The Adjusting Process

Short Exercises

(5 min.) S 3-1

Req. 1

Service revenue:

(a) Cash basis $900

(b) Accrual basis $2,200

Req. 2

The accrual basis provides more information because

it considers all the revenue you earned, including
revenue earned on account. The accrual basis also
keeps a record of your receivables from customers.
The cash basis ignores both your receivables and the
revenue you earned on account.
 (5 min.) S 3-2
Req. 1

(a Cash- Basis (b Accrual-Basis

) Amount ) Amount
Record expense Record asset
$2,900 $2,900

Req. 2

The accrual basis is more realistic because the

computer is an asset and it will benefit the business
for more than one year. To record the cost of the
computer as an expense is unrealistic.

(5 min.) S 3-3

Req. 1
a. Northwest Magazine should record revenue only
after it mails out magazines, not when it collects
cash from subscribers.

b. The amount of revenue equals $9 of the annual

subscription.

(5 min.) S 3-4
Req. 1
 Account Amount
Prepaid rent $2,375
Rent $3,325
expense

(5 min.) S 3-5
Req. 1

April 1 Paid prepaid expense

10 Unearned revenues
15 Depreciation
18 Prepaid expenses
30 Accrued revenues
30 Accrued expenses

(5 min.) S 3-6
Reqs. 1 and 2

Journal
POST
ACCOUNTS AND .
DATE EXPLANATIONS REF. DEBIT CREDIT

Req. 1 Apr 1 Prepaid rent 4,800

Cash 4,800

3
Req. 2 Apr Rent expense 800
0
Prepaid rent 800
 ($4,800 / 6) = $800

Req. 3

Prepaid rent Rent expense

Apr 1 4,800 Apr 30 800 Apr 30 800
Bal 4,000 Bal 800
 (5 min.) S 3-7

Req. 1

Accumulated Depreciation
Computer depreciation- expense-
equipment computer equipment computer equipment
May 54,00 May 1,50 May 1,50
1 0 31 0 31 0
Bal 54,00 Bal 1,50 Bal 1,50
0 0 0

Monthly depreciation: $18,000 / 12 = $1,500

Req. 2

Computer $54,000
equipment………………………..
Accumulated (1,500)
depreciation…………………
Book value at May $52,500
31……………………….

(10 min.) S 3-8

Req. 1

Journal
POST
. CREDI
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT T
Dec 3 Interest expense 884
 1
Interest payable 884
To accrue interest
expense.

Req. 2

Interest payable Interest expense

Dec 884 Dec 31 884
31
 (5-10 min.) S 3-9

Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
170,00
Cash
0
Unearned subscription 170,00
revenue 0
To record unearned
subscription
revenue.

Req. 2

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
Unearned subscription
12,000
revenue
Subscription revenue 12,000
To record earned revenue
that was collected in
advance.
 (10 min.) S 3-10

Req. 1

Famous Cut Hair Stylists

Preparation of Adjusted Trial Balance
December 31, 2012
Adjusted
Trial Balance Adjustments Trial Balance
Account Title Debit Credit Debit Credit Debit Credit
Cash $800 $800
Supplies 900 (a) 300
$600
Equipment 19,10 19,100
0
Accumulated $1,000 (b) $2,00
depreciation 1,000 0
Accounts payable 200 200
Interest payable (c) 600
600
Note payable 2,500 2,500
Common stock 7,400 7,400
Service revenue 14,800 14,80
0
Rent expense 4,500 4,500
Supplies expense (a) 600
$600
Depreciation expense (b) 1,000
1,000
Interest expense 600 (c) 1,200
600
Total $25,9 $25,90 $2,200 $2,200 $27,50 $27,5
00 0 0 00
 (10-15 min.) S 3-11
Req. 1

Famous Cut Hair Stylists

Income Statement
For the year ended December 31, 2012
Service revenue: $14,800
Less:
Rent expense $4,500
Interest expense 1,200
Depreciation 1,000
expense
Supplies expense 600
Total expenses 7,300
Net income $7,500

(5 min.) S 3-12

Req. 1

Total Assets:

Cash $ 800
Supplies 300
Equipment 19,100
Accumulated (2,000)
depreciation
Total assets $18,200
 Exercises
(5-10 min.) E 3-13
Req. 1
a. Considering the $100 paid by the freshman class, the
revenue was earned on April 2nd.
b. Considering the $410 paid by the sophomore class, the
revenue was earned on February 28th, the same day cash
was received.

(15-25 min.) E 3-14

Req. 1
Journal
POST
. CREDI
DATE DESCRIPTION REF. DEBIT T
May 1 Prepaid rent 1,500
Cash 1,500

5 Utilities expense 400

Cash 400

9 Cash 2,600
Service revenue 2,600

14 Equipment 2,400
Cash 2,400

23 Accounts receivable 3,000

Service revenue 3,000

31 Rent expense 500

Prepaid rent 500
31 Salary expense 1,400
Salary payable 1,400

31 Depreciation expense 40
Accumulated 40
depreciation
 (continued) E 3-14
Req. 2

Amount of Revenue (Expense) for May

Cash-Basis Amount Accrual-Basis
of Revenue Amount of Revenue
Date (Expense) (Expense)
May $ (1,500) $ 0
1
(400) (400)
5
2,600 2,600
9
1 (2,400) 0
4
2 0 3,000
3
3 (500)
0
1
3 (1,400)
0
1
3 0 (40)
1

Req. 3

Cash-Basis Amount
Accrual-Basis Amount
Net income (loss) $(1,700)
$3,260
Req. 4

The accrual basis gives the best picture of the true

earnings of Sweet Catering because it respects the
revenue principle and the matching principle.
 (5-10 min.) E 3-15
Req. 1
Situation February 28 adjustment
a. $200
b. $1,500
c. $900
d. $50

(10-15 min.) E 3-16

Req. 1

Missing amounts in italics.

Situations A B C D
Beginning Prepaid rent $ 1,200 $ 900 $ 200 $ 700
Payments for Prepaid
rent during the year 1,400 (b) 500 1,800 (d) 800
Total amount to 2,600 1,400 2,000 1,500
account for
Ending Prepaid rent (600) (500) (c) (400)
(100)
Rent expense (a) $ 900 $1,900 $ 1,100
$2,000
 (continued) E 3-16
Req. 2

Journal
POST
.
DATE DESCRIPTION REF. DEBIT CREDIT
Situatio
n
A: Rent expense 2,000
Prepaid rent 2,000

B: Prepaid rent 500

Cash 500

C: No journal entry.
This is an ending
balance.

D: Prepaid rent 800

Cash 800
 (10-15 min.) E 3-17

Req. 1

a. Unearned revenue
b. Accrued expense
c. Prepaid expense
d. Depreciation
e. Prepaid expense

