Adjusting The Accounts Assignment Classification Table

CHAPTER 3
Adjusting the Accounts
ASSIGNMENT CLASSIFICATION TABLE

Brief Problems Problems
Study Objectives Questions Exercises Exercises Set A Set B
1. Explain the time period 1

assumption.
2. Distinguish between the revenue 2, 3, 4

recognition principle and the
matching principle.
3. Explain the accrual basis of 5, 6 7 1, 2 3, 4, 7 3, 4, 7

accounting.
4. Explain why and distinguish when 7, 8 1

adjusting entries are needed.
5. Identify and distinguish between 9 1 1

the major types of adjusting entries.
6. Identify and prepare adjusting 10, 11, 17, 2, 3, 4, 7, 3, 4, 5, 6, 7, 2, 3, 5, 6, 2, 3, 5, 6,

entries for prepayments. 21, 22 8, 9, *13 8, 9, 10, 11 7, 8, 9, 10, 7, 8, 9, 10,
11 11
7. Identify and prepare adjusting 12, 13, 14, 5, 7, 8, 9 4, 5, 6, 7, 8, 3, 4, 5, 6, 3, 4, 5, 6,

entries for accruals. 15, 16, 17, 9, 10, 11 7, 8, 9, 10, 7, 8, 9, 10,
21, 22 11, *13 11, *13
8. Identify and prepare the adjusting 18, 19, 20, 6, 7, 8, 9 6, 7, 8, 9, 7, 8, 9, 10, 3, 7, 8, 9,

entry for amortization. 21, 22 10, 11 11, *13 10, 11,
*13
9. Describe the nature and purpose of 23 10, 11 11, 12 9, 10, 11, 9, 10, 11,
an adjusted trial balance and *13 *13
prepare.
*10. Identify and prepare adjusting *24 *12, *13 *13 *12, *13 *12, *13
entries for the alternative treatment
of prepayments (Appendix 3A).
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the Appendix to each
chapter.
3-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time
Number Description Level Allotted (min.)
1A Match adjusting entry type. Simple 10-15
2A Prepare original and adjusting journal entries for Moderate 20-25

prepayments.
3A Convert income from cash to accrual basis. Complex 25-35
4A Record transactions on accrual basis; convert revenue to Complex 25-35

cash receipts.
5A Prepare original and adjusting journal entries. Moderate 25-35
6A Prepare adjusting entries. Moderate 25-35
7A Prepare accrual-based income statement from cash- Complex 25-35

based information.
8A Identify effects of adjusting journal entries. Moderate 10-15
9A Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance.
10A Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance and financial statements.
11A Prepare adjusting entries and financial statements. Moderate 45-55
*12A Prepare original and adjusting journal entries for Moderate 20-25
prepayments, using alternative treatment.
*13A Prepare adjusting entries, adjusted trial balance and Moderate 55-65
financial statements, using alternative treatment of
prepayments.
1B Match adjusting entry type. Simple 10-15
2B Prepare original and adjusting journal entries for Moderate 20-25

prepayments.
3B Convert income from cash to accrual basis. Complex 25-35
4B Record transactions on accrual basis; convert revenue to Complex 25-35

cash receipts.
5B Prepare original and adjusting journal entries. Moderate 25-35
6B Prepare adjusting entries. Moderate 25-35
7B Prepare accrual-based income statement from cash- Complex 25-35

based information.
8B Identify effects of adjusting journal entries. Moderate 10-15
9B Prepare adjusting entries, post and prepare adjusted trial Moderate 50-60
balance.
3-2
Problem Difficulty Time
Number Description Level Allotted (min.)
10B Prepare adjusting entries, post, and prepare adjusted trial Moderate 50-60
balance and financial statements.
11B Prepare adjusting entries and financial statements. Moderate 45-55
*12B Prepare original and adjusting journal entries for Moderate 20-25
prepayments, using alternative treatment.
*13B Prepare adjusting entries, adjusted trial balance and Moderate 55-65
financial statements, using alternative treatment of
prepayments.
Cumulative Coverage—Chapters 2 to 3 Moderate 90-100
3-3
BLOOM’S TAXONOMY TABLE
Correlation Chart between Bloom’s Taxonomy, Study Objectives and End-of-Chapter Material
Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation

1. Explain the time period Q3-1
assumption.
2. Distinguish between the Q3-2

revenue recognition Q3-3
principle and the Q3-4
matching principle.
3. Explain the accrual basis Q3-5 BE3-7 P3-3B

of accounting. Q3-6 E3-2 P3-4B
E3-1 P3-3A P3-7B
P3-4A
P3-7A
4. Explain why and Q3-7

distinguish when Q3-8
adjusting entries are BE3-1
needed.
5. Identify and distinguish P3-1A Q3-9

between the major types P3-1B
of adjusting entries.
6. Identify and prepare Q3-10 Q3-17 BE3-2 P3-6A

adjusting entries for Q3-11 Q3-22 BE3-3 P3-7A
prepayments. Q3-21 BE3-8 BE3-4 P3-8A
BE3-9 BE3-7 P3-9A
*BE3-13 P3-10A
E3-3 P3-11A
E3-4 P3-2B
E3-5 P3-3B
E3-6 P3-5B
E3-7 P3-6B
E3-8 P3-7B
E3-9 P3-8B
E3-10 P3-9B
E3-11 P3-10B
P3-2A P3-11B
P3-3A
P3-5A
7. Identify and prepare Q3-12 Q3-17 Q3-15 P3-7A

adjusting entries for Q3-13 Q3-22 Q3-16 P3-8A
accruals. Q3-14 BE3-8 BE3-5 P3-9A
Q3-21 BE3-9 BE3-7 P3-10A
E3-4 P3-11A
E3-5 *P3-13A
E3-6 P3-3B
E3-7 P3-4B
E3-8 P3-5B
E3-9 P3-6B
E3-10 P3-7B
E3-11 P3-8B
P3-3A P3-9B
P3-4A P3-10B
P3-5A P3-11B
P2-6A *P3-13B
8. Identify and prepare the Q3-21 Q3-18 Q3-20 P3-9A

adjusting entry for Q3-19 BE3-6 P3-10A
3-4
Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation
amortization. Q3-22 BE3-7 P3-11A
BE3-8 E3-6 *P3-13A
BE3-9 E3-7 P3-3B
E3-8 P3-7B
E3-9 P3-8B
E3-10 P3-9B
E3-11 P3-10B
P3-7A P3-11B
P3-8A *P3-13B
9. Describe the nature and Q3-23 BE3-10 P3-11A

purpose of an adjusted BE3-11 *P3-13A
trial balance and E3-11 P3-9B
prepare. E3-12 P3-10B
P3-9A P3-11B
P3-10A *P3-13B
*10. Identify and prepare *Q3-24 *BE3-12 *P3-13A

adjusting entries for the *BE3-13 *P3-12B
alternative treatment of *E3-13 *P3-13B
prepayments. *P3-12A
Broadening Your BYP3-1 BYP3-2 BYP3-5 BYP3-6 BYP3-7

Perspective BYP3-3
BYP3-4
Cumulative Coverage
3-5
ANSWERS TO QUESTIONS
01. (a) Under the time period assumption, an accountant is required to

determine the relevance of each business transaction to specific
accounting periods, and its effects on those periods.
(b) An accounting time period of one year in length is referred to as a
fiscal year. A fiscal year that extends from January 1 to December
31 is referred to as a calendar year. Accounting periods of less
than one year are called interim periods.
2. The two generally accepted accounting principles that pertain to

adjusting the accounts are:
1. The revenue recognition principle, which states that revenue

should be recognized in the time period in which it is earned.
2. The matching principle, which states that efforts (expenses)
should be matched with accomplishments (revenues).
03. The law firm should recognize the revenue in April. The revenue
recognition principle states that revenue should be recognized in the
accounting period in which it is earned (i.e., when the work is done).
04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the

revenues in April. Under the matching principle, efforts (expenses)
should be matched with accomplishments (revenues).
05. Information presented on an accrual basis is useful because it reveals

relationships that are likely to be important in predicting future
results. To illustrate, under accrual accounting, revenues are
recognized when earned so they can be related to the economic
environment in which they occur. Trends in revenues are thus more
meaningful.
06. The balance in total owner’s equity should not equal the balance in the
cash account. Owner’s equity reflects the net amount the owners have
invested in the company, which comprises total assets–not just cash–
net of liabilities.
3-6
Questions Chapter 3 (Continued)
07. No, adjusting entries are required by the revenue recognition and
matching principles.
08. A trial balance may not contain up-to-date information for financial
statements because:
1. Some events are not journalized daily because it is unnecessary

and inefficient to do so.
2. The expiration of some costs occurs with the passage of time
rather than as a result of recurring daily transactions.
3. Some items may be unrecorded because the transaction data are
not known.
09. The three categories of adjusting entries are prepayments, accruals,

and estimates. Prepayments consist of transactions in which the cash
is exchanged in advance resulting in prepaid expenses and unearned
revenues. Accruals consist of transactions in which the cash will be
exchanged later, resulting in accrued revenues and accrued expenses.
Because we don’t always know what will happen in the future,
estimates are required. One example of an estimate is the allocation of
the cost of a capital asset over its estimated useful life.
10. If the original purchase was recorded as an asset, then in the adjusting
entry expenses are debited (to increase them) and assets are credited
(to decrease them).
11. In the adjusting entry, liabilities are debited (to decrease them) and
revenues are credited (to increase them).
12. It may have credited unearned revenue or accounts receivable.
13. Asset and revenue. An asset (a receivable) is debited and revenue is

credited.
14. Utilities Expense is debited and Accounts Payable (a liability) is

credited.
3-7
15. On the income statement, net income was understated $300. Prior to
adjustment, revenues are understated by $900 and expenses are
understated by $600. The impact on net income is $300 ($900 – $600).
On the balance sheet, accounts receivable are understated by $900,
accounts payable are understated by $600, and owner’s equity
understated by $300 (see net income).
16. The entry is:
Jan. 9 Salaries Payable............................................... 1,700

Salaries Expense............................................. 3,300
Cash............................................................ 5,000
17. (a) Accrued revenues.

(b) Unearned revenues.
(c) Accrued expenses.
(d) Accrued expenses, prepaid expenses, or estimates (amortization).
(e) Prepaid expenses or estimates (amortization).
(f) Accrued revenues or unearned revenues.
18. No. Amortization is the process of allocating the cost of an asset to

expense over its useful life in a rational and systematic manner.
Amortization results in the presentation of the book value of the asset,
not its market value.
19. Amortization expense is an expense account whose normal balance is

a debit. This account shows the cost that has expired during the
current accounting period. Accumulated amortization is a contra asset
account whose normal balance is a credit. The balance in this account
is the total of all the amortization that has been recognized from the
date of acquisition to the balance sheet date.
*20. Equipment............................................$12,000
Less: Accumulated amortization..... 7,000
Net book value................................... 5,000
3-8
21. (a) Salaries Payable is credited.

