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Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
CHAPTER 4
Accrual Accounting Concepts
ASSIGNMENT CLASSIFICATION TABLE
Brief A B
Study Objectives Questions Exercises Exercises Problems Problems BYP
*2. Describe the types of 5, 6, 7, 8, 9, 3, 4, 5 3, 4, 6, 7, 2A, 4A, 5A, 2B, 4B, 5B, 1, 2,
adjusting entries and 10, 11, 12, 8 6A, 7A, 8A, 6B, 7B, 8B, 3, 4,
prepare adjusting 16 11A 11B 5, 7
entries for
prepayments.
*3. Prepare adjusting 10, 11, 12, 5, 6, 7, 8, 9 5, 6, 7, 8 3A, 4A, 5A, 3B, 4B, 5B, 1, 2,
entries for accruals. 13, 14, 16 6A, 7A, 8A, 6B, 7B, 8B, 3, 4,
11A 11B 5, 7
*4. Prepare an adjusted 15, 17, 18 10, 11 8, 9, 10 6A, 7A, 8A, 6B, 7B, 8B, 3, 7
trial balance. 10A, 11A, 10B, 11B
*5. Prepare closing 16, 17, 18, 12, 13, 14 11 9A, 10A, 9B, 10B, 1, 3
entries and a post- 19, 20, 21, 12A 12B
closing trial balance. 22
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
10A Prepare adjusted trial balance, closing entries and Moderate 40-50
post-closing trial balance.
11A Prepare and post adjusting entries; prepare adjusted Moderate 40-50
trial balance and financial statements; assess
financial performance.
12A Prepare and post closing entries; prepare post- Simple 25-35
closing trial balance.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
10B Prepare adjusted trial balance, closing entries and Moderate 40-50
post-closing trial balance.
11B Prepare and post adjusting entries; prepare adjusted Moderate 40-50
trial balance and financial statements; assess
financial performance.
12B Prepare and post closing entries; prepare post- Simple 25-35
closing trial balance.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
ANSWERS TO QUESTIONS
1. Adjusting entries are made to adjust the accounts at the end of the period to ensure
revenues and expenses are recorded when they are earned or incurred.
Expenses are recognized in the income statement when, due to an ordinary activity,
there is a decrease in future economic benefits related to a decrease in an asset or an
increase in a liability and this change can be measured reliably.
2. The law firm should recognize the revenue in April because that is when it was earned;
the work was performed during that month.
3. Expenses of $4,500 should be deducted from the revenues in April because that is
when the expenses were incurred and the revenues earned.
4. Under the cash basis of accounting, events are only recognized in the period that cash
is paid or received. Under the accrual basis, revenue is recognized when the goods or
services are delivered or performed and expenses are recognized when incurred.
5. (a) Prepaid expenses are assets because they have a future benefit since they were
paid for before they are used or consumed.
(b) As the benefit of the prepayment expires (often with the passage of time) the asset
must be reduced and an expense recognized. This requires an adjustment at the
end of each accounting period, to expense the portion of the prepaid that has
expired (been used up) during the period.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
6. (a) Unearned revenue arises when cash is received for goods or services to be
provided in the future. It represents a liability because the cash has not yet been
earned—the company has a future obligation to provide the goods or services.
(b) Unearned revenues must be adjusted at the end of an accounting period to reflect
any revenues that have been earned.
7. No. Depreciation is the process of allocating the cost of a long-lived asset to expense
over its useful life. Depreciation results in the presentation of the carrying amount (cost
less accumulated depreciation) of the asset, not its fair value.
8. (a) Depreciation expense is an expense account with a normal debit balance and is
reported on the income statement as part of the operating expenses. This account
shows the portion of the cost of a long-lived asset that has expired during the
current accounting period.
The carrying amount (also known as net book value) is the original cost of the
asset less its related accumulated depreciation, and represents the portion of the
asset that has not yet been depreciated.
9. A contra asset account is an account with a credit balance that is deducted from the
related asset account on the statement of financial position. Using a contra asset
account discloses both the original cost of the asset and the total estimated cost which
has expired or been used up to date. This information is useful to the financial
statement user.
10. Yes, I agree. A “simple” adjusting entry affects one statement of financial position
account and one income statement account. An adjusting entry reallocates amounts
between a statement of financial position account and an income statement account.
For example: to record the expiration of insurance the following entry would be
recorded; a debit to Insurance Expense (an income statement account) and a credit to
Prepaid Insurance (a statement of financial position account). Compound adjusting
journal entries are also possible which would affect more accounts, but at least one
statement of financial position account and one income statement account is always
affected whether a simple adjusting entry or a compound adjusting entry is made.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
11. Disagree. Adjusting entries never involve the Cash account. In making adjusting
entries for prepayments, the cash has already been paid or received and recorded.
The adjusting journal entry is prepared to reflect the fact that a portion of the unearned
revenue or prepaid expense arising in the past when the cash flow occurred is now
earned or incurred, respectively. In making adjusting entries for accruals, we record
the fact that although the cash has not been paid or received, revenue has been
earned or an expense has been incurred. Again, there is no impact on the Cash
account because cash has not yet been received or paid.