Req. 2

Journal
POST.
DATE DESCRIPTION REF. DEBIT CREDIT
De 31 Adjusting Entries
c
a. Unearned rent revenue 1,375
Rent revenue 1,375

b. Salary expense 6,800

Salary payable 6,800

c. Supplies expense 1,800

Supplies 1,800

d. Depreciation expense 300

Accumulated 300
depreciation

e. Insurance expense 250

Prepaid insurance 250
 (10-20 min.) E 3-18
Req. 1

Accounts receivable Supplies

Bal 1,400 Bal 1,10 (c) 500
(a) 900 0
Bal 600
Bal 2,300

Salary payable Unearned service

revenue
(d) 400 (b) 200 Bal 600
Bal 400 Bal 400

Service revenue Salary expense

4,200 1,30
0
(a) 900 (d) 400
(b) 200 Bal 1,70
0
Bal 5,300

Supplies expense
(c) 500
Bal 500
 (10-15 min.) E 3-19
Req. 1

First Class Maids Company

Preparation of Adjusted Trial Balance
December 31, 2012
Adjusted
Trial Balance Adjustments Trial Balance
Account Debit Credit Debit Credit Debit Credit
Cash $700 $700
Supplies 3,000 (a) 1,200
$1,800
Prepaid Insurance 800 (b) 180
620
Equipment 29,000 29,000
Accumulated $7,000 (c) $7,46
depreciation 460 0
Accounts payable 2,800 2,800
Salary payable (d) 310
310
Unearned service 500 (e) 140
revenue $360
Common stock 5,100 5,100
Retained earnings 2,100 2,100
Dividends 3,000 3,000
Service revenue 25,00 (e) 25,36
0 360 0
Salary expense 6,000 (d) 6,310
310
Supplies expense (a) 1,800
1,800
Depreciation expense (c) 460
460
Insurance expense (b) 620
620
Totals $42,500 $42,50 $3,55 $3,55 $43,27 $43,2
0 0 0 0 70
 (10 min.) E 3-20
Req. 1

Journal
POST
. CREDI
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT T
Dec 31 Adjusting Entries
a. Supplies expense 1,800
Supplies 1,800

b. Insurance expense 620

Prepaid insurance 620

c. Depreciation expense 460

Accumulated depreciation 460

d. Salary expense 310

Salary payable 310

e. Unearned service revenue 360

Service revenue 360
 (10-15 min.) E 3-21
Req. 1

Jobs-4-U Employment Service, Inc.

Preparation of Adjusted Trial Balance
April 30, 2012
Adjusted
Trial Balance Adjustments Trial Balance
Account Debit Credit Debit Credit Debit Credit
Cash $ 900 $
900
Accounts receivable 4,100 (a) 5,600
$1,500
Supplies 1,000 (b)$ 500
500
Equipment 32,500
32,500
Accumulated (c) $15,40
depreciation $14,400 1,000 0
Salary payable (d) 1,200
1,200
Common stock 13,000 13,000
Retained earnings 10,300 10,300
Dividends 4,800 4,800
Service revenue 9,100 (a) 10,600
1,500
Salary expense 2,500 (d) 3,700
1,200
Rent expense 1,000 1,000
Depreciation expense (c) 1,000
1,000
Supplies expense (b) 500
500
Totals $4,20 $4,200 $50,50
$46,800 $46,800 0 $50,50 0
0
 (continued) E 3-21

Req. 2
Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
Apr 3 Accounts receivable 1,500
0
a. Service revenue 1,500
To accrue service revenue.

b. 3 Supplies expense 500

0
Supplies 500
To record supplies expense.

c. 3 Depreciation expense 1,000

0
Accumulated 1,000
depreciation
To record depreciation
expense.

d. 3 Salary expense 1,200

0
Salary payable 1,200
To accrue salary expense.
 (5-10 min.) E 3-22

Req. 1

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2013 Adjusting Entries
Jan 31 Depreciation expense 500
a. Accumulated 500
depreciation

b. 31 Rent expense 600

Prepaid rent 600

c. 31 Interest expense 300

Interest payable 300

d. 31 Salary expense 10,40

0
Salary payable 10,40
0

e. 31 Unearned service revenue 1,300

Service revenue 1,300

Req. 2

Net income would be overstated by $10,500.

 (10-20 min.) E 3-23
Req. 1

Supplies
Beg bal 1,200 Supplies 4,90
expense 0
Cash 6,100
payment
End bal 2,400

Salary payable
Cash 47,300 Beg bal 4,100
payment
Salary 45,700
expense
End bal 2,500

Unearned service revenue

Service 88,20 Beg bal 17,100
revenue 0
Cash 83,200
receipts
End bal 12,100
 (10 min.) E 3-24
Req. 1

The net income of First Class Maids Company for the

period ending December 31, 2012 is $16,170.
[$25,360 - ($6,310 + $1,800 + $460 + $620)] = $16,170

Req. 2

The total assets of First Class Maids Company at

December 31, 2012 is $23,620.
($700 + $1,200 + $180 + $29,000 - $7,460) = $23,620)

(20 min.) E 3-25

Req. 1

Jobs-4-U Employment Service, Inc.

Income Statement
Month Ended April 30, 2012
Revenue:
Service revenue $ 10,600
Expenses:
Salary expense $ 3,700
Rent expense 1,000
Depreciation expense 1,000
Supplies expense 500
Total expenses 6,200
Net income $ 4,400
 (continued) E 3-25
Req. 2

Jobs-4-U Employment Service, Inc.

Statement of Retained Earnings
Month Ended April 30, 2012
Retained earnings, March 31, 2012 $ 10,300
Net income 4,400
17,900
Dividends (4,800)
Retained earnings, April 30, 2012 $ 9,900

Req. 3

Jobs-4-U Employment Service, Inc.

Balance Sheet
April 30, 2012
ASSETS LIABILITIES
Cash $ 900 Salary payable $
1,200
Accounts 5,600
receivable
Supplies 500 STOCKHOLDERS’ EQUITY
Equipment $32,500 Common stock 13,000
Acc. depr. 17,100 Retained earnings 9,900
(15,400)
Total stockholders’ 22,900
equity
Total liabilities and
Total assets $24,10 stockholders’ equity $24,10
0 0
 (15 min.) E 3-26

Req. 1

Reva Stewart, CPA, P.C.

Income Statement
Year Ended December 31, 2012
Revenue:
Service revenue $106,50
0
Expenses:
Salary expense $
29,100
Depreciation expense—building 5,000
Depreciation expense— 1,900
equipment
Supplies expense 600
Total expenses 36,60
0
Net income $
69,900

Req. 2

Operations were successful, as shown by the $69,900 of

net income the business reported for the year.

(10-15 min.) E 3-27

Req. 1
 Rolling Hill Interiors, Inc.
Statement of Retained Earnings
Year Ended December 31, 2012
Retained earnings, December 31, 2011 $
20,000
Net income 63,000
83,000
Dividends (6,000)
Retained earnings, December 31, 2012 $ 77,000
 Problems
Group A
(10-15 min.) P 3-28A
Req. 1

Amount of Revenue (Expense) for June

Cash - Basis: Accrual - Basis:
Revenue or Expense? Revenue or Expense?
Date
Jun 1 Expense $ Neither revenue nor
(3,600) expense $ 0
2 Expense (900) Neither revenue nor 0
expense
3 Neither revenue nor 0 Revenue $2,300
expense
5 Expense (100) Expense (100)
6 Revenue 1,500 Revenue 1,500
8 Neither revenue nor 0 Neither revenue nor 0
expense expense
10 Revenue 1,200 Neither revenue nor 0
expense
14 Expense (150) Neither revenue nor 0
expense
15 Expense (1,200) Expense (1,200)
30 Neither revenue nor 0 Expense (900)
 expense
30 Neither revenue nor 0 Expense (25)
expense
30 Neither revenue nor 0 Expense (110)
expense
Net income (loss) $(3,25 Net income (loss) $1,465
0)
 (10-20 min.) P 3-29A
Req. 1

Amount of
Transactio
Revenue For
n
May
a. $ 500
b. 0
c. 0
d. 1,800
e. 800
f. 560
g. 325
h. 0

(15-25 min.) P 3-30A

Req. 1

Adjustme Asset/ Over-/

Ite Correct balance on Oct
nt Liabilit Understated Balance Sheet
m 31
needed? y ?
Liabilit Unearned service
a. Yes Overstated $ 1,000
y revenue
b. Yes Liabilit Understated Salaries payable 600
y
c. Yes Asset Overstated Prepaid insurance 200
d. Yes Asset Overstated Accumulated 750
depreciation
e. Yes Asset Overstated Supplies 30
f. Yes Liabilit Understated Accounts payable 125
y
g. Yes Asset Understated Prepaid rent 800
 (15-25 min.) P 3-31A
Req. 1