(b) Accumulated Amortization is credited.
(c) Interest Expense is debited.
(d) Supplies Expense is debited.
(e) Service Revenue is credited.
(f) Service Revenue is credited.
22. Disagree. An adjusting entry affects only one balance sheet account
and one income statement account.
23. Financial statements can be prepared from an adjusted trial balance

because the balances of all accounts have been adjusted to show the
effects of all financial events that have occurred during the
accounting period.
*24. For Supplies Expense: expenses are overstated and assets (prepaid

expense) are understated. The adjusting entry is:
Assets (Supplies).................................................................. XX
Expenses (Supplies Expense)....................................... XX
For Rent Revenue: revenues are overstated and liabilities (unearned

revenues) are understated. The adjusting entry is:
Revenues (Rent Revenue).................................................... XX

Liabilities (Unearned Rent)............................................ XX
3-9
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
1. Prepaid Insurance—to recognize insurance expired (expenses) during

the period.
2. Accumulated Amortization—to allocate the cost of the capital asset to

expense over the period it benefits.
3. Unearned Revenue—to account for Unearned Revenue received in

advance that was earned (revenues) during the period.
4. Interest Payable—to recognize interest expense accrued but unpaid

on notes payable.
5. Rent Receivable—to recognize rent earned (revenues) but not yet

collected.
BRIEF EXERCISE 3-2
Dec. 31 Advertising Supplies Expense................................ 7,200

Advertising Supplies........................................ 7,200
Advertising Supplies Advertising Supplies Expense

12/31 8,700 12/31 7,200 12/31 7,200
Balance 1,500
3-10
BRIEF EXERCISE 3-3
July 1 Prepaid Insurance......................................... 10,000

Cash........................................................ 10,000
Dec. 31 Insurance Expense ($10,000 x 6/24 mos.). . . 2,500

Prepaid Insurance.................................. 2,500
Cash
7/1 10,000
Prepaid Insurance Insurance Expense

7/1 10,000 12/31 2,500 12/31 2,500
12/31 Bal. 7,500
BRIEF EXERCISE 3-4
July 1 Cash......................................................................... 10,000

Unearned Insurance Revenue........................ 10,000
Dec. 31 Unearned Insurance Revenue................................ 2,500

Insurance Revenue ($10,000 x 6/24 mos.)..... 2,500
Cash
7/1 10,000
Unearned Insurance Revenue Insurance Revenue

12/31 2,500 7/1 10,000 12/31 2,500
12/31 Bal. 7,500
3-11
BRIEF EXERCISE 3-5
1. Dec. 31 Interest Receivable.......................................... 300

Interest Revenue...................................... 300
2. 31 Accounts Receivable....................................... 1,400

Service Revenue...................................... 1,400
3. 31 Salaries Expense............................................. 900

Salaries Payable...................................... 900
BRIEF EXERCISE 3-6
Dec. 31 Amortization Expense—Equipment...................... 5,000

Accumulated Amortization—
Equipment.................................................... 5,000
Amortization Expense—Equipment Accum. Amortization—Equipment

12/31 5,000 12/31 5,000
TAI WOO COMPANY

Balance Sheet (Partial)
December 31
Capital assets
Equipment................................................................$25,000
Less: Accumulated amortization........................... 005,000 $20,000
3-12
BRIEF EXERCISE 3-7
Transaction Cash Net Income
(a) Purchased supplies on hand for cash -$100 $ 0

(b) Recorded the use of supplies 0 -50
(c) Performed services on account 0 +1,000
(d) Received from customers payment of their
account +800 0
(e) Purchased office equipment for cash -500 0
(f) Recorded amortization of office equipment 0 -50
BRIEF EXERCISE 3-8
(a) (b)
Type of Account Status of Accounts
Adjustment Relationship Before Adjustment
1. Prepaid Assets and Expenses Assets (Supplies) Overstated

Expenses Expenses (Supplies Expense)
Understated
2. Accrued Assets and Revenues Assets (Accounts Receivable)

Revenues Understated
Revenues (Service Revenue)
Understated
3. Accrued Expenses and Expenses (Interest Expense)

Expenses Liabilities Understated
Liabilities (Interest Payable) Understated
Liabilities (Unearned Rent) Overstated

4. Unearned Liabilities and Revenues (Rent Earned) Understated
Revenues Revenues
Expenses (Amortization Expense)
5. Amortization Expenses and Assets Understated
(contra account) Assets (Capital Assets) Overstated
3-13
BRIEF EXERCISE 3-9
(a) (b)
Account Type of Adjustment Related Account
Accounts Receivable Accrued Revenues Service Revenue
Prepaid Insurance Prepaid Expenses Insurance Expense
Equipment Estimates Amortization

Expense/Accum.
Amortization
Supplies Prepaid Expenses Supplies Expense
Interest Payable Accrued Expenses Interest Expense
Unearned Service
Revenue Unearned Revenues Revenue Earned
Interest Receivable Accrued Revenues Interest Revenue
Rent Payable Accrued Expenses Rent Expense
BRIEF EXERCISE 3-10
KLAR COMPANY
Income Statement
For the Year Ended December 31, 2003
Revenues
Service revenue........................................................ $38,400
Expenses
Salaries expense...................................................... $13,000
Rent expense............................................................ 4,000
Insurance expense................................................... 2,000
Amortization expense.............................................. 001,000
Supplies expense..................................................... 500
Total expenses.................................................. 020,500
Net income....................................................................... $17,900
3-14
BRIEF EXERCISE 3-11
KLAR COMPANY
Statement of Owner's Equity
S. Klar, Capital, January 1..................................................................... $15,600

Add: Net income.................................................................................. 017,900
33,500
Less: Drawings..................................................................................... 006,000
S. Klar, Capital, December 31............................................................... $27,500
*BRIEF EXERCISE 3-12
(a)
Dec. 31 Advertising Supplies............................................... 1,500

Advertising Supplies Expense........................ 1,500
Advertising Supplies Advertising Supplies Expense

12/31 1,500 12/31 8,700 12/31 1,500
12/31 Bal. 7,200
(b) The adjusted balances are the same. It does not matter whether the
original entry is recorded to an asset or an expenses account as long
as the adjustment is done correctly.
3-15
*BRIEF EXERCISE 3-13
(a)
May 1 Cash.......................................................................... 600

Unearned Rental Revenue............................... 600
May 31 Unearned Rental Revenue....................................... 600

Rental Revenue................................................ 600
(b)
May 1 Cash.......................................................................... 600

Rental Revenue................................................ 600
May 31 No adjustment required
(c) The ending balances are the same under either alternative.
3-16
SOLUTIONS TO EXERCISES
EXERCISE 3-1
(a) Accrual basis accounting records the events that change an entity’s
financial statements in the periods in which the events occur, rather
than in the periods in which the entity receives or pays cash. That is,
revenue is recognized when it is earned. Expenses are recognized
when services or goods are used or consumed in the production of
revenue. Information presented on an accrual basis is useful because
it reveals relationships that are likely to be important in predicting
future results.
Conversely, under the cash basis of accounting, revenue is recorded

only when cash is received, and an expense is recognized only when
cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.
(b) The government is not using either the cash or accrual basis of
accounting. It is using some other basis that is not a generally
accepted accounting policy. The government may believe it is
appropriate because the commitment to spend the funds has been
made.
(c) Dear Member of Parliament,
It is my understanding that the Federal government is making

changes in the method of accounting it uses and is switching from
the cash basis of accounting to the accrual basis. I understand in
2001 accrual accounting is fully in use.
The government is to be commended for this change. The use of full

accrual accounting will provide a more accurate reflection of the true
costs of services that government provides and a more complete
reflection of its assets and liabilities. This will result in improved
information for decision makers and citizens.
Sincerely,
ACCOUNTING STUDENT
3-17
EXERCISE 3-2
(a)
Cash Accrual
Revenue $22,000 $26,000
Expenses
Operating 13,500 15,000
Insurance 2,500 0000000
Net income $ 6,000 $ 11,000
(b) The accrual basis provides the most useful information for decision
making as it reflects transactions in the period in which they occur and
properly matches revenue and expenses.
EXERCISE 3-3
(a) 1. Prepaid Rent............................................................. 20,000

Cash.................................................................... 20,000
To record payment of rent for January 1-
May 31, 2002.
2. Security Deposit....................................................... 5,000

Cash.................................................................... 5,000
To record payment of security deposit.
3. Prepaid Rent............................................................. 30,000

Cash.................................................................... 30,000
To record payment of rent for June 1-
November 30, 2002.
4. No entry required.
(b) Rent Expense................................................................ 55,000

Prepaid Rent........................................................ 50,000
Rent Payable........................................................ 5,000
See (c) for calculations.
3-18
EXERCISE 3-3 (Continued)
(c) Rent expense:
$20,000 January 1 – May 31 ($4,000 x 5 mos.)

30,000 June 1 – November 30 ($5,000 x 6 mos.)
5,000 December 1 – December 31 ($5,000 x 1 mos. accrual)
$55,000
(d) Balance sheet amounts with respect to rent:
Assets
Security deposit, $5,000
Liabilities
Rent payable, $5,000 (for the month of December)
3-19
EXERCISE 3-4
(a) July 10 Supplies............................................................ 200

Cash.......................................................... 200
14 Cash.................................................................. 3,000
Service Revenue...................................... 3,000
15 Salaries Expense.............................................. 1,200

Cash.......................................................... 1,200
20 Cash.................................................................. 700
Unearned Service Revenue..................... 700
(b) July 31 Supplies Expense............................................ 500

Supplies.................................................... 500
31 Accounts Receivable....................................... 500

Service Revenue...................................... 500
31 Salaries Expense............................................. 1,200

Salaries Payable...................................... 1,200
31 Unearned Service Revenue............................ 900

Service Revenue...................................... 900
3-20
EXERCISE 3-5
Answer Calculation
(a) Supplies balance = $800 Supplies expense $950)

Add: Supplies (1/31/03) 700)
Less: Supplies purchased (850)
Supplies (12/31/02) $800)
(b) Total premium = $4,800 Total premium = Monthly premium X

12; $400 X 12 = $4,800
Purchase date = Aug. 1, 2002 Purchase date: On Jan. 31, there are
6 months coverage remaining ($400
X 6). Thus, the purchase date was 6
months earlier on Aug. 1, 2002.
(c) Salaries payable = $1,500 Cash paid $2,500

Salaries payable (1/31/03) 800
3,300
Less: Salaries expense 1,800
Salaries payable (12/31/02) $1,500
(d) Unearned revenue = $1,150 Service revenue $2,000

Unearned revenue (1/31/03) 750
2,750
Cash received in Jan. 1,600
Unearned revenue (12/31/02) $1,150
3-21
EXERCISE 3-6
(a) (b)
Type of Accounts
Item Adjustment Before Adjustment
1. Accrued Assets (Accounts Receivable) Understated

Revenues Revenues (Service Revenue) Understated
2. Prepaid Assets (Store Supplies) Overstated

Expenses Expenses (Store Supplies Expenses) Understated
3. Accrued Expenses (Utility Expense) Understated

Expenses Liabilities (Accounts Payable) Understated
4. Unearned Liabilities (Unearned Service Revenue) Overstated

Revenues Revenues (Service Revenue) Understated
5. Accrued Expenses (Salaries Expense) Understated

Expenses Liabilities (Salaries Payable) Understated
6. Prepaid Assets (Prepaid Insurance) Overstated

Expenses Expenses (Insurance Expense) Understated
7. Amortization Assets (Capital Assets) Overstated