12. To ensure that the adjusting entry is properly calculated and prepared, the preparer of
the adjusting entry must first properly understand the original cash payment
transaction that lead to the recording of the prepayment. On the other hand, in the
case of an accrual, there is no cash payment to look up in the accounts. Consequently
no original entry can be examined in the process of preparing an adjusting entry
related to an accrual.
13. Before the recording of adjusting entries to accrued revenues in the amount of $780
and accrued expenses in the amount of $510, the profit would be understated by the
net of the amount of unrecorded revenue of $780, less unrecorded expense of $510 or
$270.
14. Reactor should recognize the expense in the period that it was incurred—December—
and set up the corresponding liability to the utility company. On December 31, Utility
Expense should be debited and an accrued liability account such as Accounts Payable
should be credited.
15. Financial statements are 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. An unadjusted trial balance is not up
to date for prepayments and accruals.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
16. Adjusting entries are only recorded at the end of the accounting period, prior to the
preparation of the financial statements. Transaction entries are made throughout the
accounting period when transactions arise. As well, adjusting entries never affect the
Cash account and always result in an adjustment to a statement of financial position
account and an income statement account. Transaction entries often result in a debit
or credit to Cash and can affect any account on the statement of financial position or
the income statement (or both).
Closing entries are required to reset the revenue and expense (income statement) and
dividend accounts to zero and to update the balance in Retained Earnings to the
closing balance per the statement of changes in equity. Unlike adjusting entries, which
are prepared before the financial statements and could be prepared more than once
per year, closing entries are only prepared and posted after the year-end financial
statements have been completed.
17. The unadjusted, adjusted, and post-closing trial balances are similar in that they prove
the equality of the total debit and total credit balances. Another similarity between the
unadjusted and adjusted trial balances is that they are prepared at the end of an
accounting period. Where trial balances differ is that the unadjusted trial balance is
prepared before any adjusting entries have been recorded or posted. An adjusted trial
balance is prepared after the adjusting entries have been posted to the accounts. The
financial statements are prepared from the adjusted trial balance. After the financial
statements have been prepared, closing entries are prepared and posted. The post-
closing trial balance is then prepared and used to form the basis of the opening
balances for the next accounting period. Unlike the adjusted trial balance which will list
temporary (revenue, expense, dividend) account balances prior to recording the
closing entries, a post-closing trial balance will not list temporary account balances as
these have now been closed out to the Retained Earnings account. Unadjusted and
adjusted trial balances are prepared whenever financial statements are prepared but a
post-closing trial balance is prepared only at the end of the year.
18. The retained earnings balance on the unadjusted and adjusted trial balances are often
the same since the account does not yet reflect the changes that arise from the
recording of closing entries. After the adjusted trial balance and financial statements
are prepared, closing entries are recorded. These will change the retained earnings
balance by updating it for the effect of any profit or loss and dividends. Consequently,
the retained earnings balance on the post-closing trial balance will be different from
the balance shown on the adjusted trial balance.
19. Closing entries are prepared to transfer temporary account balances to retained
earnings, a permanent account, so retained earnings will show an up-to-date amount.
Secondly, closing entries produce a zero balance in each temporary account so that
the temporary accounts are ready for the next accounting period, where only
transactions relating to that period are recorded in them.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
20. The Dividends account is not closed with the expense accounts because it is not an
expense; it was not incurred for the purpose of generating revenue and does not
appear on the income statement. Dividends represent a distribution of retained
earnings and are reported on the statement of changes in equity. The Dividends
account is also a temporary account and therefore requires a closing entry.
(b) Loss:
(1) (Dr) Individual revenue accounts and (Cr) Income Summary
(2) (Dr) Income Summary and (Cr) Individual expense accounts
(3) (Dr) Retained Earnings and (Cr) Income Summary
(4) (Dr) Retained Earnings and (Cr) Dividends
Note that it is only step 3 that differs between the two situations.
22. Steps in the accounting cycle that may be done on a daily basis include:
1) Analyzing business transactions
2) Journalizing the transactions
Steps in the accounting cycle that are done on a periodic basis include:
3) Posting to the general ledger accounts
4) Preparing a trial balance
5) Journalizing and posting adjusting entries (prepayments and accruals)
6) Preparing an adjusted trial balance
7) Preparing the financial statements – income statement, statement of changes in
equity, statement of financial position, and statement of cash flows
Steps in the accounting cycle that are usually only done at the company’s year-end
include:
8) Journalizing and posting closing entries
9) Preparing a post-closing trial balance
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Cash Profit
(a) –$ 100 $ 0
(b) 0 –75
(c) 0 +1,000
(d) +800 0
(e) –5,000 0
(f) 0 –1,000
(g) +1,000 0
(h) 0 –50
(i) +500 0
(j) 0 +200
(k) 0 –250
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a)
(b)
(c)
(d)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) The journal entry for the years 2015 and 2016 will be the same:
(c)
CLAYMORE CORPORATION
Statement of Financial Position (partial)
December 31
2016 2015
Property, plant, and equipment
Vehicles $50,000 $50,000
Less: Accumulated depreciation 20,000 10,000
Carrying amount $30,000 $40,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a)
(c)
(d)
Bere Ltd.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) No, Zieborg will not have to make a journal entry on December 1 when it prepares the
invoice because the November 30 adjusting entry already recorded the amount.
