-12

a. b. c. d. e. f. g. E4-19

Event a

+ Insurance Expense (E)



Bal. 0 AJE 1,800 End. 1,800 Debit Code O C F D A M K Amount $ 400 600 220 1,000 1,000 250 75,000 Code P N G B K L J Credit Amount $ 400 600 220 1,000 1,000 250 75,000

(1) On January 22, 2012, MSM received $24,000 cash from customers for one-year subscriptions to the magazine for February 2012 – January 2013. (2)

Assets Cash +24,000 =

Liabilities Unearned

+

Stockholders’ Equity Revenue +24,000 (3) (4)

Debit 24,000 Credit 24,000 Account Names Cash (+A) Unearned Revenue (+R, +SE)

Cash

Unearned Revenue

24,000

24,000 E4-19 (continued)

Event b

(1) MSM received utilities services on account at a cost of $3,000. (2)

Assets =

Liabilities Accounts Payable +3,000

+ Stockholders’ Equity Utilities Expense (+E) -3,000 Debit 3,000 Credit 3,000 (3) (4)

Account Names Utilities Expense (+E, –SE) Accounts Payable (+L)

Accounts Payable 3,000 Utilities Expense

3,000

Event c

MSM provided $2,000 of subscriptions for which it had previously

Liabilities -2,000 +

Stockholders’ Equity Subscription Revenue (+R) +2,000 (1) received payment. (2)

Assets =

Unearned Revenue (3) (4) Debit 2,000 Credit 2,000 Account Names Unearned Revenue (–L) Subscription Revenue (+R, +SE)

Unearned Revenue Subscription Revenue

2,000 2,000

E4-19 (continued)

Event d

(1) On March 31, 2012, MSM recorded an adjusting entry for the month’s depreciation of $10,000. (2)

Assets Accumulated

= Liabilities + Stockholders’ Equity Depreciation Expense -10,000 (+E)

Depreciation (+xA) -10,000 (3) Debit 10,000 Credit 10,000 Account Names Depreciation Expense (+E, –SE) Accumulated Depreciation (+xA, –A)

Accumulated Depreciation 10,000 (4) Depreciation Expense

10,000

Event e

(1) On April 1, MSM paid $5,000 rent in advance of obtaining its benefits. (2)

Assets =

Liabilities +

Stockholders’ Equity Cash –5,000 Prepaid +5,000 Rent Account Names Prepaid Rent (+A) Cash (–A)

Cash 5,000 Debit Credit 5,000 5,000 Prepaid Rent

5,000 (3) (4)

E4-19 (continued)

Event f

(1) On April 30, 2012, MSM billed customers for $10,000 of advertising services provided on account. (2)

Assets Accounts Receivable +10,000

= Liabilities +

Stockholders’ Equity Advertising Revenue +10,000 (+R) (3) (4) Debit 10,000 Credit 10,000 Account Names Accounts Receivable (+A) Advertising Revenue (+R, +SE)

Accounts Receivable 10,000 Advertising Revenue

10,000 CP4-2 Req. 1 Assets = Liabilities = Interest Payable Unearned Revenue + Stockholders’ Equity +700 Interest Expense (+E) 3,200 Rent Revenue (+R) Service +3,300 700 +3,200 a. b. c. Accounts = +3,300 = Receivable d. Prepaid Insurance e. f. Accumulated Depreciation (+xA) g. = h. Property Taxes Payable = 700 = = Wages Payable = Revenue (+R) Insurance Expense (+E) +1,100 Wage Expense (+E) Depreciation Expense (+E) 1,000 1,100 700 1,000 +400 Property Tax 400 Expense (+E) Income Tax +9,000* Income Payable Tax 9,000 Expense (+E)

* Income tax expense incurred but not paid:

Income before adjustments (given) $27,400

Effect of adjustments (a) through (g) +2,600 ( 700 +3,200 + 3,300  700

 1,100 1,000  400)

Income before income taxes 30,000

Income tax rate 30%

Income tax expense $ 9,000 CP4-2 (continued)

Req. 2

a. dr Interest Expense (+E, SE)………………………….