Expenses (Amortization Expense) Understated
3-22
EXERCISE 3-7
1. Mar. 31 Amortization Expense ($400 × 3)...................... 1,200

Equipment............................................... 1,200
2. 31 Unearned Rent Revenue................................... 3,100

Rent Revenue ($9,300 × 1/3)...................... 3,100
3. 31 Interest Expense................................................ 500

Interest Payable.......................................... 500
4. 31 Supplies Expense.............................................. 1,950

Supplies ($2,800 – $850)............................ 1,950
5. 31 Insurance Expense ($300 × 3)........................... 900

Prepaid Insurance...................................... 900
EXERCISE 3-8
1. Jan. 31 Accounts Receivable......................................... 750

Service Revenue........................................ 750
2. 31 Utilities Expense................................................ 520

Utilities Payable.......................................... 520
3. 31 Amortization Expense....................................... 1,000

Dental Equipment.................................... 1,000
31 Interest Expense................................................ 250

4. 31 Insurance Expense ($12,000 ÷ 12).................... 1,000

Prepaid Insurance...................................... 1,000
5. 31 Supplies Expense ($1,600 – $500).................... 1,100

Supplies...................................................... 1,100
3-23
EXERCISE 3-9
1. Oct. 31 Advertising Supplies Expense.......................... 1,100

Advertising Supplies ($2,500 – $1,400).... 1,100
2. 31 Insurance Expense............................................ 100

Prepaid Insurance...................................... 100
3. 31 Amortization Expense....................................... 50
Office Equipment.................................... 50
4. 31 Unearned Service Revenue............................... 600

Service Revenue........................................ 600
5. 31 Accounts Receivable......................................... 300

Service Revenue........................................ 300
6. 31 Interest Expense................................................ 70
7. 31 Salaries Expense............................................... 1,500

Salaries Payable......................................... 1,500
3-24
EXERCISE 3-10
Aug. 31 Accounts Receivable.............................................. 600

Service Revenue.............................................. 600
31 Office Supplies Expense......................................... 1,600

Office Supplies................................................ 1,600
31 Insurance Expense.................................................. 1,500

Prepaid Insurance........................................... 1,500
31 Amortization Expense............................................. 1,200

Accumulated Amortization—Office
Equipment..................................................... 1,200
31 Salaries Expense..................................................... 1,100

Salaries Payable.............................................. 1,100
31 Unearned Rent Revenue......................................... 800

Rent Revenue................................................... 800
3-25
EXERCISE 3-11
(a) July 31 Insurance Expense.......................................... 300

Prepaid Insurance.................................... 300
31 Supplies........................................................... 500
Supplies Expense.................................... 500
31 Amortization Expense..................................... 150

Accumulated Amortization— Equipment 150
31 Wages Expense............................................... 300

Wages Payable......................................... 300
31 Accounts Receivable....................................... 900

Service Revenue...................................... 900
(b)
VIRMANI CO.
Income Statement
For the Month Ended July 31, 2003
Revenues
Service revenue ($5,500 + $900)...................... $6,400
Expenses
Wages expense ($2,300 + $300)...................... $2,600
Supplies expense ($1,200 – $500)................... 700
Utilities expense............................................... 600
Insurance expense........................................... 300
Amortization expense...................................... 0,150
Total expenses.......................................... 04,350
Net income............................................................... $2,050
3-26
EXERCISE 3-12
LIM COMPANY
Income Statement
For the Year Ended August 31, 2003
Revenues
Service revenue............................................................................ $34,600
Rent revenue................................................................................. 011,800
Total revenues....................................................................... 46,400
Expenses
Salaries expense........................................................ $18,100
Rent expense.............................................................. 15,000
Office supplies expense............................................. 1,600
Insurance expense..................................................... 1,500
Amortization expense................................................ 01,200
Total expenses....................................................................... 037,400
Net income............................................................................................ $ 9,000
LIM COMPANY
For the Year Ended August 31, 2003
E. Lim, Capital, August 1, 2002............................................................. $15,600

Add: Net income.................................................................................. 009,000
E. Lim, Capital, August 31, 2003........................................................... $24,600
3-27
EXERCISE 3-12 (Continued)
LIM COMPANY
Balance Sheet
August 31, 2003
Assets
Cash....................................................................................................... $10,400
Accounts receivable............................................................................. 9,400
Office supplies...................................................................................... 700
Prepaid insurance................................................................................. 2,500
Office equipment............................................................... $14,000
Less: Accumulated amortization—office equipment.... 004,800 009,200
Total assets............................................................................ $32,200
Liabilities and Owner's Equity
Liabilities
Accounts payable......................................................................... $05,800
Salaries payable............................................................................ 1,100
Unearned rent revenue................................................................. 700
Total liabilities....................................................................... 7,600
Owner's equity
E. Lim, Capital............................................................................... 024,600
Total liabilities and owner's equity....................................... $32,200
3-28
*EXERCISE 3-13
(a) Jan. 02 Insurance Expense.......................................... 2,400

Cash.......................................................... 2,400
10 Supplies Expense............................................ 1,700

Cash.......................................................... 1,700
15 Cash.................................................................. 5,100
Service Revenue...................................... 5,100
Insurance Expense Supplies Expense

1/2 2,400 1/10 1,700
Cash Service Revenue

1/15 5,100 1/2 2,400 1/15 5,100
1/10 1,700
(b) Jan. 31 Prepaid Insurance ($200 × 11 months)........... 2,200

Insurance Expense.................................. 2,200
31 Supplies............................................................ 800
Supplies Expense.................................... 800
31 Service Revenue.............................................. 3,600

Unearned Service Revenue..................... 3,600
3-29
*EXERCISE 3-13 (Continued)
(b) (Continued)
Cash Service Revenue

1/15 5,100 1/2 2,400 1/31 3,600 1/15 5,100
1/10 1,700
Bal. 1,000 Bal. 1,500
Insurance Expense Supplies Expense

1/2 2,400 1/31 2,200 1/10 1,700 1/31 800
Bal. 200 Bal. 900
Unearned Service
Prepaid Insurance Supplies Revenue
1/31 2,200 1/31 800 1/31 3,600
(c) Cash................................................................................................ $1,000

Prepaid insurance.......................................................................... 2,200
Supplies.......................................................................................... 800
Unearned service revenue............................................................ 3,600
Service revenue............................................................................. 1,500
Insurance expense......................................................................... 200
Supplies expense........................................................................... 900
3-30
SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
3 (a) Record interest on note payable.

4 (b) Record interest on note receivable.
5 (c) Allocate cost of capital asset over its useful life.
4 (d) Record revenue that has been earned but not billed or
collected.
2 (e) Record revenue that has been earned that was previously
received in advance.
(f) Record hiring of employees.
3 (g) Record salaries owed.
1 (h) Record supplies used.
3-31
PROBLEM 3-2A
1. Jan. 1 Office Supplies............................................... 4,500

Cash........................................................ 4,500
Dec. 31 Supplies Expense ($4,500 – $900)................. 3,600

Office Supplies....................................... 3,600
2. Sept. 1 Prepaid Insurance.......................................... 3,600

Cash........................................................ 3,600
Dec. 31 Insurance Expense ($3,600 ÷ 12 x 4)............. 1,200

3. Nov. 15 Cash................................................................ 1,200

Unearned Service Revenue................... 1,200
Dec. 31 Unearned Service Revenue .......................... 1,200

Service Revenue..................................... 1,200
4. Dec. 15 Cash................................................................ 460

Unearned Rent Revenue........................ 460
Dec. 31 Unearned Rent Revenue ($460 ÷ 2)............... 230

Rent Revenue.......................................... 230
3-32
PROBLEM 3-3A
Students may find this to be a fairly challenging problem, so here are a few
points that should help:
 Under the CASH BASIS, revenues are recorded when they are
collected (received in cash), even if they were earned (the sale was
made) earlier;
 Under the ACCRUAL BASIS of accounting, revenues are recorded
when they are earned (the sale is made)–even if the cash is not
collected until later, or is received prior to the revenue being
earned.
 Under the CASH BASIS, expenses are recorded when the cash is
paid out; and
 Under the ACCRUAL BASIS of accounting, expenses are recorded
when the cost has “expired” or been “used up”, which is not always
in the same time period as when the cash is paid out.
For example,
 Under the CASH BASIS, Supplies are recorded as expenses as

soon as they are purchased and paid for;
 Under the ACCRUAL BASIS of accounting, Supplies are not

recorded as expenses until they have been used up. While the
supplies are still on hand, they are recorded as assets because they
have future benefits;
 Under the CASH BASIS, amounts such as Unpaid Wages Owing at

the end of 2002 would not be considered expenses until they are
actually paid out–in 2003; and
 Under the ACCRUAL BASIS of accounting, Unpaid Wages Owing at

the end of 2002 would be considered expenses in 2002, because the
cost was incurred or “used up” during 2002–even though the cash
will not be paid out until 2003.
3-33
PROBLEM 3-3A (Continued)
$35,190 Cash basis income
+3,400 Accounts Receivable arise from sales that have been

made, thus revenue must be recognized.
-2,500 Accounts Receivable collected in 2003 from sales that

were made (and revenue that was earned) in 2002.
+1,300 Supplies are not recorded as expenses until used up).
-1,160 Supplies from 2002 that were used up (and an expense

incurred) in 2003.
-1,200 Which is an expense because the cost was incurred

during 2003.
+2,400 For 2002 wages expense that were paid in 2003.
-1,440 Which is an expense because the cost was incurred

during 2003.
+1,600 For 2002 expenses that were paid in cash in 2003.
$37,590 Accrual basis income
3-34
PROBLEM 3-4A
(a)
1. Cash.......................................................................... 9,000
Fees Receivable................................................ 9,000
2. Unearned Fees Revenue............................................. 22,000

Fees Revenue.................................................... 22,000
3. Cash.............................................................................. 30,000
Unearned Fees Revenue.................................. 30,000
Unearned Fees Revenue ($30,000 – $17,000)............ 13,000

Fees Revenue.................................................... 13,000
4. Fees Receivable........................................................... 118,000

Fees Revenue ($153,000 – $22,000 – $13,000)118,000
5. Cash.............................................................................. 106,000
Fees Receivable ($118,000 – $12,000)............. 106,000
(b) Cash received with respect to fees = $9,000 + $106,000 + $30,000 =

$145,000
T accounts (not required)

Unearned Fees Revenue
Fees Receivable 22,000
9,000 (2) 22,000 (3) 30,000
(4) 118,000 (1) 9,000 (3) 13,000
(5) 106,000 17,000
12,000
Cash
Fees Revenue (1) 9
(2) 22,000 ,000
(3) 13,000 (3) 30,000
(4) 118,000 (5) 106,000
153,000 145,000
3-35
PROBLEM 3-5A
1. (a) July 1 Office Supplies............................................ 1,560

Cash........................................................ 1,560
(b) Dec. 31 Supplies Expense ($1,560 + $640 – $740). . 1,460

Office Supplies....................................... 1,460
2. (a) Jan. 1 Cash.............................................................. 10,000

Note Payable........................................... 10,000
(b) Dec. 31 Interest Expense.......................................... 600

Interest Payable ($10,000 X 6%)............ 600
3. (b) Dec. 31 Telephone Expense..................................... 400