(c) 2016
Jan. 1 Bank Loan Payable ................................................ 30,000
Interest Payable ..................................................... 900
Cash .............................................................. 30,900
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) $3,500 = $400 (2013 payable balance) + $3,600 – $500. Notice how the change in the
payable each year indicates the difference between the expense and the cash paid. In
other words, in this year, the company had to pay off last year’s tax of $400 but did not
pay off $500 of this year’s tax. Since this year’s tax was $3,600, only $3,100 of this
was paid off. This $3,100 along with the $400 relating to last year totals $3,500.
(c) $4,400 = $4,200 – $500 (2014 payable balance) + $700 (2015 payable balance). The
$4,200 that was paid would have included $500 relating to the prior year so the
remainder of $3,700 would have related to the current year. Since $700 of the current
year’s tax is unpaid, the total tax expense for this year must have been $3,700 + $700.
Debit Credit
Cash ............................................................................... $ 8,000
Accounts receivable ........................................................ 28,000
Supplies ......................................................................... 1,000
Prepaid insurance ........................................................... 2,500
Equipment ....................................................................... 23,450
Accumulated depreciation—equipment .......................... $ 5,400
Accounts payable............................................................ 13,000
Salaries payable ............................................................. 3,000
Income tax payable ......................................................... 50
Common shares.............................................................. 20,000
Retained earnings ........................................................... 21,000
Dividends ........................................................................ 2,000
Fees earned .................................................................... 39,500
Salaries expense ............................................................ 16,400
Rent expense .................................................................. 6,000
Depreciation expense ..................................................... 4,400
Supplies expense............................................................ 4,000
Insurance expense.......................................................... 3,500
Utilities expense .............................................................. 2,400
Income tax expense ....................................................... 0 300 0000 000
Totals.............................................................................. $101,950 $101,950
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a)
OROMOCTO CORPORATION
Income Statement
Year Ended February 28, 2015
Revenues
Fees earned ......................................................................... $39,500
Expenses
Salaries expense .................................................................. $16,400
Rent expense ....................................................................... 6,000
Depreciation expense .......................................................... 4,400
Supplies expense ................................................................. 4,000
Insurance expense ............................................................... 3,500
Utilities expense ................................................................... 2,400
Total expenses ............................................................ 36,700
Profit before income tax ................................................................ 2,800
Income tax expense ...................................................................... 300
Profit ............................................................................................. $ 2,500
(b)
OROMOCTO CORPORATION
Statement of Changes in Equity
Year Ended February 28, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
OROMOCTO CORPORATION
Statement of Financial Position
February 28, 2015
Assets
Current Assets
Cash ..................................................................................... $ 8,000
Accounts receivable ............................................................. 28,000
Supplies................................................................................ 1,000
Prepaid insurance ................................................................ 2,500
Total current assets ..................................................... 39,500
Property, plant, and equipment
Equipment ............................................................................ $23,450
Less: Accumulated depreciation—equipment ..................... 5,400 18,050
Total assets ................................................................................... $57,550
Current liabilities
Accounts payable ........................................................................................ $13,000
Salaries payable .......................................................................................... 3,000
Income tax payable ..................................................................................... 50
Total current liabilities ......................................................................... 16,050
Shareholders’ equity
Common shares ..................................................................... $20,000
Retained earnings .................................................................. 21,500
Total shareholders’ equity .................................................................. 41,500
Total liabilities and shareholders’ equity ............................................................... $57,550
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a) Since the performance by WestJet is not complete until the flight actually occurs,
revenue should not be recognized until December. WestJet should recognize the
revenue in December when the customer has been provided with the flight.
(c) Revenue should be recognized on a per game basis over the season from April to
October, since that is when the products (games) are provided to the fans.
(d) Interest revenue should be accrued and recognized by RBC Financial Group evenly
over the term of the loan.
(e) Revenue should be recognized when the sweater is shipped to the customer in
September, provided there is reasonable assurance of collectability.