700

3,200

700

3,200

cr Interest Payable

(+L)…………………………

To accrue interest expense incurred but not paid.

cr Rent Revenue (+R, +SE) ....................

b. dr Unearned Revenue (L) .......................................

$4,800 ÷ 6 months = $800 per month x 4 months. This entry reduces (debits) the liability for the amount earned and records the revenue.

c.

dr Accounts Receivable (+A) .................................... cr Service Revenue (+R, +SE) ................

3,300

3,300

This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2012.

cr Prepaid Insurance (A) .....................

700

700

d. dr Insurance Expense (+E, SE) ..............................

$4,200 ÷ 12 months = $350 per month x 2 months of coverage. This entry reduces the asset (Prepaid Insurance) because part of it has been used and only $3,500 represents future benefits (an asset) to the company.

cr Wages Payable (+L) ............................

1,100

1,100

e. dr Wage Expense (+E, SE) .....................................

Wage Expense is increased (debited) because this expense was incurred in 2012. A liability (Wages Payable) is credited because this amount is owed to the employees.

f.

dr Depreciation Expense (+E, SE) ........................... cr Accumulated Depreciation (+xA, A) .....

To record depreciation for the truck for the year (amount is given).

1,000

1,000

g.

dr Property Tax Expense (+E, SE) ........................... cr Property Tax Payable (+L) .......................

To record expense incurred but not paid.

400

9,000

400

9,000

h.

dr Income Tax Expense (+E, SE) ............................ cr Income Tax Payable (+L) ........................

To accrue income tax expense incurred but not paid:

Income before adjustments (given) $27,400

Effect of adjustments (a) through (g) +2,600 ( 700 +3,200 + 3,300  700

1,1001,000  400)

Income before income taxes 30,000

Income tax rate 30%

Income tax expense $ 9,000 CP4–4

Req. 1

GOLF ACADEMY, INC. Unadjusted Income Statement For the Year Ended December 31, 2012

Lesson Revenue Wages Expense Supplies Expense Interest Expense Income Tax Expense Total Expenses Net Income

$ 51,500 36,100 2,400

0 0 38,500 $ 13,000

Req. 2

The pairs of accounts that require adjustment include:

Balance sheet account Supplies

Unearned Revenue Wages Payable Income Tax Payable Interest Payable

Related income statement account Supplies Expense Lesson Revenue Wages Expense Income Tax Expense Interest Expense

CP4–4 (continued) Req. 3

Account Names Cash Supplies

Unearned Revenue

Debit Credit Explanation No adjustment required. Adjust to supplies count

should be moved into Lesson Revenue, leaving $500 unearned

Wages Payable Income Tax Payable

200 Owe employees $100/ day for two

days of work

4,590 Adjusted income before tax x Tax

rate = ($54,500 – 36,300 – 2,800 – 100) x 30% = $4,590.

Interest Payable Note Payable (short) Contributed Capital Retained Earnings Lesson Revenue Wages Expense Supplies Expense

100 Interest owed on note payable 12,000 No adjustment required. 1,000 No adjustment required. 3,000 No adjustment required.

54,500 $3,000 more in lesson revenue

earned during December

36,300 2,800

Two days of work in December that must be recorded at $100/day $400 of supplies used in December, which is added to previous expense of $2,400

Interest Expense Income Tax Expense

100 4,590

Amount of interest incurred on note Amount of income tax (calculated above)

Totals Req. 4

a) dr Supplies Expense (+E, –SE)

400

75,890 75,890 31,900 200

500 $3,000 was earned so that amount

cr Supplies (-A)

400

b) dr Unearned Revenue (-L) 3,000

cr Lesson Revenue (+R, +SE) 3,000

c) dr Wages Expense (+E, –SE) cr Wages Payable (+L)

d) dr Income Tax Expense (+E, –SE) cr Income Tax Payable (+L) e) dr Interest Expense (+E, –SE) cr Interest Payable (+L)

200

200

4,590 4,590

100

100

CP4–4 (continued)