Accounts Payable................................... 400
4. (a) Jan. 1 Truck............................................................. 18,000

Cash........................................................ 18,000
(b) Dec. 31 Amortization Expense................................. 3,600

Accumulated Amortization–Truck......... 3,600
5. (a) Dec. 26 Wages Expense........................................... 3,000

Cash........................................................ 3,000
(b) Dec. 31 Wages Expense........................................... 1,800

Wages Payable ($3,000 ÷ 5 x 3)............. 1,800
Note to Instructors: The January 3, 2003 journal entry follows for

information:
Jan. 3 Wages Expense........................................... 1,200

Wages Payable............................................ 1,800
Cash........................................................ 3,000
3-36
PROBLEM 3-6A
1. Dec. 31 Advertising Expense......................................... 5,200

Prepaid Advertising................................... 5,200
A650 – $6,000 / 12 = $500 per month

for 8 months = $4,000
B974 – $7,200 / 24 = $300 per month
for 4 months = 0 1,200
$5,200
2. Dec. 31 Unearned Rent Revenue................................... 108,000

Rent Revenue............................................. 108,000
5 × $4,000 × 2 = $ 40,000
4 × $8,500 × 2 = 68,000
Total rent earned $108,000
Note that the $369,000 balance in Unearned Rent Revenue includes the
security deposits.
3. Dec. 31 Interest Expense................................................ 3,733

Interest Payable.......................................... 3,733
$80,000 × 8% × 7/12 mos. = $3,733
4. Dec. 31 Salaries Expense............................................... 2,000

Salaries Payable......................................... 2,000
5 x $700 x 2/5 days = $1,400

3 x $500 x 2/5 days = 600
Total $2,000
3-37
PROBLEM 3-7A
EXOTIC DESIGNS
Income Statement
Revenues
Design revenue ($61,500 + (6) $3,800)............ $65,300
Expenses
Wage expense ($18,400 + (5) $400)................. $18,800
Supplies expense ($12,200 – (2) $1,800)......... 10,400
Rent expense ($9,600 – (3) $600)..................... 9,000
Automobile expense [(7) 12,000 X $0.30)]...... 3,600
Advertising expense........................................ 3,600

Amortization expense ($18,400 ÷ (1) 10)........ 1,840
Telephone expense.......................................... 980
Insurance expense ($1,800 ÷ (4) 2).................. 900
Total expenses.......................................... 49,120
Net income............................................................... $16,180
EXOTIC DESIGNS
Balance Sheet
December 31, 2003
Assets
Cash.......................................................................... $ 2,520
Prepaid insurance ($1,800 ÷ 2 (4))........................... 900
Rent deposit.............................................................. 600
Accounts receivable (6)........................................... 3,800
Supplies (2)............................................................... 1,800
Equipment................................................................. $18,400
Less: Accumulated amortization—equipment...... 1,840 16,560
Total assets....................................................... $26,180
Liabilities and Owner’s Equity

Liabilities
Wages payable (5)........................................... $ 400
Accounts payable ((7) $12,000 X $0.30)....... 3,600

Total liabilities.......................................... 4,000
Owner’s equity
3-38
Smith, Capital ($30,000 - $16,120 - $24,000). . 22,180
Total liabilities and owner’s equity......... $26,180
3-39
PROBLEM 3-8A
Balance Sheet Income Statement

Adj. Owner’s Net
Entry Assets = Liabilities + Equity Revenues - Expenses = Income
1. $500 O NA $500 O NA $500 U $500 O
2. $200 O NA $200 O NA $200 U $200 O
3. NA $750 O $750 U $750 U NA $750 U
4. NA $500 U $500 O NA $500 U $500 O
5. $100 U NA $100 U $100 U NA $100 U
6. $1,200 O NA $1,200 O NA $1,200 U $1,200 O
3-40
PROBLEM 3-9A
(a) 1. June 30 Insurance Expense ($7,200 × 1/12)........... 600

Prepaid Insurance.............................. 600
2. 30 Amortization Expense—Office
Equipment............................................... 50
Office Equipment............................. 50
30 Amortization Expense—Buses................. 2,300

Accum. Amortization—Buses........... 2,300
3. 30 Interest Expense........................................ 300

Interest Payable.................................. 300
4. 30 Unearned Fees Revenue............................ 6,000

Fees Earned ($1,500 × 4).................... 6,000
5. 30 Salaries Expense........................................ 1,200

Salaries Payable ($400 × 3)................ 1,200
6. 30 Accounts Receivable................................. 1,200

Fees Earned........................................ 1,200
7. 30 Advertising Expense.................................. 500

Accounts Payable............................... 500
3-41
(b)
Cash
Date Explanation Ref. Debit Credit Balance
June 30 Balance  3,000
Accounts Receivable
June 30 J2 1,200 1,200
Prepaid Insurance
30 J2 0,600 006,600
Office Equipment
Accumulated Amortization—Office Equipment

June 30 J2 0,050 000,050
Buses
3-42
(b) (Continued)
Accumulated Amortization—Buses
June 30 J2 2,300 002,300
Notes Payable
Accounts Payable
June 30 J2 0, 500 0,5500
Interest Payable
June 30 J2 0,300 000,300
Salaries Payable
June 30 J2 1,200 001,200
Unearned Fees
30 J2 6,000 9,000
3-43
(b) (Continued)
Eldon Kaplan, Capital

Fees Earned
30 J2 6,000 21,900
30 J2 1,200 23,100
Salaries Expense
30 J2 1,200 10,200
Advertising Expense
30 J2 500 1,300
Gas and Oil Expense

3-44
(b) (Continued)
Insurance Expense
June 30 J2 0,600 0,600
Amortization Expense—Office Equipment

June 30 J2 0,050 0,050
Amortization Expense—Buses
June 30 J2 2,300 2,300
Interest Expense
June 30 J2 0,300 0,300
3-45
(c) ATLANTIC TOURS

Adjusted Trial Balance
June 30, 2003
Debit Credit
Cash.......................................................................... $ 3,000
Accounts Receivable............................................... 1,200
Prepaid Insurance.................................................... 6,600
Office Equipment..................................................... 1,800
Accumulated Amortization—Office
Equipment.............................................................. $ 50
Buses........................................................................ 140,000
Accumulated Amortization—Buses........................ 2,300
Notes Payable........................................................... 62,000
Accounts Payable.................................................... 500
Interest Payable........................................................ 300
Salaries Payable....................................................... 1,200
Unearned Fees......................................................... 9,000
Eldon Kaplan, Capital.............................................. 70,000
Fees Earned.............................................................. 23,100
Salaries Expense...................................................... 10,200
Advertising Expense................................................ 1,300
Gas and Oil Expense................................................ 1,100
Insurance Expense................................................... 600
Amortization Expense—Office Equipment............. 50
Amortization Expense—Buses............................... 2,300
Interest Expense...................................................... 300 0000000
$ 168,450 $168,450
3-46
PROBLEM 3-10A
(a) 1. Aug. 31 Insurance Expense ($450 × 3)................... 1,350

Prepaid Insurance.............................. 1,350
2. 31 Supplies Expense ($3,300 – $1,000)......... 2,300

Supplies.............................................. 2,300
3. 31 Amortization Expense—Cottages
($6,250 × 1/4) ......................................... 1,562
Accum. Amort.—Cottages................. 1,562
31 Amortization Expense—Furniture
($5,200 × 1/4) ......................................... 1,300
Accum. Amort.—Furniture................. 1,300
4. 31 Unearned Rent Revenue............................ 5,000

Rent Revenue..................................... 5,000
5. 31 Salaries Expense........................................ 400

Salaries Payable................................. 400
6. 31 Accounts Receivable................................. 800

Rent Revenue..................................... 800

Interest Payable [($80,000 × 8%) × 1/12] 533
3-47
(b)
Cash
Aug. 31 Balance  19,600
Accounts Receivable
Aug. 31 J1 800 00,800
Prepaid Insurance
31 J1 0,1,350 004,050
Supplies
31 J1 2,300 001,000
Land
Cottages
3-48
(b) (Continued)
Accumulated Amortization—Cottages
Aug. 31 J1 1,562 001,562
Furniture
Accumulated Amortization—Furniture
Aug. 31 J1 1,300 000,1,300
Accounts Payable
Unearned Rent Revenue

31 J1 5,000 001,800
Salaries Payable
Aug. 31 J1 400 000,400
Interest Payable
Aug. 31 J1 0,533 000,533
3-49
(b) (Continued)
Mortgage Payable
Keath Yhap, Capital

Keath Yhap, Drawings

Rent Revenue
31 J1 5,000 85,000
31 J1 0,800 85,800
Salaries Expense
31 J1 400 51,400
Utilities Expense
3-50
(b) (Continued)
Repair Expense
Insurance Expense
Aug. 31 J1 1,350 00,11,350
Supplies Expense
Aug. 31 J1 2,300 2,300
Amortization Expense—Cottages
Aug. 31 J1 1,562 1,562
Amortization Expense—Furniture
Aug. 31 J1 0,11,300 0,1,300
Interest Expense
Aug. 31 J1 0,533 0,533
3-51
(c)
HIGHLAND COVE RESORT
August 31, 2003
Debit Credit
Cash..................................................................................
$ 19,600
Accounts Receivable....................................................... 800
Prepaid Insurance............................................................ 4,050
Supplies............................................................................ 1,000
Land.................................................................................. 25,000
Cottages...........................................................................125,000
Accumulated Amortization—Cottages........................... $ 1,562
Furniture........................................................................... 26,000
Accumulated Amortization—Furniture.......................... 1,300
Accounts Payable............................................................ 6,500
Unearned Rent Revenue.................................................. 1,800
Salaries Payable.............................................................. 400
Interest Payable............................................................... 533
Mortgage Payable............................................................ 80,000
Keath Yhap, Capital......................................................... 100,000
Keath Yhap, Drawings..................................................... 5,000
Rent Revenue................................................................... 85,800
Salaries Expense............................................................. 51,400
Utilities Expense.............................................................. 9,400
Repair Expense................................................................ 3,600
Insurance Expense.......................................................... 1,350
Supplies Expense............................................................ 2,300
Amortization Expense—Cottages................................... 1,562
Amortization Expense—Furniture.................................. 1,300
Interest Expense.............................................................. 000 0533 0000 000
$277,895 $277,895
3-52
(d) HIGHLAND COVE RESORT

Income Statement
For the Three Months Ended August 31, 2003
Revenues
Rent revenue.............................................................. $ 85,800
Expenses
Salaries expense....................................................... $ 51,400
Utilities expense........................................................ 9,400
Repair expense.......................................................... 3,600
Supplies expense...................................................... 2,300
Amortization expense—cottages............................. 1,562
Insurance expense.................................................... 1,350
Interest expense........................................................ 533
Amortization expense—furniture............................. 1,300
Total expenses................................................... 71,445
Net income....................................................................... $ 14,355

For the Three Months Ended August 31, 2003
Keath Yhap, Capital, June 1................................................................ $ 0

Add: Investment by owner................................................................100,000
Net income................................................................................
0 14,355
114,355
Less: Drawings...................................................................................
0 05,000
Keath Yhap, Capital, August 31.......................................................... $109,355
3-53
(d) (Continued)