EXERCISE 4-2
(a) (b)
Accrual Basis Cash Basis
Service revenue $52,000 $44,000
Expenses
Operating expenses 31,000 27,500
Insurance expense 1,000 2,000
32,000 29,500
(c) The accrual basis of accounting provides more useful information for decision makers
because it recognizes revenue when earned and expenses when incurred. This
provides a better measurement of performance because it records what has happened
regardless of the movement of cash. This also enhances the predictive ability of the
income statement.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-3
(a) 2015
June 1 Prepaid Insurance .......................................................... 1,800
Cash ..................................................................... 1,800
(b) 2015
Dec. 31 Insurance Expense ........................................................ 1,050
Prepaid Insurance ................................................ 1,050
($1,800 × 7/12 months = $1,050)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Note: The Cash account has not been included in this solution, as per the instructions.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-4
(a) 2015
Dec. 31 Depreciation Expense .................................................... 4,000
Accumulated Depreciation—Vehicles...................... 4,000
($28,000 ÷ 7 = $4,000 per year)
(b)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-5
(a) 2015
Dec. 31 Utilities Expense ......................................................... 425
Accounts Payable .............................................. 425
(b) 2016
Jan. 11 Accounts Payable ....................................................... 425
Cash .................................................................. 425
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-6
(a) July 2 Prepaid Rent ............................................................. 1,500
Cash ................................................................ 1,500
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-7
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-8
(a) December entry: Cash 1,600
Unearned Revenue 1,600
Unearned Revenue
Jan. 1 Bal. 2,350
Adj. 1,600
Jan. 31 Bal. 750
The balance in Unearned Revenue on January 1, 2015 was $2,350 ($750 + $1,600).
Therefore the equipment is 5 years, 1 month old. It would have been purchased on
January 1, 2010.
Since the prepaid insurance is $1,600, we can assume that 4 months ($1,600 ÷ $400
= 4) of the policy remain. Consequently, if it expires at $400 per month, then the policy
is $3,200 ÷ $400 = 8 months old and it was purchased on June 1, 2014.
Prepaid Insurance
June 1, 2014 4,800 June 30 to
Dec. 31 Adj. 2,800
Dec. 31, 2014 Bal. 2,000
Jan. 31 Adj. 400
Jan. 31, 2015 Bal. 1,600
The original insurance policy premium was $4,800 ($400 × 12). The monthly
adjustments made June 30 through December 31 totalled $2,800 ($400 × 7).
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Derive the balance by working backward up through the T account. Therefore, the balance in
Supplies on January 1 was $900 ($700 + $950 – $750).
(e) Journal entry to record income tax payable: Income Tax Expense
Income Tax Payable
Derive the balance by working backward up through the T account. The balance in Income
Tax Payable on January 1 was $$150 ($150 − $100 + $100). It is assumed that income tax
instalments are paid monthly and that the balance owing at December 31 (January 1) was the
adjustment required at year-end after the income tax return was prepared. This balance
owing must be paid within three months of the company’s year-end.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-9
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-10
(a)
FRASER VALLEY SERVICES LTD
Income Statement
Year Ended August 31, 2015
Revenues
Service revenue.................................................................... $54,275
Expenses
Salaries expense .................................................................. $19,200
Rent expense ....................................................................... 15,000
Depreciation expense ........................................................... 2,275
Supplies expense ................................................................. 1,750
Interest expense ................................................................... 1,500
Insurance expense ............................................................... 1,100
Total expenses ............................................................ 40,825
Profit before income tax................................................................. 13,450
Income tax expense ...................................................................... 2,000
Profit ............................................................................................. $11,450
(b)
FRASER VALLEY SERVICES LTD.
Statement of Changes in Equity
Year Ended August 31, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Assets
Current assets
Cash ..................................................................................... $11,430
Accounts receivable ............................................................. 18,225
Supplies................................................................................ 3,400
Prepaid insurance................................................................. 3,450
Total current assets ..................................................... 36,505
Property, plant, and equipment
Equipment ............................................................................ $25,600
Less: Accumulated depreciation—equipment ..................... 5,905 19,695
Total assets ................................................................................... $56,200
Current liabilities
Accounts payable ........................................................................................ $ 2,800
Salaries payable .......................................................................................... 2,200
Interest payable ........................................................................................... 1,500
Rent payable ............................................................................................... 1,250
Income tax payable ..................................................................................... 1,500
Unearned revenue ....................................................................................... 700
Total current liabilities ......................................................................... 9,950
Non-current liabilities
Bank loan payable ....................................................................................... 25,000
Total liabilities ..................................................................................... 34,950
Shareholders’ equity
Common shares .......................................................................................... 5,000
Retained earnings ....................................................................................... 16,250
Total shareholders’ equity .................................................................. 21,250
Total liabilities and shareholders’ equity ............................................................... $56,200
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
EXERCISE 4-11
(a)
2015
Aug. 31 Service Revenue ............................................................ 54,275
Income Summary................................................... 54,275
Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
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 or later;
• 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 they are
incurred which is when their cost has “expired”, “used up” (lost its future benefit), which is
not always in the same time period as when the cash is paid out.
For example,
• Under the CASH BASIS, insurance is recorded as an expense as soon as it is paid for
even if a portion relates to future periods;
• Under the ACCRUAL BASIS of accounting, insurance expense is not recorded until the
coverage has expired through the passage of time. While the prepaid insurance has not
expired, it is recorded as an asset because it still has a future benefit.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Notice how the difference between a cash basis and an accrual basis revenue or expense is
always the change in the related balance sheet account. For example, if accounts receivable
goes up during the year, that change is the difference between cash and accrual revenue.