Journal
POST
. CREDI
DATE DESCRIPTION REF. DEBIT T
Mar 1 Prepaid insurance 600
Cash 600

4 Accounts receivable 2,500

Service revenue 2,500

5 Equipment 1,600
Accounts payable 1,600

8 Property tax expense 100

Cash 100

11 Equipment 1,500
Cash 1,500

19 Cash 900
Service revenue 900

24 Cash 400
Accounts receivable 400

26 Accounts payable 1,600

Cash 1,600

29 Salary expense 1,000

Cash 1,000

31 Insurance expense 200

Prepaid insurance 200
31 Unearned service revenue 1,200
Service revenue 1,200
 (continued) P 3-31A

Req. 2

Amount of Revenue (Expense) for March

Cash – Accrual -
Cash - Basis: Basis Accrual - Basis: Basis
Date Revenue or Expense? Amount Revenue or Expense? Amount
Mar Expense $ (600) Neither revenue nor $ 0
1 expense
4 Neither revenue nor 0 Revenue 2,500
expense
5 Neither revenue nor 0 Neither revenue nor 0
expense expense
8 Expense (100) Expense (100)
11 Expense (1,500) Neither revenue nor 0
expense
19 Revenue 900 Revenue 900
24 Revenue 400 Neither revenue nor 0
expense
26 Expense (1,600) Neither revenue nor 0
expense
29 Expense (1,000) Expense (1,000)
31 Neither revenue nor Expense
0 (200)
expense
31 Neither revenue nor 0 Revenue 1,200
 expense
Total Net income (loss) $(3,500) Net income (loss) $3,300
 (continued) P 3-31A
Req. 3

Net loss of ($3,500) under Cash-basis.

Net income of $3,300 under Accrual-basis.

Req. 4

Accrual-basis gives the best picture of the true earnings

of Charlotte’s Golf School, Inc. because it accounts for
revenues and expenses when they occur.
 (15-25 min.) P 3-32A
Req. 1

Journal
POST
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
a. Dec 3 Salary expense 4,200
1
Salary payable 4,200
To accrue salary expense.

b. 3 Insurance expense 4,500

1
Prepaid insurance 4,500
To record insurance expense.

c. 3 Supplies expense 6,800

1
Supplies 6,800
To record supplies expense.

d. 3 Unearned service revenue 4,200

1
Service revenue 4,200
To record revenue that was
collected in advance

e. 3 Depreciation expense-equipment 3,700

1
Depreciation expense-trucks 1,300
Accumulated depreciation- 3,700
equipment
Accumulated depreciation- 1,300
trucks
To record depreciation expenses.
 (15-25 min.) P 3-33A
Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
1. Dec 3 Accounts receivable 800
1
Service revenue 800

2. 3 Supplies expense 1,400

1
Supplies 1,400

3. 3 Insurance expense 600

1
Prepaid insurance 600

4. 3 Depreciation expense 4,400

1
Accumulated depreciation 4,400

5. 3 Salary expense 300

1
Salary payable 300
 (45-60 min.) P 3-34A
Req.1
Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2012 Adjusting Entries
Dec 3
1
a. Unearned service 1,500
revenue
Service revenue 1,500

b. Rent expense 1,900

Prepaid rent 1,900

c. Supplies expense 600

Supplies 600

d. Depreciation expense 900

Accumulated 900
depreciation

e. Advertising expense 900

Accounts payable 900

f. Salary expense 1,100

Salary payable 1,100

Req. 2
ACCOUNT UNEARNED SERVICE ACCOUNT
REVENUE NO
 JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 2,600
(a) 1,500 1,100

ACCOUNT SERVICE ACCOUNT NO.

REVENUE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 15,400
1 (a) 1,500 16,900
(continued) P 3-34A
Req. 2 (4-Column Accounts)

ACCOUNT RENT EXPENSE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (b) 1,900 1,900
1

ACCOUNT PREPAID RENT ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 2,400
1
(b) 1,900 500

ACCOUNT SUPPLIES EXPENSE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (c) 600 600
1
ACCOUNT SUPPLIES ACCOUNT NO
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 1,300
1
(c) 600 700

ACCOUNT DEPRECIATION ACCOUNT NO

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (d) 900 900
1

ACCOUNT ACCUMULATED ACCOUNT NO

DEPRECIATION
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 4,300
1 (d) 900 5,200
 (continued) P 3-34A
Req. 2 (4-Column Accounts)

ACCOUNT ADVERTISING ACCOUNT NO

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 9 1,900
1 (e) 00 2,800

ACCOUNT ACCOUNTS ACCOUNT NO

PAYABLE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 3,600
1 (e) 900 4,500

ACCOUNT SALARY EXPENSE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 3,500
(f) 1,100 4,600

ACCOUNT SALARY PAYABLE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (f) 1,100 1,100
1
 (continued) P 3-34A
Req. 3

Arlington Air Purification System, Inc.

Adjusted Trial Balance
December 31, 2012
ACCOUNT DEBIT CREDIT
Cash $
7,700
Accounts receivable 19,200
Prepaid rent 500
Supplies 700
Equipment 19,900
Accumulated depreciation $
5,200
Accounts payable 4,500
Salary payable 1,100
Unearned service revenue 1,100
Common stock 17,000
Retained earnings 22,500
Dividends 9,500
Service revenue 16,900
Salary expense 4,600
Rent expense 1,900
Depreciation expense 900
Advertising expense 2,800
Supplies expense 600

Total $ $
68,300 68,300
Req. 4

The company will use the adjusted trial balance to

prepare financial statements.
 (45-60 min.) P 3-35A
Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2012 Adjusting Entries
Dec 3
1
a. Insurance expense 1,600
Prepaid insurance 1,600

b. Supplies expense 500

Supplies 500

c. Depreciation expense 1,600

Accumulated 1,600
depreciation

d. Salary expense 400

Salary payable 400

e. Unearned service 1,000

revenue
Service revenue 1,000
 (continued) P 3-35A
Req. 2
ACCOUNT INSURANCE ACCOUNT NO
EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (a) 1,600 1,600
1

ACCOUNT PREPAID ACCOUNT NO

INSURANCE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 2,300
1
(a) 1,600 700

ACCOUNT SUPPLIES EXPENSE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (b) 500 500
1

ACCOUNT SUPPLIES ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 1,100
1
(b) 500 600

ACCOUNT DEPRECIATION ACCOUNT NO

EXPENSE
 JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal.
1,600
1 (c) 1,600

ACCOUNT ACCUMULATED ACCOUNT NO

DEPRECIATION
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 312,500
1 (c) 1,600 314,100

(continued) P 3-35A
Req. 2

ACCOUNT SALARY EXPENSE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 2,700
(d) 400 3,100

ACCOUNT SALARY PAYABLE ACCOUNT NO

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (d) 400 400
1

ACCOUNT UNEARNED SERVICE ACCOUNT

REVENUE NO
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 2,400
 (e) 1,000 1,400

ACCOUNT SERVICE ACCOUNT NO.