Balance Sheet
August 31, 2003
Assets
Cash.................................................................................. $ 19,600
Accounts receivable........................................................ 800
Prepaid insurance............................................................ 4,050
Supplies............................................................................ 1,000
Land.................................................................................. 25,000
Cottages...........................................................................
$125,000
Less: Accumulated amortization—cottages................. 1,562 123,438
Furniture...........................................................................26,000
Less: Accumulated amortization—furniture................. 1,300 24,700
Total assets...................................................... $ 198,588
Liabilities
Accounts payable..................................................... $ 6,500
Salaries payable....................................................... 400
Interest payable........................................................ 533
Unearned rent revenue............................................ 1,800
Mortgage payable..................................................... 80,000
Total liabilities.................................................. 89,233
Owner's equity
Keath Yhap, Capital.................................................. 109,355
Total liabilities and owner's equity................. $198,588
3-54
PROBLEM 3-11A
(a) Dec. 31 Accounts Receivable........................................ 1,500

Advertising Revenue................................ 1,500
31 Art Supplies Expense....................................... 3,400

Art Supplies............................................... 3,400
31 Insurance Expense........................................... 850

Prepaid Insurance..................................... 850
31 Amortization Expense...................................... 7,000

Accumulated Amortization....................... 7,000
31 Interest Expense............................................... 150

Interest Payable........................................ 150
31 Unearned Advertising Revenue....................... 1,400

Advertising Revenue................................ 1,400
31 Salaries Expense.............................................. 1,300

Salaries Payable........................................ 1,300
3-55
(b) YOUNT ADVERTISING AGENCY

Income Statement
Revenues
Advertising revenue...................................................... $61,500
Expenses
Salaries expense........................................................... $11,300
Amortization expense................................................... 7,000
Rent expense................................................................. 4,000
Art supplies expense.................................................... 3,400
Insurance expense........................................................ 850
Interest expense............................................................000500
Total expenses....................................................... 27,050
Net income........................................................................... $34,450
YOUNT ADVERTISING AGENCY

T. Yount, Capital, January 1.................................................................. $25,500

Add: Net income..................................................................................34,450
59,950
Less: Drawings.....................................................................................12,000
T. Yount, Capital, December 31............................................................ $47,950
3-56
(b) (Continued)
YOUNT ADVERTISING AGENCY

Balance Sheet
December 31, 2002
Assets
Cash...................................................................................... $11,000
Accounts receivable............................................................ 21,500
Art supplies.......................................................................... 5,000
Prepaid insurance................................................................ 2,500
Printing equipment.............................................................. $60,000
Less: Accumulated amortization
—Printing equipment 35,000 25,000
Total assets............................................................. $65,000
Liabilities
Notes payable................................................................. $ 5,000
Accounts payable........................................................... 5,000
Interest payable.............................................................. 150
Unearned advertising revenue...................................... 5,600
Salaries payable............................................................. 1,300
Total liabilities......................................................... 17,050
Owner's equity
T. Yount, Capital............................................................... 47,950
Total liabilities and owner's equity..................... $65,000
3-57
(c) $5,000 x ? x 10/12 mos. = $500
$500 interest for 10 months is equivalent to $600 interest for 12

months.
$600 / $5,000 = 12% interest per year
(d) Salaries Expense, $11,300 less Salaries Payable on 12/31/02, $1,300 =

$10,000 payment made for 2002 salaries. Total Payments, $13,500 –
$10,000 = $3,500 Salaries Payable on 12/31/01
Salaries Payable
12/31/01 3,500
Payments 13,500 Expense 11,300
12/31/02 1,300
3-58
*PROBLEM 3-12A
1. Jan. 1 Supplies Expense........................................... 4,500

Cash........................................................ 4,500
Dec. 31 Office Supplies .............................................. 900

Office Supplies Expense........................ 900
2. Sept. 1 Insurance Expense......................................... 3,600

Cash........................................................ 3,600
Dec. 31 Prepaid Insurance ($3,600 ÷ 12 x 8)............. 2,400

Insurance Expense................................. 2,400
3. Nov. 15 Cash................................................................ 1,200

Service Revenue..................................... 1,200
Dec. 31 No entry required
4. Dec. 15 Cash................................................................ 460

Rental Revenue....................................... 460
Dec. 31 Rental Revenue ($460 ÷ 2)............................. 230

Unearned Rental Revenue..................... 230
3-59
*PROBLEM 3-13A
(a) 1. June 30 Supplies...................................................... 1,500

Supplies Expense............................... 1,500
2. 30 Interest Expense ($17,000 × 8% × 5/12). . . 567

Interest Payable................................. 567
3. 30 Prepaid Insurance ($1,800 x 8/12)............. 1,200

Insurance Expense............................ 1,200
4. 30 Consulting Revenue................................... 1,000

Unearned Consulting Revenue......... 1,000
5. 30 Accounts Receivable................................. 2,000

Graphic Revenue................................ 2,000
6. 30 Amortization Expense ($9,000 ÷ 2)........... 4,500

Equipment........................................ 4,500
3-60
*PROBLEM 3-13A (Continued)
(b) GLOBAL GRAPHICS COMPANY

June 30, 2003
Debit Credit
Cash.......................................................................... $ 9,500
Accounts Receivable ($14,000 + $2,000)................ 16,000
Supplies.................................................................... 1,500
Equipment................................................................. 45,000
Accumulated Amortization...................................... $ 4,500
Notes Payable........................................................... 17,000
Accounts Payable.................................................... 9,000
Unearned Consulting Revenue............................... 1,000
Jill Batke, Capital..................................................... 25,000
Graphic Revenue ($52,100 + $2,000)....................... 54,100
Consulting Revenue ($5,000 – $1,000).................... 4,000
Supplies Expense ($2,700 – $1,500)........................ 1,200
Rent Expense........................................................... 1,500
Utilities Expense...................................................... 1,700
Amortization Expense.............................................. 4,500
Insurance Expense ($1,800 – $1,200)...................... 600
Interest Expense...................................................... 567
$ 115,167 $ 115,167
3-61
(c) GLOBAL GRAPHICS COMPANY

Income Statement
For the Six Months Ended June 30, 2003
Revenues
Graphic revenue........................................................... $54,100
Consulting revenue...................................................... 4,000
Total revenues....................................................... 58,100
Expenses
Salaries expense.......................................................... $30,000
Advertising expense.................................................... 1,900
Utilities expense........................................................... 1,700
Rent expense................................................................ 1,500
Supplies expense......................................................... 1,200
Amortization expense.................................................. 4,500
Interest expense........................................................... 567
Insurance expense....................................................... 600
Total expenses...................................................... 41,967
Net income........................................................................... $16,133
GLOBAL GRAPHICS COMPANY

For the Six Months Ended June 30, 2003
Jill Batke, Capital, January 1................................................................ $ 0

Add: Investment by owner.................................................................. 25,000
Net income.................................................................................. 16,133
Jill Batke, Capital, June 30.................................................................... $41,133
3-62
(c) (Continued)
GLOBAL GRAPHICS COMPANY

Balance Sheet
June 30, 2003
Assets
Cash...................................................................................... $ 9,500
Supplies................................................................................ 1,500
Equipment............................................................................
$45,000
Less: Accumulated amortization....................................... 4,500 40,500
Total assets................................................................. $68,700
Liabilities
Notes payable.............................................................. $17,000
Accounts payable....................................................... 9,000
Interest payable........................................................... 567
Unearned consulting revenue.................................... 1,000
Total liabilities..................................................... 27,567
Owner's equity
Jill Batke, Capital........................................................ 41,133
Total liabilities and owner's equity.................... $68,700
3-63
PROBLEM 3-1B
3 (a) Record interest on overdue account payable.

4 (b) Record interest earned on overdue account receivable.
5 (c) Allocate cost of equipment over its useful life.
4 (d) Record revenue owed by customers for services provided.
2 (e) Record fees that have been earned that were previously
received in advance.
(f) Record signing of lease for rental space.
3 (g) Record property taxes due.
1 (h) Record expiration of rent at the end of the month.
3-64
PROBLEM 3-2B
1. Jan. 1 Office Supplies............................................... 2,800

Cash........................................................ 2,800
Dec. 31 Supplies Expense ($2,800 – $500)................. 2,300

Office Supplies....................................... 2,300
2. Aug. 1 Prepaid Insurance.......................................... 3,600

Cash........................................................ 3,600
Dec. 31 Insurance Expense ($3,600 ÷ 12 x 5)............. 1,500

3. Nov. 15 Cash................................................................ 1,200

Unearned Service Revenue................... 1,200
Dec. 31 Unearned Service Revenue ($400 x 2).......... 800

Service Revenue..................................... 800
4. Dec. 15 Prepaid Rent................................................... 4,500

Cash........................................................ 4,500
Dec. 31 No entry required
3-65
PROBLEM 3-3B
$43,900 Cash basis earnings.

Accounts receivable arise from sales that have been made,
+3,600 thus revenue must be recognized for balance outstanding at
the end of the current year.
Accounts receivable collected in current year, for sales
- 2,700
made in previous year must be deducted from earnings.
Prepaid expenses at year end should be set up as an asset
+1,550
rather than expensed, this increases earnings.
Prepaid expenses at the end of the previous year should be
- 1,310
expensed this year, this decreases earnings.
Accounts payable owing at the end of the current year
- 1,500
should be accrued, thus reducing earnings.
Accounts payable owed at the end of the previous year
+2,200 should not be deducted from the current year’s earnings,
thus increasing earnings.
Unearned revenue at the end of the current year should be
- 1,360
accrued, thus reducing earnings.
Unearned revenue at the end of the previous year should not
+1,500 be deducted from the current year’s income, thus increasing
earnings.
Amortization expense is equal to the increase in
- 2,000 accumulated amortization from 2001 to 2002 ($22,000 -
$20,000 = $2,000)
$43,880 Accrual basis income.
3-66
PROBLEM 3-4B
(a)
1. Cash ................................................................ 11,000

Dues Receivable.................................... 11,000
2. Unearned Ticket Revenue.............................. 25,000

Ticket Revenue...................................... 25,000
3. Cash ................................................................ 35,000

Unearned Ticket Revenue..................... 35,000
Unearned Ticket Revenue ($35,000- $20,000) 15,000

Ticket Revenue...................................... 15,000
4. Dues Receivable............................................. 148,000

Dues Revenue ....................................... 148,000
5. Cash ................................................................ 133,000

Dues Receivable ($148,000 – $15,000). 133,000
Dues Receivable 20,000

2001 Bal. 11,000
4. 148,000 1. 11,000 Dues Revenue
5. 133,000 4. 148,000
2002 Bal. 15,000
2002 Bal.
Unearned Ticket Revenue 148,000
2001 Bal. 25,000
2. 25,000 3. 35,000 Ticket Revenue
3. 15,000 2. 25,000
2002 Bal. 3. 15,000
2002 Bal. 50,000
(b) Cash received with respect to dues and tickets:
1. Collection of 2001 dues $ 11,000

3. Sale of tickets 35,000
5. Collection of 2002 dues 133,000
$179,000
3-67
PROBLEM 3-5B
1. (a) Jan. 31 Supplies........................................................ ,500

Cash....................................................... 1,500
(b) Dec. 31 Supplies Expense ($300 + $1,500 – $500). . 1,300