An alternate calculation:
Revenues $193,400
Less: Expenses 149,800
Profit $ 43,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-2A
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-3A
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-4A
(b) Nov. 30, 2015 Supplies Expense ($1,000 + $2,100 – $500) ..... 2,600
Supplies ..................................................... 2,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c) Dec. 7, 2015 Salaries Payable (Sunday and Monday) ............ 2,000
Salaries Expense (Tuesday through Saturday) .. 5,000
Cash........................................................... 7,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-5A
(a)
1. Prepaid Insurance
The unadjusted Prepaid Insurance account balance is $11,700 because no adjustment has
yet been made for the expiry of any portion of this asset for the fiscal year ending on July 31,
2015.
Policy B4564 cost $10,800 and covers a 24-month period so insurance expense relating to
this policy is $450 per month ($10,800 ÷ 24). Because this policy was taken out on December
1, 2013, when the company made adjusting entries at the end of the prior fiscal year on July
31, 2014 insurance expense for the period December 1, 2013 to July 31, 2014 which covers
8 months would have been recorded for $450 × 8 = $3,600. This would have reduced the
prepaid insurance relating to this policy to $7,200 ($10,800 – $3,600). During this past fiscal
year ending July 31, 2015, this balance would have remained unchanged.
Policy A2958 cost $4,500 and was purchased during the current fiscal year. When
purchased, the Prepaid Insurance account would have been debited for this amount. The
total amount of prepaid insurance on the unadjusted trial balance would therefore be $7,200
relating to the first policy plus $4,500 for a total of $11,700.
2. Unearned Revenue
Unearned revenue has a balance of $51,000 because all amounts received during the year for
subscription contracts were recorded into this account as follows:
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
2015
1. July 31 Insurance Expense...................................................... 6,900
Prepaid Insurance .............................................. 6,900
($11,700 from (a) above – $4,800 see below)
Remaining Months of
Original Period of (3) Monthly Policy at Prepaid
Policy Cost Coverage Cost July 31, 2015 Insurance
Number (1) (2) (1) ÷ (2) (4) (3) × (4)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-6A
(a) Cash Balance, December 31, 2015 = $177,600 cash receipts – $150,440 cash
payments = $27,160.
(b) (1)
CREATIVE DESIGNS LTD.
Income Statement
Year Ended December 31, 2015
Revenues
Fees earned ($157,600 + $2,400) ................................. $160,000
Expenses
Salaries expense ($59,800 + $3,050) ............................ $62,850
Rent expense ($20,000 – $2,000) ................................. 18,000
Supplies expense ($6,800 – $1,260) ............................. 5,540
Advertising expense ...................................................... 6,800
Depreciation expense ($35,400 ÷ 6).............................. 5,900
Insurance expense ($3,840 × 11/12) ............................ 3,520
Office expense............................................................... 1,800
Total expenses ..................................................... 104,410
Profit before income tax.......................................................... 55,590
Income tax expense ............................................................... 13,000
Profit ...................................................................................... $ 42,590
(2)
CREATIVE DESIGNS LTD.
Statement of Changes in Equity
Year Ended December 31, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
(3)
Assets
Current assets
Cash.............................................................................. $27,160
Accounts receivable ..................................................... 2,400
Supplies ....................................................................... 1,260
Prepaid rent .................................................................. 2,000
Prepaid insurance ($3,840 – $3,520) ............................ 320
Total current assets .............................................. 33,140
Property, plant, and equipment
Equipment ..................................................................... $35,400
Less: Accumulated depreciation—equipment ............... 5,900 29,500
Total assets ........................................................................ $62,640
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-7A
(a) and (b)
Boats
Cash
Nov. 30 Bal. 140,400
Nov. 30 Bal. 1,800
Accumulated Depreciation—Boats
Accounts Receivable
Nov. 30 Bal. 46,800
Nov. 30 Bal. 2,640
Nov. 30 Adj. 11,700
Nov. 30 Adj. 1,250
Nov. 30 Bal. 58,500
Nov. 30 Bal. 3,890
Accounts Payable
Supplies
Nov. 30 Bal. 1,925
Nov. 30 Bal. 965
Nov. 30 Adj. 260
Nov. 30 Adj. 665
Nov. 30 Bal. 2,185
Nov. 30 Bal. 300
Unearned Revenue
Accumulated Depreciation – Equipment
Nov. 30 Bal. 14,000
Nov. 30 Bal. 3,360 Nov. 30 Adj. 14,000
Nov. 30 Adj. 1,680
Nov. 30 Bal. 0
Nov. 30 Bal. 5,040
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Common Shares
Nov. 30 Bal. 10,000 Interest Expense
Nov. 30 Bal 3,465
Nov. 30 Adj. 315
Retained Earnings Nov. 30 Bal 3,780
Nov. 30 Bal. 27,225
Advertising Expense
Fees Earned Nov. 30 Bal. 825
Nov. 30 Bal. 110,575 Nov. 30 Adj. 260
Nov. 30 Adj. 14,000 Nov. 30 Bal 1,085
Nov. 30 Adj. 1,250
Nov. 30 Bal. 125,825
Depreciation Expense
Nov. 30 Adj. 13,380
Salaries Expense
Nov. 30 Bal. 69,560
Nov. 30 Adj. 500 Supplies Expense
Nov. 30 Bal. 70,060 Nov. 30 Adj. 665
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
2015
1. Nov. 30 Insurance Expense ................................................. 4,880
Prepaid Insurance
($7,320 ÷ 12 × 8) .............................................. 4,880