REVENUE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 15,600
1 (e) 1,000 16,600
 (continued) P 3-35A
Req. 3

Lexington Inn Corporation

Adjusted Trial Balance
December 31, 2012
ACCOUNT DEBIT CREDIT
Cash $ 12,100
Accounts receivable 14,300
Prepaid insurance 700
Supplies 600
Building 411,000
Accumulated depreciation $
314,100
Accounts payable 1,950
Salary payable 400
Unearned service revenue 1,400
Common stock 108,000
Retained earnings 6,740
Dividends 2,860
Service revenue 16,600
Salary expense 3,100
Insurance expense 1,600
Depreciation expense 1,600
Advertising expense 830
Supplies expense 500

Total $449,190 $449,19

0
 (continued) P 3-35A
Req. 4
Lexington Inn Corporation
Income Statement
Month Ended December 31, 2012
Revenue:
Service revenue $
16,600
Expenses:
Salary expense $3,100
Insurance expense 1,600
Depreciation expense 1,600
Advertising expense 830
Supplies expense 50
0
Total expenses 7,63
0
Net income $ 8,970

Lexington Inn Corporation

Statement of Retained Earnings
Month Ended December 31, 2012
Retained earnings, December 1, 2012 $ 6,740
Net income 8,970
15,710
Dividends (2,860)
Retained earnings, December 31, 2012 $ 12,850
 (continued) P 3-35A

Req. 4

Lexington Inn Corporation

Balance Sheet
December 31, 2012
ASSETS LIABILITIES
Cash $12,10 Accounts payable $ 1,950
0
Accounts 14,300 Unearned service 1,400
receivable revenue
Prepaid insurance 700 Salary payable 400
Supplies 600 Total liabilities 3,750

Building $411,000 STOCKHOLDERS’

EQUITY
Acc. depr. 96,900 Common stock 108,000
(314,100)
Retained earnings 12,850
Total stockholders’
equity 120,850
Total liabilities and

Total assets $124,6 stockholders’ equity $124,60

00 0
 (45-60 min.) P 3-36A
Req. 1

Reliable Limo Service Company

Preparation of Adjusted Trial Balance
June 30, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash $ $ 6,900
6,900
Accounts receivable 1,100 (a) $ 2,600
1,500
Prepaid rent 3,500 (b) $ 2,800
700
Supplies 1,100 (c) 700
400
Automobile 77,000 77,000
Accumulated $ (d) $ 4,800
depreciation 3,400 1,400
Accounts payable 3,300 3,300
Salary payable (e) 300
300
Common stock 66,350 66,350
Retained earnings 13,650 13,650
Dividends 4,400 4,400
Service revenue 9,600 (a) 11,100
1,500
Salary expense 1,500 (e) 1,800
300
Rent expense (b) 700
700
Fuel expense 800 800
Depreciation expense (d) 1,400
1,400
Supplies expense (c) 40
400 0
Total $ $ $ $ $ $
96,300 96,300 4,300 4,300 99,500 99,500
 (continued) P 3-36A

Req. 2

Reliable Limo Service Company

Income Statement
Month Ended June 30, 2012
Revenue:
Service revenue $
11,100
Expenses:
Salary expense $
1,800
Depreciation expense 1,400
Fuel expense 800
Rent expense 700
Supplies expense 400
Total expenses 5,100
Net income $
6,000

Reliable Limo Service Company

Statement of Retained Earnings
Month Ended June 30, 2012
Retained earnings, June 1, 2012 $
13,650
Net income 6,000
19,650
Dividends (4,400)
Retained earnings, June 30, 2012 $
15,250
 (continued) P 3-36A

Req. 2

Reliable Limo Service Company

Balance Sheet
June 30, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $
6,900 3,300
Accounts receivable 2,600 Salary payable 3
00
Prepaid rent 2,800 Total liabilities 3,600
Supplies 700
Automobile $ 77,000 STOCKHOLDERS’ EQUITY
Acc. depr. Common stock 66,350
(4,800)
72,20 Retained earnings 15,250
0
Total
stockholders’ 81,600
equity
Total liabilities
and
Total assets $ stockholders’ $
85,200 equity 85,200
 (20-30 min.) P 3-37A

Req. 1

Party Piano Tuning Service, Inc.

Income Statement
Year Ended May 31, 2012
Revenue:
Service revenue $
65,000
Expenses:
Salary expense $
9,600
Depreciation expense 5,600
Utilities expense 3,900
Insurance expense 3,700
Supplies expense 1,90
0
Total expenses 24,70
0
Net income $
40,300

Req. 2

Party Piano Tuning Service, Inc.

Statement of Retained Earnings
Year Ended May 31, 2012
Retained earnings, May 31, 2011 $
11,800
Net income 40,300
52,100
Dividends (38,000)
Retained earnings, May 31, 2012 $
14,100
 (continued) P 3-37A

Req. 3

Party Piano Tuning Service, Inc.

Balance Sheet
May 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $
12,600 3,300
Accounts receivable 10,800 Unearned service 4,700
revenue
Supplies 1,900 Salary payable 800
Equipment Note payable 14,000
$25,900
Acc. depr. 13,40 Total liabilities 22,800
(12,500) 0
STOCKHOLDERS’ EQUITY
Common stock 1,800
Retained earnings 14,100
Total
stockholders’ 15,900
equity
Total liabilities
and
Total assets $ stockholders’ $
38,700 equity 38,700

Req. 4

The results of operations are reported on the income

statement. Yes, operations were successful because the
income statement shows net income.

Req. 5
The company’s financial position is reported on the balance
sheet.
 Problems

Group B
(15-25 min.) P 3-38B
Req. 1

Amount of Revenue (Expense) for April

Cash – Accrual -
Cash - Basis: Basis Accrual - Basis: Basis
Date Revenue or Expense? Amount Revenue or Expense? Amount
Apr Expense $(4,800 Neither revenue nor $ 0
1 ) expense
2 Expense (3,600) Neither revenue nor 0
3 Neither revenue nor 0 expense 3,400
expense Revenue
5 Expense (225) Expense (225)
6 Revenue 2,000 Revenue 2,000
8 Neither revenue nor 0 Neither revenue nor 0
expense expense
10 Revenue 1,900 Neither revenue nor 0
14 Expense (130) expense 0
15 Expense (1,000) Neither revenue nor (1,000)
 30 Neither revenue nor expense
0 (1,200)
expense Expense
30 Neither revenue nor 0 Expense (100)
expense Expense
30 Neither revenue nor 0 Expense (95)
expense
Total Net income (loss) $(5,855 Net income (loss) $2,780
)
 (10-20 min.) P 3-39B
Req. 1
Amount of
Transactio
Revenue for
n
February
a. $ 800
b. 0
c. 0
d. 2,100
e. 900
f. 520
g. 660
h. 0

(15-25 min.) P 3-40B

Req. 1
Adjust-
Over-/ Correct
Ite ment Asset/
Understate Balance Sheet balance on
m needed Liability
d? October 31
?
Unearned service
a. Yes Liability Overstated $2,400
revenue
 Understate
b. Yes Liability Salaries payable 900
d
c. Yes Asset Overstated Prepaid insurance 350
Accumulated
d. Yes Asset Overstated 1,000
depreciation
e. Yes Asset Overstated Supplies 90
Understate
f. Yes Liability Accounts payable 205
d
Understate
g. Yes Asset Prepaid rent 550
d
 (15-25 min.) P 3-41B

Req. 1
Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Oct 1 Prepaid insurance 900
Cash 900

4 Accounts receivable 2,400

Service revenue 2,400

5 Equipment 1,500
Accounts payable 1,500

8 Property tax expense 200

Cash 200

1 Equipment 1,000
1
Cash 1,000

1 Cash 700
9
Service revenue 700

2 Cash 500
4
Accounts receivable 500

2 Accounts payable 1,500

6
Cash 1,500
2 Salary expense 1,400
9
Cash 1,400

3 Insurance expense 300

1
Prepaid insurance 300

3 Unearned service revenue 1,100

1
Service revenue 1,100
 (continued) P 3-41B
Req. 2 Cash-Basis and Accrual-Basis:

Amount of Revenue (Expense) for October

Cash – Accrual -
Cash - Basis: Basis Accrual - Basis: Basis
Date Revenue or Expense? Amount Revenue or Expense? Amount
Oct Expense $(900) Neither revenue nor $ 0
1 expense
4 Neither revenue nor 0 Revenue 2,400
expense Neither revenue nor
5 Neither revenue nor 0 expense 0
expense Expense
8 Expense (200) Neither revenue nor (200)
11 Expense (1,000) expense 0
19 Revenue 700 Revenue 700
24 Revenue 500 Neither revenue nor 0
26 Expense (1, 500) expense 0
29 Expense (1,400) Neither revenue nor (1,400)
31 Neither revenue nor expense
0 (300)
expense Expense
31 Neither revenue nor 0 Expense 1,100
expense Revenue
Total $(3,800 Total $2,300
)
 (continued) P 3-41B