Req. 5

GOLF ACADEMY, INC. Income Statement

For the Year Ended December 31, 2012

Lesson Revenue Wages Expense Supplies Expense Interest Expense Income Tax Expense Total Expenses Net Income

$ 54,500

36,300 2,800 100 4,590 43,790 $ 10,710

The adjustments in requirement 4 caused Net Income to decrease from $13,000 to $10,710, which is a difference of $2,290. S4-1 1. A 2. D 3. B CC-4 Req. 1

a) Deferral d) Deferral

Req. 2

b) Deferral e) Deferral

c) Accrual f) Deferral

a) dr

Prepaid Rent 4,800 (+A)………………………………….. cr

Cash

(-A)…………………………………………

b) dr

Building 47,000 (+A) …………........................................ cr

Cash

(-A)…………………………………………

c) This requires an accrual adjustment (see requirement 3). d) dr

Prepaid Insurance

3,000

(+A)…………………………….

cr

Cash (-A)…………………………………………

e) dr

Supplies 2,000 (+A)……………………………………….. cr

Accounts Payable (+L)…………………………

f)

dr

Cash 90 (+A)…………………………………………… cr

Unearned

Revenue

(+L)……………………….

Req. 3 a) dr

Rent

Expense

(+E,

2,400

-SE)…………………………..

cr Prepaid Rent (-A)……………………………… (4/8 x $4,800)

b) dr

Depreciation Expense (+E, 2,000

-SE)…………………. cr

Accumulated

Depreciation

(+xA,

-A)…………

4,800

47,000

3,000

2,000

90

2,400

2,000

c) dr

Wages Expense (+E, -SE)………………………..

cr Wages Payable (+L)………………………….. ($1,000 x 2)

d) dr

Insurance

Expense

(+E, -SE)……………………. cr

Prepaid

Insurance

(-A)………………………... (7/12 x 3,000) e) dr

Supplies

Expense

(+E, -SE)……………………...

cr

Supplies

(-A)…………………………………… ($2,000 – $700) f)

dr Unearned Revenue (-L)………………………….. cr

Service

Revenue

(+R,

+SE)…………………..

2,000 2,000

1,750

1,750

1,300

1,300

90 90

【graded practice】

- M: 3,11,20- E: 6,11,13, PA: 4

M4-3 (1) B (2) A (3) A (4) A (5) B M4-11

(a) dr Prepaid Insurance (+A) ...............................

Calculations:

Prepaid Insurance 0 (a) 2,275

Insurance Expense 2,340 (a) 65

Service Revenue 1,500 (b) 500

Unearned Revenue 0 (b) 1,000 2,275

1,000

2,255

2,275

1,000

2,000 255

cr Insurance Expense (E, +SE) ...

cr Unearned Revenue (+L) ...........

cr Prepaid Expenses (A) ............. cr Income Tax Payable (+L) ..........

(b) dr Service Revenue (R, SE)........................

(c) dr Income Tax Expense (+E, SE) ..................

($2,275 = $2,340 x 35/36 months remaining; $65 used up) ($500 = $1,500 x 1/3 earned; 2/3 unearned)

Unadjusted income before tax (given) – AJE (a) – AJE (b) = Adjusted income before tax $10,000 – (-2275) – 1,000 = $11,275

Income Tax Expense = 20% x $11,275 = $2,255

M4-20

dr Insurance Expense (+E, SE) ............................... 1,800 cr Prepaid Insurance (A) ........................

($1,800 = $7,200 total x 6/24 used)

1,800

+ Prepaid Insurance (A)  Bal. 7,200 AJE 1,800 End. 5,400 E4-6 Req. 1

2013 Income statement:

2013 Balance sheet: Req. 2

2013 Income statement:

2013 Balance sheet:

Supplies (given) = $10,000

+ Insurance Expense (E)

 Bal. 0 AJE 1,800 End. 1,800 Insurance Expense ($7,200 x 12/24) = $3,600 used.

Prepaid Insurance ($7,200 x 12/24) = $3,600

Supplies Expense: $72,000 + ($15,000  $10,000) = $77,000 used.