4. 30 Interest Expense
($54,000 × 7% × 1/12 months) ................................ 315
Interest Payable ............................................. 315
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
Debit Credit
Cash .................................................................................. $ 1,800
Accounts receivable........................................................... 3,890
Supplies ............................................................................. 300
Prepaid rent ....................................................................... 1,200
Prepaid insurance .............................................................. 2,440
Equipment.......................................................................... 13,440
Accumulated depreciation—equipment ............................. $ 5,040
Boats ................................................................................. 140,400
Accumulated depreciation—boats ..................................... 58,500
Accounts payable .............................................................. 2,185
Salaries payable ................................................................ 500
Interest payable ................................................................. 315
Income tax payable............................................................ 300
Bank loan payable ............................................................. 54,000
Common shares ................................................................ 10,000
Retained earnings.............................................................. 27,225
Fees earned....................................................................... 125,825
Salaries expense ............................................................... 70,060
Depreciation expense ........................................................ 13,380
Insurance expense ............................................................ 4,880
Supplies expense .............................................................. 665
Repairs and maintenance expense ................................... 11,170
Rent expense..................................................................... 14,400
Interest expense ................................................................ 3,780
Advertising expense .......................................................... 1,085
Income tax expense........................................................... 1,000
Totals .......................................................................... $283,890 $283,890
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-8A
(a), (b), and (d)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Dividends
Nov. 28 500
Nov. 30 Bal. 500
Income Tax Expense
Nov. 30 Adj. 1,100
Service Revenue Nov. 30 Bal. 1,100
Nov. 19 11,400
Nov. 27 3,800
Nov. 30 Bal. 15,200 Salaries Expense
Nov. 30 Adj. 800 Nov. 9 1,200
Nov. 30 Bal. 16,000 Nov. 23 2,400
Nov. 30 Bal. 3,600
Nov. 30 Adj. 1,000
Rent Expense Nov. 30 Bal. 4,600
Nov. 23 600
Nov. 30 Bal. 600
Supplies Expense
Nov. 30 Adj. 3,600
Nov. 30 Bal. 3,600
Depreciation Expense
Nov. 30 Adj. 300
Nov. 30 Bal. 300
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Before After
Adjustment Adjustment
Dr. Cr. Dr. Cr.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d)
2015
1. Nov. 30 Supplies Expense ......................................................... 3,600
Supplies ($4,600 – $1,000) .................................. 3,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(f) (1)
ALOU EQUIPMENT REPAIR CORP.
Income Statement
Month Ended November 30, 2015
Revenues
Service revenue............................................................. $16,000
Expenses
Salaries expense ........................................................... $4,600
Supplies expense .......................................................... 3,600
Rent expense ................................................................ 600
Depreciation expense .................................................... 300
Total expenses ..................................................... 9,100
Profit before income tax.......................................................... 6,900
Income tax expense ............................................................... 1,100
Profit ...................................................................................... $ 5,800
(2)
ALOU EQUIPMENT REPAIR CORP.
Statement of Changes in Equity
Month Ended November 30, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(f) (Continued)
(3)
ALOU EQUIPMENT REPAIR CORP.
Statement of Financial Position
November 30, 2015
Assets
Current assets
Cash ................................................................................................. $35,180
Accounts receivable ......................................................................... 7,220
Supplies ............................................................................................ 1,000
Total current assets ................................................................. 43,400
Property, plant, and equipment
Equipment ................................................................... $18,000
Less: Accumulated depreciation ................................. 3,900 14,100
Total assets ............................................................................................... $57,500
Current liabilities
Accounts payable ............................................................................... $ 600
Salaries payable ................................................................................. 1,000
Income tax payable ............................................................................ 1,100
Unearned revenue .............................................................................. 1,300
Total current liabilities ................................................................ 4,000