Req. 3

Cash - basis: net loss of $(3,800)

Accrual - basis: net income of $2,300

Req. 4

The accrual - basis gives the best picture of the true

earning because it accounts for revenues and
expenses when they occur.
 (15-25 min.) P 3-42B
Req. 1

Journal
POST
. CREDI
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT T
Adjusting Entries
a. Dec 3 Salary expense 3,900
1
Salary payable 3,900
To accrue salary expense.

b. 3 Insurance expense 5,500

1
Prepaid insurance 5,500
To record insurance expense.

c. 3 Supplies expense 6,900

1
Supplies 6,900
To record supplies expense.

d. 3 Unearned service revenue 6,300

1
Service revenue 6,300
To record revenue that was
collected
in advance.

e. 3 Depreciation expense—equipment 3,600

1
Depreciation expense—trucks 1,400
Accumulated depreciation- 3,600
equipment
Accumulated depreciation— 1,400
trucks
To record depreciation expenses.
 (15-20 min.) P 3-43B
Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
a. Dec 3 Accounts receivable 900
1
Service revenue 900

b. 3 Supplies expense 800

1
Supplies 800

c. 3 Insurance expense 800

1
Prepaid insurance 800

d. 3 Depreciation expense 3,500

1
Accumulated depreciation 3,500

e. 3 Salary expense 500

1
Salary payable 500
 (45-60 min.) P 3-44B

Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2012 Adjusting Entries
De 3
c 1
a. Unearned service revenue 800
Service revenue 800

b. Rent expense 1,600

Prepaid rent 1,600

c. Supplies expense 400

Supplies 400

d. Depreciation expense 700

Accumulated 700
depreciation

e. Advertising expense 900

Accounts payable 900

f. Salary expense 800

Salary payable 800
 (continued) P 3-44B
Req. 2

ACCOUNT UNEARNED SERVICE ACCOUNT

REVENUE NO.
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 2,600
(a) 800 1,800

ACCOUNT SERVICE ACCOUNT NO.

REVENUE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 15,900
1 (a) 800 16,700

ACCOUNT RENT EXPENSE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (b) 1,600 1,600
1

ACCOUNT PREPAID RENT ACCOUNT NO.

DATE ITEM JRNL. DEBIT CREDIT BALANCE
 REF. DEBIT CREDIT
Dec 3 Bal. 2,200
1
(b) 1,600 600
 (continued) P 3-44B
Req. 2

ACCOUNT SUPPLIES EXPENSE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (c) 400 400
1

ACCOUNT SUPPLIES ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 1,600
1
(c) 400 1,200

ACCOUNT DEPRECIATION ACCOUNT NO.

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (d) 700 700
1

ACCOUNT ACCUMULATED ACCOUNT NO.

DEPRECIATION
 JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 3,700
1 (d) 700 4,400
 (continued) P 3-44B
Req. 2

ACCOUNT ADVERTISING ACCOUNT NO.

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 9 1,300
1 (e) 00 2,200

ACCOUNT ACCOUNTS ACCOUNT NO.

PAYABLE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 3,400
1 (e) 900 4,300

ACCOUNT SALARY EXPENSE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 3,300
(f) 800 4,100

ACCOUNT SALARY PAYABLE ACCOUNT NO.

DATE ITEM JRNL. DEBIT CREDIT BALANCE
 REF. DEBIT CREDIT
Dec 3 Bal. 0
1 (f) 800 800
 (continued) P 3-44B
Req. 3

Canton Air Purification System, Inc.

Adjusted Trial Balance
December 31, 2012
ACCOUNT DEBIT CREDIT
Cash $ 7,200
Accounts receivable 19,400
Prepaid rent 600
Supplies 1,200
Equipment 20,000
Accumulated depreciation $ 4,400
Accounts payable 4,300
Salary payable 800
Unearned service revenue 1,800
Common stock 14,000
Retained earnings 25,000
Dividends 9,600
Service revenue 16,700
Salary expense 4,100
Rent expense 1,600
Depreciation expense 700
Advertising expense 2,200
Supplies expense 400

Total $ 67,000 $
67,000

Req. 4
The company will use the adjusted trial balance to
prepare financial statements.
 (45-60 min.) P 3-45B

Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2012 Adjusting Entries
Dec 31
a. Insurance expense 1,900
Prepaid insurance 1,900

b. Supplies expense 500

Supplies 500

c. Depreciation expense 1,000

Accumulated 1,000
depreciation

d. Salary expense 300

Salary payable 300

e. Unearned service 1,500

revenue
Service revenue 1,500
 (continued) P 3-45B
Req. 2

ACCOUNT INSURANCE ACCOUNT NO.

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (a) 1,900 1,900
1

ACCOUNT PREPAID ACCOUNT NO.

INSURANCE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 2,800
1
(a) 1,900 900

ACCOUNT SUPPLIES EXPENSE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (b) 500 500
1

ACCOUNT SUPPLIES ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 1,400
1
 (b) 500 900

ACCOUNT DEPRECIATION ACCOUNT NO.

EXPENSE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (c) 1,000 1,000
1

(continued) P 3-45B
Req. 2

ACCOUNT ACCUMULATED ACCOUNT

DEPRECIATION NO.
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 310,500
1 (c) 1,000 311,500

ACCOUNT SALARY EXPENSE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 2,800
(d) 300 3,100

ACCOUNT SALARY PAYABLE ACCOUNT NO.

JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 (d) 300 300
1
ACCOUNT UNEARNED SERVICE ACCOUNT
NO.
REVENUE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 31 Bal. 3,000
(e) 1,500 1,500

ACCOUNT SERVICE ACCOUNT NO.

REVENUE
JRNL. BALANCE
DATE ITEM REF. DEBIT CREDIT DEBIT CREDIT
Dec 3 Bal. 15,700
1 (e) 1,500 17,200
 (continued) P 3-45B

Req. 3

Concord Bed and Breakfast Corporation

Adjusted Trial Balance
December 31, 2012
ACCOUNT DEBIT CREDIT
Cash $ 12,000
Accounts receivable 14,400
Prepaid insurance 900
Supplies 900
Building 435,000
Accumulated depreciation $
311,500
Accounts payable 1,930
Salary payable 300
Unearned service revenue 1,500
Common stock 122,000
Retained earnings 19,060
Dividends 2,940
Service revenue 17,200
Salary expense 3,100
Insurance expense 1,900
Depreciation expense 1,000
Advertising expense 850
Supplies expense 500
Total $ $
473,490 473,490
 (continued) P 3-45B

Req. 4

Concord Bed and Breakfast Corporation

Income Statement
Month Ended December 31, 2012
Revenue:
Service revenue $
17,200
Expenses:
Salary expense $
3,100
Insurance expense 1,900
Depreciation expense 1,000
Advertising expense 850
Supplies expense 50
0
Total expenses 7,35
0
Net income $
9,850

Concord Bed and Breakfast Corporation

Statement of Retained Earnings
Month Ended December 31, 2012
Retained earnings, December 1, 2012 $ 19,060
Net income 9,850
 28,910
Dividends (2,940)
Retained earnings, December 31, 2012 $ 25,970
 (continued) P 3-45B
Req. 4