Office Supplies...................................... 1,300
2. (a) June 1 Cash.............................................................. 4,000

Note Payable......................................... 4,000
(b) Dec. 31 Interest Expense.......................................... 187

Interest Payable ($4,000 X 8% x 7/12).. 187
3. (b) Dec. 31 Utilities Expense.......................................... 1,400

Accounts Payable................................. 1,400
4. (a) Jan. 1 Truck............................................................. 38,000

Cash....................................................... 38,000
(b) Dec. 31 Amortization Expense................................. 10,000

Accumulated Amortization – Truck..... 10,000
5. Dec. 31 Wages Expense ($3,000 x 2/12* days)........ 500

Wages Payable...................................... 500
*See errata note.
Note to Instructors: The January 11, 2003 journal entry follows for
information:
Jan. 11 Wages Expense ($3,000 x 10/12 days)....... 2,500

Wages Payable ($3,000 x 1/12 days).......... 500
Cash....................................................... 3,000
Errata Note: Advise students to see errata sheet

if they have the first printing of the text. In
transaction #5, December 31 falls on a Tuesday,
not Thursday, in 2002. December 28 falls on a ..................
Saturday. No adjusting entry has been recorded
for the period from December 30 through
December 31. Assume a six-day (Monday
through Saturday) work week.
PROBLEM 3-6B
(a) Prepaid Insurance – before adjustments
A2958 – $ 5,800
B4564 – 9,600
$15,400
(b)
1. Dec. 31 Insurance Expense........................... 5,300
Prepaid Insurance.................... 5,300
Prepaid Insurance—balance after adjustment

($15,400 - $5,300 = $10,100)
A2958 – $5,800 ÷ 24 = $242 per month
for 12 months = $ 2,900
B4564 – $9,600 ÷ 24 = $400 per month
for 18 months = 0 7,200
$10,100
Insurance Expense
A2958 – $5,800 ÷ 24 = $242 per month
for 12 months = $2,900
B4564 – $9,600 ÷ 24 = $400 per month
for 6 months = 2,400
$5,300
PROBLEM 3-6B (Continued)
(b) (Continued)
2. Dec. 31 Unearned Subscription Revenue..... 7,000

Rent Subscription Revenue.... 7,000
Subscription Revenue Earned

October 200 x $50 x 3/12 = $2,500
November 300 x $50 x 2/12 = 2,500
December 480 x $50 x 1/12 = 2,000
$7,000
Unearned Subscription Revenue ($49,000 - $7,000 = $42,000)

October 200 x $50 x 9/12 = $ 7,500
November 300 x $50 x 10/12 = 12,500
December 480 x $50 x 11/12 = 22,000
$42,000
3. Dec. 31 Salaries Expense..........................3,060

Salaries Payable.................. 3,060
5 x $600 x 3/5 days = $1,800

3 x $700 x 3/5 days = 1,260
Total $3,060
PROBLEM 3-7B
(a)
THE RADICAL EDGE
Income Statement
For the Six Months Ended April 30, 2003
Revenues
Repair services ($32,150 + $650)..................... $32,800
Expenses
Wages expense ($2,600 + $120)...................... $2,720
Rent expense ($1,225 - $175)........................... 1,050
Advertising expense........................................ 375
Amortization expense ($9,200 ÷ (i) 8 x 6/12 ). 575
Total expenses.......................................... 5,690
Net income............................................................... $27,110
(b)
THE RADICAL EDGE
Balance Sheet
April 30, 2003
Assets
Cash......................................................................... $37,780
Rent deposit............................................................ 175
Accounts receivable .............................................. 650
Equipment............................................................... $9,200
Less: Accumulated amortization—equip............. 575 8,625
Total assets...................................................... $47,230
Liabilities
Wages payable............................................... $ 120
Owner’s equity
Charron, Capital ($20,000 + $27,110)............ 47,110
Total liabilities and owner’s equity........ $47,230
PROBLEM 3-8B
Balance Sheet Income Statement

Adj.
Owner’s Net
Entry Assets = Liabilities + Revenues - Expenses =
Equity Income
1. $300 O NA $300 O NA $300 U $300 O
2. $1,000 O NA $1,000 O NA $1,000 U $1,000 O
3. NA $750 O $750 U $750 U NA $750 U
4. $2,000 U NA $2,000 U $2,000 U NA $2,000 U
5. NA $250 U $250 O NA $250 U $250 O
6. $1,000 O NA $1,000 O NA $1,000 U $1,000 O
PROBLEM 3-9B
(a) 1. Dec. 31 Accounts Receivable................................. 2,500

Service Revenue................................. 2,500
2. 31 Insurance Expense ($3,600 × 1/2)............. 1,800

Prepaid Insurance.............................. 1,800
3. 31 Amortization Expense—Automobiles...... 15,000

Automobiles..................................... 15,000
4. 31 Interest Expense........................................ 5,400

Interest Payable.................................. 5,400
5. 31 Unearned Service Revenue....................... 1,000

Service Revenue ................................ 1,000
6. 31 Salaries Expense........................................ 1,500

Salaries Payable ($500 × 3)................ 1,500
7. 31 Repair Expense.......................................... 650

Accounts Payable............................... 650
(b)
Cash
Dec. 31 Balance  12,400
Accounts Receivable
31 J2 2,500 5,700
Prepaid Insurance
31 J2 0,1,800 001,800
Automobiles
Dec. 31 Balance  0058,000
Accumulated Amortization—Automobiles
Dec. 31 J2 0,015,000 0015,000
Notes Payable
(b) (Continued)
Accounts Payable
Dec. 31 J2 0, 650 0,5650
Interest Payable
Dec. 31 J2 0,5,400 000,5,400
Salaries Payable
Dec. 31 J2 1,500 001,500
Unearned Revenue
31 J2 1,000 1,500
C. Orosco, Capital
Service Revenue
31 J2 2,500 86,500
31 J2 1,000 87,500
(b) (Continued)
Salaries Expense
31 J2 1,500 58,500
Repair Expense
Dec. 31 Balance  00,6,000
31 J2 650 6,650
Gas and Oil Expense

Insurance Expense
Dec. 31 J2 0,1,800 0,11,800
Amortization Expense—Automobiles
Dec. 31 J2 0,015,000 0,15,000
Interest Expense
Dec. 31 J2 05,400 05,400
(c) OROSCO SECURITY SERVICE

December 31, 2002
Debit Credit
Cash.......................................................................... $ 12,400
Accounts Receivable............................................... 5,700
Automobiles............................................................. 58,000
................................................................................... $ 15,000
Amortization—Automobiles.................................... 45,000
Notes Payable........................................................... 5,400
Accounts Payable.................................................... 1,500
Salaries Payable....................................................... 1,500
Unearned Revenue................................................... 18,000
C. Orosco, Capital.................................................... 87,500
Service Revenue...................................................... 58,500
Repair Expense........................................................ 9,300
Gas and Oil Expense................................................ 1,800
Insurance Expense................................................... 15,000
Amortization Expense—Automobiles..................... 0005,400 0000000
Interest Expense...................................................... $174,550 $174,550
PROBLEM 3-10B
(a) 1. May 31 Insurance Expense ($1,800 x 1/12)........... 150

Prepaid Insurance.............................. 150
2. 31 Supplies Expense ($1,900 – $1,000)......... 900

Supplies.............................................. 900
3. 31 Amortization Expense—Lodge
($3,500 × 1/12) ....................................... 292
Accum. Amort.—Lodge...................... 292
31 Amortization Expense—Furniture
($3,360 × 1/12)....................................... 280
Accum. Amort.—Furniture................. 280

Interest Payable ($35,000 × 8% × 1/12) 233
5. 31 Unearned Rent Revenue............................ 1,500

Rent Revenue..................................... 1,500
6. 31 Accounts Receivable................................. 800

Rent Revenue..................................... 800
7. 31 Salaries Expense........................................ 300

Salaries Payable................................. 300
(b)
Cash
May 31 Balance  2,500
Accounts Receivable
May 31 J1 800 00,800
Prepaid Insurance
31 J1 0, 150 001,650
Supplies
31 J1 900 001,000
Land
Lodge
(b) (Continued)
Accumulated Amortization—Lodge
May 31 J1 292 292
Furniture
Accumulated Amortization—Furniture
May 31 J1 280 000,280
Accounts Payable
Unearned Rent Revenue

31 J1 1,500 002,100
Salaries Payable
May 31 J1 300 000,300
(b) (Continued)
Interest Payable
May 31 J1 0,233 0,233
Mortgage Payable
Sara Sutton, Capital

Rent Revenue
31 J1 1,500 10,700
31 J1 0,800 11,500
Salaries Expense
31 J1 300 3,300
Utilities Expense
(b) (Continued)
Advertising Expense
May 31 Balance  0 500
Insurance Expense
May 31 J1 150 150
Supplies Expense
May 31 J1 900 900
Amortization Expense—Lodge
May 31 J1 292 292
Amortization Expense—Furniture
May 31 J1 0,280 0280
Interest Expense
May 31 J1 0,233 0233
(c)
SUPER MOTEL
May 31, 2003
Debit Credit
Cash..................................................................................
$ 2,500
Accounts Receivable....................................................... 800
Prepaid Insurance............................................................ 1,650
Supplies............................................................................ 1,000
Land.................................................................................. 15,000
Lodge................................................................................ 70,000
Accumulated Amortization—Lodge............................... $ 292
Furniture........................................................................... 16,800
Accumulated Amortization—Furniture.......................... 280
Accounts Payable............................................................ 4,700
Unearned Rent Revenue.................................................. 2,100
Salaries Payable.............................................................. 300
Interest Payable............................................................... 233
Mortgage Payable............................................................ 35,000
Sara Sutton, Capital......................................................... 60,000
Rent Revenue................................................................... 11,500
Salaries Expense............................................................. 3,300
Utilities Expense.............................................................. 1,000
Advertising Expense....................................................... 500
Insurance Expense.......................................................... 150
Supplies Expense............................................................ 900
Amortization Expense—Lodge....................................... 292
Amortization Expense—Furniture.................................. 280
Interest Expense.............................................................. 00 00233 0000 000
$114,405 $114,405
(d) SUPER MOTEL

Income Statement
For the Month Ended May 31, 2003
Revenues
Rent revenue........................................................... $11,500
Expenses
Salaries expense.....................................................$3,300
Utilities expense...................................................... 1,000
Advertising expense............................................... 500
Supplies expense.................................................... 900
Amortization expense—lodge................................ 292
Insurance expense.................................................. 150
Interest expense...................................................... 233
Amortization expense—furniture........................... 280
Total expenses................................................ 6,655
Net income....................................................................... $ 4,845
SUPER MOTEL
For the Month Ended May 31, 2003
Sara Sutton, Capital, May 1.................................................................$ 0

Add: Investment by owner................................................................. 60,000
Net income................................................................................. 4,845
64,845
Less: Drawings................................................................................... 0
Sara Sutton, Capital, May 31...............................................................$64,845
(d) (Continued)
SUPER MOTEL
Balance Sheet
May 31, 2003
Assets
Cash.................................................................................. $ 2,500
Accounts receivable........................................................ 800
Prepaid insurance............................................................ 1,650
Supplies............................................................................ 1,000
Land.................................................................................. 15,000
Cottages...........................................................................$70,000
Less: Accumulated amortization—cottages.................000292 69,708
Furniture........................................................................... 16,800
Less: Accumulated amortization—furniture.................000280 0016,520
Total assets............................................................. $107,178
Liabilities
Accounts payable..................................................... $ 4,700
Salaries payable....................................................... 300
Interest payable........................................................ 233
Unearned revenue.................................................... 2,100
Mortgage payable..................................................... 0035,000
Total liabilities.................................................. 42,333
Owner's equity
Sara Sutton, Capital................................................. 0064,845
Total liabilities and owner's equity................. $107,178
PROBLEM 3-11B
(a) Sept. 30 Accounts Receivable..................................... 600

Commission Revenue............................ 600
30 Rent Expense................................................. 600

Prepaid Rent........................................... 600
30 Supplies Expense........................................... 200

Supplies.................................................. 200
30 Amortization Expense.................................... 350

Accum. Amortization—Equipment........ 350
30 Interest Expense............................................ 50

Interest Payable...................................... 50
30 Unearned Rent Revenue................................ 300

Rent Revenue.......................................... 300
30 Salaries Expense............................................ 400

Salaries Payable..................................... 400
(b) IRABU CO.