E4-6 (continued) Req. 3 a. Prepaid Insurance b. Supplies 5,000 Assets 3,600 = = = Liabilities + Stockholders’ Equity Insurance Expense (+E) Supplies Expense (+E) 3,600 5,000 E4-11

Balance Sheet

Assets

Equipment

Accumulated Depreciation

250,000

Income Statement

Revenues

Expenses

Depreciation Expense

30,000

(150,000)

Liabilities

Stockholders’ Equity

E4-13

Items Amounts reported Effects of: a. Depreciation b. Wages c. Rent Revenue Net Income (8,000) (17,000) 1,600 Total Assets (8,000) 17,000 (1,600) Total Liabilities $40,000 Stockholders’ Equity $50,000 (8,000) (17,000) 1,600 $30,000 $90,000 Adjusted balances d. Effect of Income Taxes

Correct amounts

Computations:

6,600

(1,980)

82,000

55,400

1,980

26,600

(1,980)

$ 4,620 $82,000 $57,380 $24,620

a. Given, $8,000 Depreciation Expense. b. Given, $17,000 accrued and unpaid. c.

$4,800 x 1/3 = $1,600 Rent Revenue earned. The remaining $3,200 in Unearned Revenue is a liability for two months of occupancy \"owed'' to the renter. d. PA4-4 Req. 1

VAL’S HAIR EMPORIUM

Unadjusted Income Statement (preliminary) For the Year Ended December 31, 2013

Service Revenue Wages Expense Utilities Expense Rent Expense Supplies Expense Income Tax Expense Total Expenses Net Income

Req. 2

$75,800 29,100 12,200 20,000 4,800

0 66,100 $9,700

$6,600 income before taxes x 30% = $1,980.

The pairs of accounts that require adjustment include:

Balance sheet account Related income statement account Supplies

Prepaid Rent Accounts Payable Wages Payable Income Taxes Payable

PA4-4 (continued) Req. 3

Account Names Cash

Supplies Expense

Rent Expense Utilities Expense Wages Expense

Income Tax Expense

Debit Credit Explanation

Unchanged

Supplies Prepaid Rent

Accounts Payable

Wages Payable Income Tax Payable

Contributed Capital Retained Earnings Service Revenue Wages Expense

Utilities Expense

Rent Expense

Supplies Expense

3,800

1,300 2,000

29,250

12,650

24,000

1,950

150

630 2,000 900 75,800

Based on supplies count

Two months of rent at $2,000/month

have

been

used so $4,000 is expensed Additional $450 for utility services must be added to previous amount of $1,500 Owe stylists $150 in wages

Adjusted income before tax x

Tax rate = [($75,800 – 29,250 – 12,650 – 24,000 – 7,800) x 30% = $630.

Unchanged

Unchanged Unchanged One day of wages totaling $150 that is added to previous amount of $29,100 $450 in utility services used during December that must be added to previous amount of $12,200

Two months have been used up so $4,000 of rent expense must be added to previous amount of $20,000

$3,000 of supplies used in 7,800

Income Tax Expense

630

Totals

81,430 81,430 December, which is added to previous amount of $4,800 Amount

of

income

tax

(calculated above)

PA4-4 (continued) Req. 4

a) dr Supplies Expense (+E, –SE) 3,000 cr Supplies (-A) 3,000

b) dr Rent Expense (+E, -SE) 4,000 cr Prepaid Rent (-A)

c) dr Wages Expense (+E, –SE) 150 cr Wages Payable (+L)

150

d) dr Income Tax Expense (+E, –SE) 630 cr Income Tax Payable (+L) 630

e) dr Utilities Expense (+E, –SE) 450

cr Accounts Payable (+L)

450

Req. 5

VAL’S HAIR EMPORIUM

Income Statement

For the Year Ended December 31, 2013

Service Revenue

$

75,80

0

Wages Expense 29,250 Rent Expense 24,000 Utilities Expense 12,650 Supplies Expense

7,800

4,000 Income Tax Expense Total Expenses Net Income

630 74,330 $ 1,4

70

The adjustments in requirement 4 caused the net income to decrease from $9,700 to $1,470, which is a difference of $8,230.