Concord Bed and Breakfast Corporation

Balance Sheet
December 31, 2012
ASSETS LIABILITIES
Cash $12,00 Accounts payable $
0 1,930
Accounts receivable 14,400 Unearned service
Prepaid insurance 900 revenue 1,500
Supplies 900 Salary payable 30
0
Building $ Total liabilities 3,73
435,000 0
Acc. depr. 123,50
(311,500) 0
STOCKHOLDERS’ EQUITY
Common stock 122,00
0
Retained 25,970
earnings
Total
stockholders’ 147,97
equity 0
Total liabilities
and
Total assets $151,7 stockholders’ $151,7
00 equity 00
 (45-60 min.) P 3-46B
Req. 1
Star Limo Service Company
Preparation of Adjusted Trial Balance
September 30, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash $ $
6,800 6,800
Accounts receivable 1,400 (a) $ 3,200
1,800
Prepaid rent 5,000 (b) $ 4,000
1,000
Supplies 1,200 (c) 800
400
Automobile 72,000 72,000
Accumulated $ (d) $ 4,800
depreciation 3,800 1,000
Accounts payable 3,600 3,600
Salary payable (e) 240
240
Common stock 61,200 61,200
Retained earnings 13,800 13,800
Dividends 3,700 3,700
Service revenue 9,700 (a) 11,500
 1,800
Salary expense 1,400 (e) 1,640
240
Rent expense (b) 1,000
1,000
Fuel expense 600 600
Depreciation expense (d) 1,000
1,000
Supplies expense (c) 400
400
$ $ $ $ 4,440 $ $ 95,140
92,100 92,100 4,440 95,140
__________
 (continued) P 3-46B

Req. 2

Star Limo Service Company

Income Statement
Month Ended September 30, 2012
Revenue:
Service revenue $
11,500
Expenses:
Salary expense $
1,640
Rent expense 1,000
Depreciation expense 1,000
Fuel expense 600
Supplies expense 400
Total expenses 4,640
Net income $
6,860

Star Limo Service Company

Statement of Retained Earnings
Month Ended September 30, 2012
Retained earnings, September 1, 2012 $
13,800
Net income 6,860
20,660
Dividends (3,700)
Retained earnings, September 30, 2012 $
16,960
 (continued) P 3-46B

Req. 2

Star Limo Service Company

Balance Sheet
September 30, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $
6,800 3,600
Accounts receivable 3,200 Salary payable 2
40
Prepaid rent 4,000 Total liabilities 3,840
Supplies 800
Automobile $72,000 STOCKHOLDERS’ EQUITY
Acc. depr. 67,20 Common stock 61,200
(4,800) 0
Retained earnings 16,960
Total
stockholders’ 78,160
equity
Total liabilities
and
Total assets $82,00 stockholders’ $82,00
0 equity 0
 (20-30 min.) P 3-47B

Req. 1

A Plus Events Piano Tuning Service, Inc.

Income Statement
Year Ended October 31, 2012
Revenue:
Service revenue $
66,000
Expenses:
Salary expense $
9,600
Depreciation expense 5,500
Utilities expense 4,100
Insurance expense 3,700
Supplies expense 1,40
0
Total expenses 24,30
0
Net income $
41,700

Req. 2

A Plus Events Piano Tuning Service, Inc.

Statement of Retained Earnings
Year Ended October 31, 2012
Retained earnings, October 31, 2011 $ 7,300
Net income 41,700
 49,000
Dividends (36,000)
Retained earnings, October 31, 2012 $13,000
 (continued) P 3-47B

Req. 3

A Plus Events Piano Tuning Service, Inc.

Balance Sheet
October 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $
12,300 3,300
Accounts receivable 10,700 Unearned service 4,600
revenue
Supplies 1,800 Salary payable 700
Equipment Note payable 15,000
$25,800
Acc. depr. 13,50 Total liabilities 23,600
(12,300) 0
STOCKHOLDERS’ EQUITY
Common stock 1,700
Retained earnings 13,00
0
Total
stockholders’ 14,700
equity
Total liabilities
and
Total assets $38,30 stockholders’ $38,30
0 equity 0

Req. 4

The results of operations are reported on the income

statement. Yes, operations were successful because the
income statement shows net income.
Req. 5

The company’s financial position is reported on the balance

sheet.
Continuing Exercise

(20-30 min.) E 3-48

Req. 2

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
Ma 3
y 1 Supplies expense 110
Lawn supplies 110

3
1 Depreciation expense 30
Acc. depr. -
equipment 30

Reqs. 1 & 3
Cash Accounts receivable
May 1 1,700 May 5 30 May 6 150 May 100
31
1 800 8 150 Bal 50
7
3 100
1
Bal 2,420
 Lawn supplies Equipment
May 8 150 May 110 May 3 1,440
31
Bal 40 Bal 1,440
 (continued) E 3-48

Reqs. 1 & 3

Accumulated depreciation—
equipment
May 30
31
Bal 30

Accounts payable Common stock

May 3 1,440 May 1 1,700
Bal 1,440 Bal 1,700

Service revenue Fuel expense

May 150 May 5 30
6
1 800 Bal 30
7
Bal 950

Depreciation expense Supplies expense

May 30 May 110
31 31
 (continued) E 3-48

Req. 4

Lawlor Lawn Service, Inc.

Preparation of Adjusted Trial Balance
May 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash $2,420 $2,420
Accounts receivable 50 50
Lawn supplies 150 $110 40
Equipment 1,440 1,440
Accumulated depr.— 30 $30
equipment
Accounts payable $1,440 1,440
Common stock 1,700 1,700
Service revenue 950 950
Fuel expense 30 30
Supplies expense $110 110
Depreciation expense 30 30

Totals $4,090 $4,090 $140 $140 $4,120 $4,120

Continuing Problem
(40-50 min.) P 3-49

Req. 2

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
2
Dec 1 Cash 1,400
Unearned service
revenue 1,400

2 No entry; no transaction
1 yet

2
6 Accounts payable 450
Cash 450

2
8 Cash 300
Accounts receivable 300

3
0 Dividends 1,400
Cash 1,400
 (continued) P 3-49
Resq. 1 & 3

Cash Accounts receivable

Dec 2 18,000 Dec 2 550 Dec 9 1,500 Dec 300
28
18 1,100 3 1,800 Bal 1,200
21 1,400 12 250
28 300 26 450
30 1,400
Bal 16,350

Supplies Equipment
Dec 5 900 Dec 3 1,800
Bal 900 Bal 1,800

Furniture
Dec 4 4,200
Bal 4,200
 Accounts payable
Dec 450 Dec 4 4,200
26
5 900
Bal 4,650
 (continued) P 3-49

Req. 1 & 3

Unearned service
revenue
Dec 1,400
21
Bal 1,400

Common stock Dividends

Dec 2 18,00 Dec 1,400
0 30
Bal 18,00 Bal 1,400
0

Service revenue
Dec 9 1,500
18 1,100
Bal 2,600

Rent expense Utilities expense

Dec 2 550 Dec 250
12
Bal 550 Bal 250
 (continued) P 3-49
Reqs. 4 & 5

Draper Consulting, Inc.