Income Statement
For the Quarter Ended September 30, 2003
Revenues
Commission revenue....................................... $14,600
Rent revenue.................................................... 700
Total revenues.......................................... 15,300
Expenses
Salaries expense.............................................. $9,400
Rent expense.................................................... 1,500
Amortization expense...................................... 350
Supplies expense............................................. 200
Interest expense............................................... 50
Total expenses.......................................... 12,010
Net income........................................................ $ 3,290
IRABU CO.
Statement of Owner’s Equity
For the Quarter Ended September 30, 2003
Yosuke Irabu, Capital, July 1....................................................... $ 0

Add: Investment........................................................................ 14,000
Net income........................................................................ 3,290
17,290
Less: Drawings........................................................................... 600
Yosuke Irabu, Capital, September 30......................................... $16,690
(b) (Continued)
IRABU CO.
Balance Sheet
September 30, 2003
Assets
Cash........................................................................ $ 6,700
Accounts receivable............................................... 1,000
Prepaid rent............................................................ 900
Supplies.................................................................. 1,000
Equipment............................................................... $15,000
Less: Accum. amortization—equipment............. 350 14,650
Total assets..................................................... $24,250
Liabilities
Notes payable................................................. $ 5,000
Accounts payable........................................... 1,510
Salaries payable.............................................. 400
Interest payable.............................................. 50
Unearned rent revenue................................... 600
Total liabilities......................................... 7,560
Owner’s equity
Yosuke Irabu, Capital..................................... 16,690
Total liabilities and owners’ equity........ $24,250
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
*PROBLEM 3-12B
1. Jan. 1 Supplies Expense........................................... 2,800

Cash........................................................ 2,800
Dec. 31 Office Supplies............................................... 500

Supplies Expense................................... 500
2. Aug. 1 Insurance Expense......................................... 3,600

Cash........................................................ 3,600
Dec. 31 Prepaid Insurance ($3,600 ÷ 12 x 7).............. 2,100

Insurance Expense................................. 2,100
3. Nov. 15 Cash................................................................ 1,200

Service Revenue..................................... 1,200
Dec. 31 Service Revenue ........................................... 400

Unearned Service Revenue................... 400
4. Dec. 15 Rent Expense................................................. 4,500

Cash........................................................ 4,500
Dec. 31 Prepaid Rent................................................... 4,500

Rent Expense.......................................... 4,500
*PROBLEM 3-13B
(a) 1. Dec. 31 Supplies...................................................... 1,800

Supplies Expense ($3,300 - $1,500)... 1,800
2. 31 Interest Expense ($18,000 × 10% × 2/12). 300

Interest Payable................................. 300
3. 31 Prepaid Insurance ($2,100 x 8/12)............. 1,400

Insurance Expense............................ 1,400
4. 31 Consulting Fees Earned............................ 1,600

Unearned Consulting Fees................ 1,600
5. 31 Amortization Expense ($2,200 ÷ 2)........... 1,100

Equipment........................................ 1,100
6. 31 Utilities Expense........................................ 200

Accounts Payable.............................. 200
*PROBLEM 3-13B (Continued)
(b) ROYAL GRAPHICS COMPANY

December 31, 2002
Debit Credit
Cash.......................................................................... $ 8,600
Accounts Receivable .............................................. 13,000
Supplies.................................................................... 1,800
Equipment................................................................. 48,000
Accumulated Amortization...................................... $ 1,100
Notes Payable........................................................... 18,000
Accounts Payable ($11,000 + $200)........................ 11,200
Unearned Consulting Fees...................................... 1,600
Jan Bejar, Capital..................................................... 22,000
Graphic Fees Earned............................................... 55,500
Consulting Fees Earned ($7,600 – $1,600)............. 6,000
Supplies Expense ($3,300 – $1,800)........................ 1,500
Rent Expense........................................................... 2,500
Utilities Expense ($1,900 + $200)............................ 2,100
Amortization Expense.............................................. 1,100
Insurance Expense ($2,100 – $1,400)...................... 700
Interest Expense...................................................... 00 00300 00 0000
$115,700 $115,700
(c) ROYAL GRAPHICS COMPANY

Income Statement
For the Six Months Ended December 31, 2002
Revenues
Graphic fees earned................................................... $55,500
Consulting fees earned.............................................. 6,000
Total revenues.................................................... 61,500
Expenses
Salaries expense......................................................... $33,000
Advertising expense...................................................1,700
Utilities expense..........................................................2,100
Rent expense..............................................................2,500
Supplies expense........................................................1,500
Amortization expense.................................................1,100
Interest expense.......................................................... 300
Insurance expense...................................................... 000700
Total expenses.................................................... 42,900
Net income........................................................................... $18,600
ROYAL GRAPHICS COMPANY

For the Six Months Ended December 31, 2002
Jan Bejar, Capital, July 1......................................................................$ 0

Add: Investment by owner.................................................................... 22,000
Net income.................................................................................... 18,600
Jan Bejar, Capital, December 31..........................................................$40,600
(c) (Continued)
ROYAL GRAPHICS COMPANY

Balance Sheet
December 31, 2002
Assets
Cash...................................................................................... $ 8,600
Supplies................................................................................ 1,800
Equipment............................................................................
$48,000
Less: Accumulated amortization....................................... 001,100 46,900
Total assets........................................................... $71,700
Liabilities
Notes payable.............................................................. $18,000
Accounts payable....................................................... 11,200
Interest payable........................................................... 300
Unearned consulting fees.......................................... 1,600
Total liabilities..................................................... 31,100
Owner's equity
Jan Bejar, Capital........................................................ 40,600
Total liabilities and owner's equity.................... $71,700
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3
(a), (c), & (e)
Cash No. 101

Sept. 1 Balance  04,880
8 J102 1,200 03,680
10 J102 1,200 04,880
12 J102 3,400 08,280
20 J102 6,000 02,280
22 J102 0,500 01,780
25 J102 1,200 0 580
29 J102 0,650 01,230
Accounts Receivable No. 112

10 J102 1,200 02,320
27 J102 1,000 03,320
Supplies No. 126

17 J102 1,500 02,500
30 Adj. entry J103 500 02,000
Store Equipment No. 153

15 J102 3,000 18,000
CUMULATIVE COVERAGE: CHAPTERS 2 TO 3 (Continued)
(a), (c), & (e) (Continued)
Accumulated Amortization—Store Equipment No. 154

30 Adj. entry J103 0,300 01,800
Accounts Payable No. 201

15 J102 3,000 06,400
17 J102 1,500 07,900
20 J102 6,000 01,900
Unearned Service Revenue No. 209

29 J102 0,650 01,050
30 Adj. entry J103 300 00,750
Salaries Payable No. 212

8 J102 0,500 00,000
30 Adj. entry J103 500 00,500
R. Pitre, Capital No. 301

(a), (c), & (e) (Continued)
Service Revenue No. 400

Sept. 12 J102 3,400 3,400
27 J102 1,000 4,400
30 Adj. entry J103 0,300 4,700
Amortization Expense No. 711

Sept. 30 Adj. entry J103 0,300 0,3300
Supplies Expense No. 631

Sept. 30 Adj. entry J103 0,500 0,500
Salaries Expense No. 726

Sept. 8 J102 0,700 0,700
20 J102 1,200 1,900
30 Adj. entry J103 0,500 2,400
Rent Expense No. 729

Sept. 22 J102 0,500 0,500
(b)
GENERAL JOURNAL J102

Date Account Titles and Explanation Ref. Debit Credit
Sept. 8 Salaries Payable 212 0,500
Salaries Expense 726 0,700
Cash 101 1,200
10 Cash 101 1,200

Accounts Receivable 112 1,200
12 Cash 101 3,400

Service Revenue 400 3,400
15 Store Equipment 153 3,000

Accounts Payable 201 3,000
17 Supplies 126 1,500

Accounts Payable 201 1,500
20 Accounts Payable 201 6,000

Cash 101 6,000
22 Rent Expense 729 0,500

Cash 101 0,500
25 Salaries Expense 726 1,200

Cash 101 1,200
27 Accounts Receivable 112 0,1,000

Service Revenue 400 0,1,000
29 Cash 101 0,650

Unearned Service Revenue 209 0,650
(d) & (f) PITRE EQUIPMENT REPAIR

Unadjusted and Adjusted Trial Balances
September 30, 2003
Unadjusted Adjusted
Dr. Cr. Dr. Cr.
Cash.........................................................
$ 1,230 $ 1,230
Accounts Receivable.............................. 3,320 3,320
Supplies...................................................2,500 2,000
Store Equipment..................................... 18,000 18,000
Accumulated Amortization.................... $ 1,500 $ 1,800
Accounts Payable................................... 1,900 1,900
Unearned Service Revenue.................... 1,050 750
Salaries Payable..................................... 500
R. Pitre, Capital....................................... 18,600 18,600
Service Revenue..................................... 4,400 4,700
Amortization Expense............................ 300
Supplies Expense................................... 500
Salaries Expense.................................... 1,900 2,400
Rent Expense.......................................... 500 500
$27,450 $ 27,450 $28,250 $ 28,250
(e) GENERAL JOURNAL J103

Date Account Titles and Explanation Ref. Debit Credit
1. Sept. 30 Supplies Expense................................... 631 500

Supplies ($2,500 – $2,000).............. 126 500
2. 30 Salaries Expense.................................... 726 500

Salaries Payable............................. 212 500
3. 30 Amortization Expense........................... 711 300

Store Equipment.......................... 154 300
4. 30 Unearned Service Revenue.................. 209 300

Service Revenue............................. 400 300
(g) PITRE EQUIPMENT REPAIR

Income Statement
For the Month Ended September 30, 2003
Revenues
Service revenue............................................................ $4,700
Expenses
Salaries expense...........................................................
$2,400
Supplies expense......................................................... 500
Rent expense................................................................ 500
Amortization expense................................................... 300
Total expenses.............................................................. 3,700
Net income.......................................................................... $1,000
PITRE EQUIPMENT REPAIR

For the Month Ended September 30, 2003
R. Pitre, Capital, September 1..............................................................