Shareholders’ equity
Common shares ........................................................ $15,000
Retained earnings ..................................................... 38,500
Total shareholders’ equity.......................................................... 53,500
Total liabilities and shareholders’ equity ...................................................... $57,500
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-9A
(a)
2015
Nov. 30 Service Revenue....................................................... 16,000
Income Summary ............................................. 16,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Cash
Nov. 1 Bal. 15,580 Salaries Payable
Nov. 12 5,000 Nov. 9 2,200 Nov. 1 Bal. 1,000
Nov. 13 12,400 Nov. 21 4,600 Nov. 9 1,000
Nov. 19 11,400 Nov. 23 600 Nov. 30 Bal. 0
Nov. 30 1,100 Nov. 23 2,400 Nov. 30 Adj. 1,000
Nov. 28 500 Nov. 30 Bal. 1,000
Nov. 30 Bal. 35,180
Income Tax Payable
Accounts Receivable Nov. 30 Adj. 1,100
Nov. 1 Bal. 15,820 Nov. 30 Bal. 1,100
Nov. 27 3,800 Nov. 13 12,400
Nov. 30 Bal. 7,220 Unearned Revenue
Nov. 1 Bal. 1,000
Supplies Nov. 30 1,100
Nov. 1 Bal. 4,000 Nov. 30 Bal. 2,100
Nov. 20 600 Nov. 30 Adj. 800
Nov. 30 Bal. 4,600 Nov. 30 Bal. 1,300
Nov. 30 Adj. 3,600
Nov. 30 Bal. 1,000 Common Shares
Nov. 1 Bal. 10,000
Equipment Nov. 12 5,000
Nov. 1 Bal. 18,000 Nov. 30 Bal. 15,000
Nov. 30 Bal. 18,000
Retained Earnings
Accumulated Depreciation— Nov. 1 Bal. 33,200
Equipment Nov. 30 CE4 500 Nov. 30 CE3 5,800
Nov. 1 Bal. 3,600 Nov. 30 Bal. 38,500
Nov. 30 Bal. 3,600
Nov. 30 Adj. 300 Dividends
Nov. 30 Bal. 3,900 Nov. 28 500
Nov. 30 Bal. 500
Accounts Payable Nov. 30 CE4 500
Nov. 1 Bal. 4,600 Nov. 30 Bal. 0
Nov. 21 4,600 Nov. 20 600
Nov. 30 Bal. 600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Service Revenue
Nov. 19 11,400 Salaries Expense
Nov. 27 3,800 Nov. 9 1,200
Nov. 30 Bal. 15,200 Nov. 23 2,400
Nov. 30 Adj. 800 Nov. 30 Bal. 3,600
Nov. 30 Bal. 16,000 Nov. 30 Adj. 1,000
Nov. 30 CE1 16,000 Nov. 30 Bal. 4,600
Nov. 30 Bal. 0 Nov. 30 CE2 4,600
Nov. 30 Bal. 0
Rent Expense
Nov. 23 600 Supplies Expense
Nov. 30 Bal. 600 Nov. 30 Adj. 3,600
Nov. 30 CE2 600 Nov. 30 Bal. 3,600
Nov. 30 Bal. 0 Nov. 30 CE2 3,600
Nov. 30 Bal. 0
Income Summary
Nov. 30 CE2 10,200 Nov. 30 CE1 16,000
Nov. 30 CE3 5,800
Nov. 30 Bal. 0
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
ALOU EQUIPMENT REPAIR CORP.
Post-Closing Trial Balance
November 30, 2015
Dr. Cr.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-10A
(a)
OZAKI CORP.
Adjusted Trial Balance
September 30, 2015
Debit Credit
Cash ..................................................................................... $ 3,250
Accounts receivable ............................................................. 8,435
Supplies ............................................................................... 1,265
Equipment ............................................................................ 15,040
Accumulated depreciation—equipment ................................ $ 750
Accounts payable ................................................................. 4,460
Salaries payable ................................................................... 840
Interest payable .................................................................... 105
Income tax payable .............................................................. 200
Unearned revenue................................................................ 550
Bank loan payable ................................................................ 7,800
Common shares ................................................................... 7,000
Retained earnings ................................................................ 2,600
Dividends ............................................................................. 700
Fees earned ......................................................................... 22,485
Depreciation expense ........................................................... 750
Interest expense ................................................................... 105
Rent expense ....................................................................... 1,500
Salaries expense ................................................................. 13,840
Supplies expense ................................................................. 485
Utilities expense ................................................................... 820
Income tax expense ............................................................. 600
Totals............................................................................. $46,790 $46,790
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
2015
Sept. 30 Fees Earned ................................................................... 22,485
Income Summary................................................... 22,485
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-11A
(a) and (b)
Prepaid Insurance
May 31 Bal. 4,550 Interest Payable
May 31 Adj. 910 May 31 Adj. 840
May 31 Bal. 3,640 May 31 Bal. 840
Buildings
May 31 Bal. 168,000 Unearned Revenue
May 31 Bal. 17,500
May 31 Adj. 2,500 May 31 Adj. 2,800
Accumulated Depreciation—Buildings May 31 Bal. 17,800
May 31 Bal. 16,800
May 31 Adj. 700
May 31 Bal. 17,500 Mortgage Payable
May 31 Bal. 126,000
Furniture
May 31 Bal. 33,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Salaries Expense
May 31 Bal. 98,700
May 31 Adj. 1,590 Depreciation Expense
May 31 Bal. 100,290 May 31 Adj. 700
May 31 Adj. 560
May 31 Bal. 1,260
Utilities Expense
May 31 Bal. 23,870
May 31 Adj. 2,240 Income Tax Expense
May 31 Bal. 26,110 May 31 Bal. 7,000
May 31 Adj. 1,000
May 31 Bal. 8,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
RAINBOW LODGE LTD.
Adjusted Trial Balance
May 31, 2015
Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d) (1)
RAINBOW LODGE LTD.