Preparation of Adjusted Trial Balance
December 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash $16,35 $16,350
0
Accounts receivable 1,200 (a) $ 1,750
550
Supplies 900 ( c) 200
$700
Equipment 1,800 1,800
Accumulated depr.— (d1) $30
equipment 30
Furniture 4,200 4,200
Accumulated depr.—furniture (d2) 70
70
Accounts payable $4,650 4,650
Salary payable (e) 685
685
Unearned service revenue 1,400 (b) 700
 700
Common stock 18,000 18,000
Dividends 1,400 1,400
Service revenue 2,600 (a) 3,850
550
(b)
700
Rent expense 550 550
Utilities expense 250 250
Salary expense (e) 685
685
Depreciation expense— (d1) 30
equipment 30
Depreciation expense— (d2) 70
furniture 70
Supplies expense ( c) 700
700
Totals $26,65 $26,65 $2,735 $2,735 $27,985 $27,985
0 0
 (continued) P 3-49

Req. 6

Journal
POST
. CREDI
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT T
Adjusting Entries
(a) Dec 31 Accounts receivable 550
Service revenue 550

(b) 31 Unearned service revenue 700

Service revenue 700

(c) 31 Supplies expense 700

Supplies 700

(d) 31 Depreciation expense - 30

equipment
Depreciation expense - 70
furniture
Acc. depreciation - 30
equipment
Acc. depreciation - 70
furniture

(e) 31 Salary expense 685

Salary payable 685
 (continued) P 3-49
Req. 6

Accounts receivable Unearned service

revenue
Bal 1,200 Adj-b 700 Bal 1,400
Adj-a 550
Bal 1,750 Bal 700

Supplies Supplies expense

Bal. 900 Adj-c 700 Bal 0
Adj-c 700
Bal. 200 Bal 700

Accum. depr. - equipment Acc. depr. - furniture

Bal. 0 Bal. 0
Adj-d 30 Adj-d 70

Bal. 30 Bal. 70

Depreciation expense- Depreciation expense-

equip furn
Bal 0 Bal 0
Adj-d 30 Adj-d 70
Bal 30 Bal 70

Salary payable Salary expense

Bal 685 Bal 0
Adj-e Adj-e 685

Bal 685 Bal 685

 (continued) P 3-49
Req. 7

Draper Consulting, Inc.

Income Statement
Month Ended December 31, 2012
Revenue:
Service revenue $
3,850
Expenses:
Supplies expense $ 700
Salary expense 685
Rent expense 550
Utilities expense 250
Depreciation expense - 70
furniture
Depreciation expense - 30
equipment
Total expenses 2,285
Net income $
1,565

Draper Consulting, Inc.

Statement of Retained Earnings
Month Ended December 31, 2012
Retained earnings, December 1, 2012 $ 0
Net income $1,565
 1,565
Dividends
(1,400)
Retained earnings, December 31, $165
2012
 (continued) P 3-49
Req. 7

Draper Consulting, Inc.

Balance Sheet
December 31, 2012
ASSETS LIABILITIES
Cash $16,35 Accounts payable $
0 4,650
Accounts receivable 1,750 Salary payable 685
Supplies 200 Unearned service 70
revenue 0
Equipment Total liabilities 6,035
1,800
Acc.depr-equipment 1,770
(30)
Furniture STOCKHOLDERS’ EQUITY
4,200
Acc.depr-furniture 4,130 Common stock 18,00
(70) 0
Retained earnings 16
5
Total stockholders’ 18,16
equity 5
Total liabilities and

Total assets $24,20 stockholders’ $24,2

0 equity 00
PRACTICE SET: Chapter 3
(20-30 min.)
Req. 1

Adjusting Journal Entries

POS
T
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Nov 3 Supplies expense 220
0
Expense 220

3 Depreciation expense 170

0
Accumulated 170
depreciation

3 Rent expense 500

0
Prepaid rent 500

3 Insurance expense 200

0
Prepaid insurance 200

3 Unearned service 150

0 revenue
Service revenue 150

3 Interest expense 100

0
Interest payable 100
 (continued) Practice set
Req. 2
Shine King Cleaning, Inc.
Preparation of Adjusted Trial Balance
November 30, 2012
Adjusted Trial
Trial Balance Adjustments Balance
ACCOUNT Debit Credit Debit Credit Debit Credit
Cash $73,100 $73,100
Accounts receivable 2,000 2,000
Supplies 270 $220 50
Prepaid rent 2,000 500 1,500
Prepaid insurance 2,400 200 2,200
Truck 8,000 8,000
Equipment 2,200 2,200
Accumulated depreciation 170 $170
Accounts payable $945 945
Interest payable 100 100
Unearned service revenue 3,600 $150 3,450
Notes payable 40,000 40,000
Common stock 43,000 43,000
Dividends 600 600
Service revenue 3,800 150 3,950
Contract labor expense 500 500
Utilities expense 175 175
Advertising expense 100 100
Interest expense 100 100
Insurance expense 200 200
Rent expense 500 500
Depreciation expense 170 170
Supplies expense 220 220
Total $91,345 $91,345 $1,340 $1,340 $91,615 $91,615
 Chapter 3 Appendix

Alternative Treatment of Prepaid

Expenses and Unearned Revenues

Appendix Exercises

(10-15 min.) E 3A-1

Req. 1 (Supplies recorded initially as an asset;

CP = cash payment; Adj. = Adjustment)

Supplies Supplies expense

Beg Bal 1,100 Adj 5,400 Adj 5,40
0
CP 5,000 Bal 5,40
0
Bal 700

Req. 2 (Supplies recorded initially as an expense)

Supplies Supplies expense

Adj 700 Beg Bal 1,10 Adj 700
0
Bal 700 CP 5,00
0
Bal 5,40
0

Req. 3

Account balances are the same under both

approaches.

(15-25 min.) E 3A-2

Req. 1 (Unearned revenue recorded initially as a

liability)

Journal entries:

Journal
POST.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Cash 7,300
Unearned service 7,300
revenue

Unearned service revenue 6,500

Service revenue 6,500

Ledger accounts and posting: CR = Cash receipt

 Adj = Adjustment

Unearned service Service revenue

revenue
Adj 6,500 Bal 2,700 Adj 6,50
0
CR 7,300 Bal 6,50
0
Bal 3,500
 (continued) E 3A-2

Req. 2 (unearned revenue recorded initially as a

revenue)

Journal entries:

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Cash 7,300
Service revenue 7,300

Service revenue 3,500

Unearned service 3,500
revenue

Ledger accounts and posting:

Unearned service Service revenue

revenue
Adj 3,500 Adj 3,50 Bal 2,70
0 0
Bal 3,500 CR 7,30
0
Bal 6,50
0
Req. 3

Account balances are the same under both

approaches.
Ch 3: Apply Your Knowledge

Decision Cases

Decision Case 3-1

Req. 1 (your highest price)

Your Name
Income Statement
Month Ended January 31, 2012
Service revenue ($12,300 + 3,800) $
……… 16,100
Expenses:
Salary $3,40
expense………………………… 0
Utilities 900
expense………………………
Other expenses (unrecorded) 1,100
………
Salary of your 5,00 10,4
manager………………… 0 00
Your expected monthly net $
income……… 5,700
Multiplier to compute ×
price………………… 20
Your highest $114,0
price…………………………… 00
Req. 2 (Nicholas’s lowest price)

World.com Advertising, Inc.

Statement of Retained Earnings
Month Ended January 31, 2012
Retained earnings, $
beginning…………... 60,400
Add: Net income:
Revenue ($12,300 + $3,800) $16,10
0
Less: Expenses ($3,400 + $900 +
$1,100) (5,400) 10,700
71,100
Less:
Dividends…………………………... (9,000)
Retained earnings, 62,100
ending……………….
Plus: Common
stock……………………… 50,000
Equal: Total stockholders’ $
equity……… 112,100

(continued) Decision Case 1

Req. 3

You should offer Nicholas approximately $100,000

for the business because he is willing to take
$112,100. If Nicholas appears especially eager to
sell out, you may be able to buy the firm for
approximately $100,000 to $110,000. However, if he
is not so eager to sell and if you want the business
badly enough, you may have to pay his asking price
of $112,100. You can always raise your offer from
$100,000 to $110,000, but you cannot decrease it, so
start the negotiating process with an offer of
$100,000.