$18,600
Add: Net income..................................................................................
1,000
R. Pitre, Capital, September 30............................................................
$19,600
(g) (Continued)
PITRE EQUIPMENT REPAIR

Balance Sheet
September 30, 2003
Assets
Cash...................................................................................... $ 1,230
Supplies................................................................................ 2,000
Store equipment..................................................................
$18,000
Less: Accumulated amortization—store
equipment............................................................................
1,800 16,200
Total assets................................................................. $22,750
Liabilities
Accounts payable............................................................ $01,900
Salaries payable.............................................................. 500
Unearned service revenue.............................................. 00 0750
Total liabilities............................................................. 3,150
Owner's equity
R. Pitre, Capital................................................................ 019,600
Total liabilities and owner's equity................................ $22,750
BYP 3-1 FINANCIAL REPORTING PROBLEM
(a) The title The Second Cup used for its income statement is
“Consolidated Statement of Operations and Deficit.”
(b) The types of revenues reported include Franchise Revenue, Sales from
Corporate Stores, and Product Sales.
(c) For competitive reasons, The Second Cup does not want to disclose
details of its operating costs and expenses. Most of the items shown on
its income statement are minimum required disclosures (many of which
are related to non-typical events rather than regular operations).
(d) Prepayments: Prepaid Expenses and Sundry Assets are reported on the
balance sheet ($419,000). In adjusting this account the other side of the
entry would be an expense account, for example insurance expense.
Deferred Financing Charges are also reported ($125,000). The other
account involved in adjustments to this account would likely be interest
expense.
(e) Accruals: Accrued revenues might include Income Taxes Receivable

($1,150,000) and Future Income Taxes ($295,000). The other account use
in preparing adjustments for this account would be a reduction of
income taxes expense. Accounts Receivable ($2,294,000) may also
include some accrued revenue amounts. Accrued expenses are
included in the line Accounts Payable and Accrued Liabilities
($2,718,000). The other accounts used in preparing adjustments for this
account would be expense accounts.
BYP 3-2 INTERPRETING FINANCIAL STATEMENTS
COTT CORPORATION
(a) (in millions)

1997 Prepaid Contract Costs................................ 29,743
Cash......................................................... 29,743
(b) (in millions)

1997 Amortization Expense.................................. 26,349
Accumulated Amortization
(or Prepaid Contract Costs)................... 26,349
(c) I think it should be recorded as an expense not a reduction of sales

revenue. All expenses are incurred to earn revenue–this item should
not be treated any differently than other expenses.
(d) 1. Cott may have made this change from capitalizing to expensing
these cost because of uncertainty relating to the future benefit of
the costs.
[The company states, in its 1999 Annual report, that “this change in
accounting policy reflected the maturing of the company’s
operations in the industry and its relationships with customers.”]
2. (in millions)
1997 Contract Costs Expense.............................. 29,743

Cash......................................................... 29,743
BYP 3-3 INTERPRETING FINANCIAL STATEMENTS
(a) The company is recording its legal expenses using an accrued

expense account.
(b) All of the adjustments are accrued expense adjustments, which

decrease net income.
(c) The accrued interest would have been recorded as follows:
Interest Expense..................................... 18,000

Interest Payable.............................. 18,000
BYP 3-4 ACCOUNTING ON THE WEB
Due to the frequency of change with regard to information available on the

world wide web, the Accounting on the Web cases are updated as required.
Their suggested solutions are also updated whenever necessary, and can be
found on-line in the Instructor Resources section of our home page
[www.wiley.com/canada/weygandt2].
BYP 3-5 COLLABORATIVE LEARNING ACTIVITY
(a) RV WORLD
Income Statement
For the Quarter Ended March 31, 2003
Revenues
Rental fees ($95,000 – $30,000)............................................ $65,000
Expenses
Wages expense [$29,800 + ($400 × 2)]................ $30,600
Advertising expense ($5,200 + $110).................. 5,310
Supplies expense ($5,200 – $1,300).................... 3,900
Repair expense ($4,000 + $260)........................... 4,260
Insurance expense ($7,200 × 3/12)...................... 1,800
Utilities expense ($900 + $180)............................ 1,080
Amortization expense.......................................... 800
Interest expense ($12,000 × 8% × 3/12)............... 00,240
Total expenses............................................................... 047,990
Net income..................................................................................... $17,010
(b) (1) The generally accepted accounting principles pertaining to the

income statement that were not recognized by Michel were the
revenue recognition principle and the matching principle.
The revenue recognition principle states that revenue is
recognized when it is earned. The fees of $30,000 for summer
rentals have not been earned and, therefore, should not be reported
in income for the quarter ended March 31.
The matching principle dictates that efforts (expenses) be
matched with accomplishments (revenues). This means that the
expenses should include amounts incurred in March but not paid
until April, and any other costs related to the operations of the
business during the period January – March.
(2) The difference in expenses was $7,290 ($47,990 – $40,700). The

overstatement of revenues ($30,000) plus the understatement of
expenses ($7,290) equals the difference in reported income of
$37,290 ($54,300 – $17,010).
BYP 3-6 COMMUNICATION ACTIVITY
Memorandum
To: Mary Lee Virgil

From: Student
Date:
Re: Adjusting Journal Entries
Upon reviewing the accounts of your company at the end of the year, I
discovered that adjusting entries were not made.
Adjusting entries are made at the end of the accounting period to ensure
that the revenue recognition and matching principles required under
generally accepted accounting principles are followed. The use of adjusting
entries makes it possible to report on the balance sheet the appropriate
assets, liabilities, and owner's equity at the statement date, and to report on
the income statement the proper revenue, expense, and net income (or loss)
for the year.
Adjusting entries are needed because the trial balance may not contain an
up-to-date and complete record of transactions and events, for the following
reasons:
1. Some events are not journalized daily because it is inexpedient to

do so. Examples are the use of supplies and the earning of wages
by employees.
2. The expiration of some costs is not journalized during the

accounting period because these costs expire with the passage of
time, rather than as a result of recurring daily transactions.
Examples of such costs are building and equipment deterioration,
rent, and insurance.
BYP 3-6 (Continued)
3. Some expenses, such as the cost of utility service and property

taxes, may be unrecorded because the bills for the costs have not
been received.
There are five types of adjusting entries:
1. Prepaid expenses—expenses paid in cash and recorded as assets

until they are used.
2. Unearned revenues—revenues received in cash and recorded as

liabilities until they are earned.
3. Accrued revenues—revenues earned but not yet received in cash

or recorded.
4. Accrued expenses—expenses incurred but not yet paid in cash or

recorded.
5. Amortization—allocation of the cost of capital assets to expense,

over their estimated useful lives.
I will be happy to answer any questions you may have on adjusting entries.
BYP 3-7 ETHICS CASE
(a) The stakeholders in this situation are:
 Carole Chiasson, controller

 The president of Die Hard Company
 The external users of Die Hard’s financial information
(b) 1. It is unethical for the president to place pressure on Carole to

misstate net earnings by requesting her to prepare incorrect
adjusting entries.
2. It is customary for adjusting entries to be dated as of the balance

sheet date although the entries are prepared at a later date. Carole
did nothing unethical by dating the adjusting entries December 31.
(c) Carole can accrue revenues and defer expenses through the
preparation of adjusting entries and be ethical so long as the entries
reflect economic reality. Intentionally misrepresenting the company’s
financial condition and its results of operations is unethical (it is also
illegal).

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CHAPTER 3

Adjusting the Accounts

ASSIGNMENT CLASSIFICATION TABLE

1. Explain the time period 1

2. Distinguish between the revenue 2, 3, 4

3. Explain the accrual basis of 5, 6 7 1, 2 3, 4, 7 3, 4, 7

4. Explain why and distinguish when 7, 8 1

5. Identify and distinguish between 9 1 1

6. Identify and prepare adjusting 10, 11, 17, 2, 3, 4, 7, 3, 4, 5, 6, 7, 2, 3, 5, 6, 2, 3, 5, 6,

7. Identify and prepare adjusting 12, 13, 14, 5, 7, 8, 9 4, 5, 6, 7, 8, 3, 4, 5, 6, 3, 4, 5, 6,

8. Identify and prepare the adjusting 18, 19, 20, 6, 7, 8, 9 6, 7, 8, 9, 7, 8, 9, 10, 3, 7, 8, 9,

1A Match adjusting entry type. Simple 10-15

2A Prepare original and adjusting journal entries for Moderate 20-25

3A Convert income from cash to accrual basis. Complex 25-35

4A Record transactions on accrual basis; convert revenue to Complex 25-35

5A Prepare original and adjusting journal entries. Moderate 25-35

6A Prepare adjusting entries. Moderate 25-35

7A Prepare accrual-based income statement from cash- Complex 25-35

8A Identify effects of adjusting journal entries. Moderate 10-15

11A Prepare adjusting entries and financial statements. Moderate 45-55

1B Match adjusting entry type. Simple 10-15

2B Prepare original and adjusting journal entries for Moderate 20-25

3B Convert income from cash to accrual basis. Complex 25-35

4B Record transactions on accrual basis; convert revenue to Complex 25-35

5B Prepare original and adjusting journal entries. Moderate 25-35

6B Prepare adjusting entries. Moderate 25-35

7B Prepare accrual-based income statement from cash- Complex 25-35

8B Identify effects of adjusting journal entries. Moderate 10-15

11B Prepare adjusting entries and financial statements. Moderate 45-55

Cumulative Coverage—Chapters 2 to 3 Moderate 90-100

Study Objectives Knowledge Comprehension Application Analysis Synthesis Evaluation

2. Distinguish between the Q3-2

3. Explain the accrual basis Q3-5 BE3-7 P3-3B

4. Explain why and Q3-7

5. Identify and distinguish P3-1A Q3-9

6. Identify and prepare Q3-10 Q3-17 BE3-2 P3-6A

7. Identify and prepare Q3-12 Q3-17 Q3-15 P3-7A

8. Identify and prepare the Q3-21 Q3-18 Q3-20 P3-9A

9. Describe the nature and Q3-23 BE3-10 P3-11A

*10. Identify and prepare *Q3-24 *BE3-12 *P3-13A

Broadening Your BYP3-1 BYP3-2 BYP3-5 BYP3-6 BYP3-7

01. (a) Under the time period assumption, an accountant is required to

2. The two generally accepted accounting principles that pertain to

1. The revenue recognition principle, which states that revenue

04. Expenses of $4,500 ($2,000 + $2,500) should be deducted from the

05. Information presented on an accrual basis is useful because it reveals

1. Some events are not journalized daily because it is unnecessary

09. The three categories of adjusting entries are prepayments, accruals,

12. It may have credited unearned revenue or accounts receivable.

13. Asset and revenue. An asset (a receivable) is debited and revenue is

14. Utilities Expense is debited and Accounts Payable (a liability) is

16. The entry is:

Jan. 9 Salaries Payable............................................... 1,700

17. (a) Accrued revenues.

18. No. Amortization is the process of allocating the cost of an asset to

19. Amortization expense is an expense account whose normal balance is

21. (a) Salaries Payable is credited.

23. Financial statements can be prepared from an adjusted trial balance

*24. For Supplies Expense: expenses are overstated and assets (prepaid

10. Identify and prepare Q3-24 BE3-12 P3-13A