Student responses will vary.

 Decision Case 2

Req. 1

Swift Classified Ads

Income Statement
Year Ended December 31, 2015
Revenues:
Service revenue ($59,500 + $1,600 $62,00
+ $900) 0
Expenses:
Salary expense ($17,000 + $18,20
$1,200)…… 0
Depreciation 5,000
expense…………………
Rent expense………………………… 2,400
Supplies 1,700
expense………………………
Utilities 80
expense………………………… 0
Total 28,10
expenses…………………… 0
Net $33,90
income……………………………………… 0

Advice: Stay in business. The business earned a

profit the first year. Many companies lose
money in the early going, so Swift Classified
Ads is performing better than most start-up
companies.
Ethical Issue 3-1

Req. 1

These transactions—recorded as directed by

Steinbach—overstate the store’s reported income by
$3,300 ($2,000 + $900 + $400).

Req. 2

It appears that Steinbach wants to improve the

store’s income in order to borrow on favorable terms.
Steinbach’s action is unethical because he is
deliberately overstating the store’s reported income.

Steinbach would be helped by his unethical actions.

The bank would be harmed. Lending money to
Steinbach under false pretenses may lead the bank
to charge a low interest rate that would generate
less in profits than they would otherwise have
realized. Lending money under false pretenses also
increases the risk to the bank that their customer
will default.
Req.3
Personal advice will vary from student to student.
This question challenges students to take the high
road of ethical conduct by having nothing to do with
Steinbach’s scheme. The authors would advise the
accountant to:
a. refuse to take any part in Steinbach’s
scheme.
b. explain that the result is overstatement of
reported
income and is therefore wrong. Accountants
are bound
to standards of ethical conduct, which these
actions
violate.
Fraud Case 3-1

Req.1

Only an engineer or technician would be

qualified to estimate the percentage of
completion of a high-tech asset. He/she may
base his or her estimate on the percentage of
total costs incurred, or of engineering steps
completed, or other criteria. Revenue could be
accrued based on the percentage of completion.

Req. 2

A correction entry would be required to reverse

the amount of revenue that had been recognized
the previous year, if that revenue were not going
to be realized upon completion, or termination of
the project. In addition, whatever costs were
incurred to create the asset up to the time when
the project was cancelled would have to be
removed from the asset records of the company,
i.e. the company would have to make a “write-
off” entry.
Financial Statement Case 3-1

Req. 1 (balances in millions at December 31, 2008)

Accumulated Accounts
depreciation payable Other assets
555 3594 720

Req. 2 (amounts in millions)

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
a. Depreciation expense 75
Accumulated 75
depreciation

b. Accounts payable 2,795

Cash 2,795
c. Inventory 3,594
Accounts payable 3,594

d. Other assets 424

Cash 424
 (continued) Financial Statement Case

Req. 3 (amounts in millions at December 31, 2009)

Accum.
deprec. Accts payable Other assets
555 3,594 3,594 720
5,60
70 5 754
147
625 5,605 4

All three account balances agree with Amazon.com’s

actual balances.
Team Project 3-1

Suggested Answers

Factors to consider in setting up an It’s Just Lunch

office include the following items. For each
consideration, we offer the opinion given there.

Req. 1

We will use the accrual-basis of accounting

because it provides more complete information
than the cash-basis. For example, the accrual
basis provides data on receivables and payables
and other liabilities that the cash-basis ignores. An
accrual-basis income statement gives a better
measure of the business’s net income or net loss,
and an accrual-basis balance sheet gives a more
complete indication of the business’s financial
position.

Req. 2

We want monthly financial statements in order to

keep abreast of profits and losses, cash flows, and
financial position on a timely basis. We will use the
financial statements as follows:
 Income statement to measure operating
performance in terms of profits and losses
 Balance sheet to measure financial position in
terms of assets, liabilities, and owner’s equity.

(continued) Team Project 3-1

Req. 3

We will earn service revenue by arranging a

package of several dates for a client, and, in the
most likely case, by having the client complete the
series of dates. When to record the revenue raises
the question as to when we earn the revenue. We
should record the revenue as we earn it and not
before. Here are some possible ways to decide
when to record the revenue:

If the client pays the full fee up front for the

name of one potential dating partner, if the fee
is nonrefundable, and if we are obligated for no
further service, then we will have earned the
fee when we provide the client with the name
of a person. In that case, we can record all the
revenue when we receive the cash.
 If we are obligated for ongoing service beyond
providing a client with a potential partner’s
name, then we should record the revenue over
the span of time that the package of dates
occur.

Students may come up with other possibilities.

 (continued) Team Project 3-1
Req. 4

It’s Just Lunch’s latest available income statement

lists the following accounts with expenses from
largest to smallest, as follows:

It’s Just Lunch, Inc.

Income Statement
Year Ended December 31, 2015

Net revenues
Expenses
Payroll
Advertising /
Marketing
Office
Professional fees
Depreciation
Travel
Interest
Insurance
Miscellaneous
Total
expenses
Net income
 Communication Activity 3-1

Adjusting entries update accounts to reflect all

transactions and events.
 Chapter 3: Appendix A Problems

(25-35 min.) P 3A-3A

Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Nov 1 Prepaid rent 6,000
Cash 6,000

Dec 1 Cash 5,200

Unearned service 5,200
revenue

Req. 2

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Adjusting Entries
Dec 3 Rent expense 4,000
1
Prepaid rent 4,000
3 Unearned service revenue 1,300
1
Service revenue 1,300
 (continued) P 3A-3A

Req. 3

Prepaid rent Rent expense

6,000 4,000 4,000
Bal 2,0 Bal 4,000
00

Unearned service Service revenue

revenue
1,300 5,200 1,300
Bal 3,900 Bal
1,300

Req. 4

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Nov 1 Rent expense 6,000
Cash 6,000

Dec 1 Cash 5,200

Service revenue 5,200

Dec 3 Prepaid rent 2,000

1
Rent expense 2,000

3 Service revenue 3,900

1
Unearned service 3,900
revenue
 (continued) P 3A-3A

Prepaid rent Rent expense

2,000 6,000 2,000
Bal 2,000 Bal 4,000

Unearned service revenue Service revenue

3,900 3,900 5,200
Bal 3,900 Bal 1,300

Req. 5

All of the account balances are equal.

 (25-35 min.) P 3A-4B

Req. 1

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Nov 1 Prepaid rent 6,000
Cash 6,000

Dec 1 Cash 4,500

Unearned service 4,500
revenue

Req. 2

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Dec 3 Rent expense 3,000
1
Prepaid rent 3,000

3 Unearned service revenue 1,500

1
Service revenue 1,500
 (continued) P 3A-4B

Req. 3

Prepaid rent Rent expense

6,000 3,000 3,000
Bal 3,0 Bal 3,000
00

Unearned service revenue Service revenue

1,500 4,500 1,50
0
Bal 3,000 Bal 1,50
0

Req. 4

Journal
POST
.
DATE ACCOUNTS AND EXPLANATIONS REF. DEBIT CREDIT
Nov 1 Rent expense 6,000
Cash 6,000

Dec 1 Cash 4,500

Service revenue 4,500

Dec 3 Prepaid rent 3,000

1
Rent expense 3,000

3 Service revenue 3,000

1
Unearned service 3,000
revenue
 (continued) P 3A-4B
Prepaid rent Rent expense
3,000 6,000 3,000
Bal 3,000 Bal 2,000

Unearned service revenue Service revenue

3,000 3,000 4,500
Bal 3,000 Bal 1,500

Req. 5

All of the account balances are equal.