Income Statement
Year Ended May 31, 2015
Revenues
Rent revenue ................................................................. $201,800
Expenses
Salaries expense ........................................................... $100,290
Utilities expense ............................................................ 26,110
Interest expense ............................................................ 10,080
Insurance expense ........................................................ 7,280
Supplies expense .......................................................... 3,540
Depreciation expense .................................................... 1,260
Advertising expense ...................................................... 1,000
Total expenses ..................................................... 149,560
Profit before income tax.......................................................... 52,240
Income tax expense ............................................................... 8,000
Profit ...................................................................................... $ 44,240
(2)
RAINBOW LODGE LTD.
Statement of Changes in Equity
Year Ended May 31, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d) (Continued)
(3)
RAINBOW LODGE LTD.
Statement of Financial Position
May 31, 2015
Assets
Current assets
Cash ............................................................. $ 6,400
Accounts receivable ..................................... 13,580
Supplies ........................................................ 1,340
Prepaid insurance......................................... 3,640
Total current assets .................................. $ 24,960
Property, plant, and equipment
Land ............................................................. $106,370
Buildings ....................................................... $168,000
Less: Accumulated depreciation .................. 17,500 150,500
Furniture ....................................................... $33,600
Less: Accumulated depreciation .................. 14,000 19,600
Total property, plant, and equipment ........ 276,470
Total assets ........................................................... $301,430
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(e) The financial position and performance of a company can be evaluated in terms of
its liquidity, profitability and solvency.
Liquidity
Rainbow Lodge does not appear at first glance appear to have a healthy liquidity
position. Although it has a positive cash balance of $6,400, the company has a
current ratio of only 0.8:1 ($24,960 ÷ $31,610). This seems to indicate initially that
there are insufficient current assets to repay the company’s current liabilities. It
should be noted that simply looking at the current ratio does not tell the whole
story. Of the total current liabilities, 56% ($17,800 ÷ $31,610) is made up of
unearned revenue, which will not require the payment of cash. On the other hand,
there are current assets that are not going to turn into cash such as supplies and
prepaid insurance. Excluding supplies, prepaid insurance and unearned revenue,
the revised current ratio is 1.4:1 [($24,960 – $1,340 – $3,640) ÷ ($31,610 –
$17,800)].
Profitability
According to the income statement, Rainbow Lodge was profitable in 2015 with
after tax profit of over $44,000. The lodge also has a positive balance in retained
earnings, which indicates it has been profitable in the past.
The company also paid out dividends of $2,000 in the past year, which may be of
interest to your friend if your friend is considering an income investment.
Solvency
The company has a large mortgage, which is in line with the cost of the property,
plant, and equipment. Shareholders’ equity is smaller, but by not a large margin,
than total liabilities.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-12A
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Accounts Payable
Accounts Receivable May 31 Bal. 8,140
May 31 Bal. 11,800 May 31 Adj. 2,240
May 31 Adj. 1,780 May 31 Bal. 10,380
May 31 Bal. 13,580
Salaries Payable
Supplies May 31 Adj. 1,590
May 31 Bal. 4,880 May 31 Bal. 1,590
May 31 Adj. 3,540
May 31 Bal. 1,340 Interest Payable
May 31 Adj. 840
May 31 Bal. 840
Prepaid Insurance
May 31 Bal. 4,550
May 31 Adj. 910 Income Tax Payable
May 31 Bal. 3,640 May 31 Adj. 1,000
May 31 Bal. 1,000
Land
May 31 Bal. 106,370 Unearned Revenue
May 31 Bal. 17,500
May 31 Adj. 2,500 May 31 Adj. 2,800
Buildings May 31 Bal. 17,800
May 31 Bal. 168,000
Mortgage Payable
May 31 Bal. 126,000
Accumulated Depreciation—Buildings
May 31 Bal. 16,800
May 31 Adj. 700 Common Shares
May 31 Bal. 17,500 May 31 Bal. 60,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-1B
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 they are
incurred which is when their cost has “expired”, “used up” (lost its future benefit), which is
not always in the same time period as when the cash is paid out.
For example,
• Under the CASH BASIS, insurance is recorded as an expense as soon as it is paid for
even if a portion relates to future periods;
• Under the ACCRUAL BASIS of accounting, insurance expense is not recorded until the
coverage has expired through the passage of time. While the prepaid insurance has not
expired, it is recorded as an asset because it still has a future benefit.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
–905 Accounts payable owing at the end of the year should be accrued; the related
expense was incurred in the year and thus, reduces profit.
+1,450 Accounts receivable arise from sales that have been made during the year, and
thus, revenue must be recognized and recorded in the year.
–8,625 Depreciation expense is a non-cash expense which reduces profit for the year.
–4,600 Income tax owing at the end of the year should be accrued; the expense related
to the current year.
+810 Prepaid insurance at end of the year is an asset rather than an expense.
Amount has been deducted from cash and must be added back for accrual
basis profit.
Unearned revenue that was received in cash during the current year but has not
–700 been earned and thus, must reduce the cash basis profit.
$11,630 Accrual basis profit
Notice how the difference between a cash basis and an accrual basis revenue or expense is
always the change in the related balance sheet account. For example, if accounts receivable
goes up during the year, that change is the difference between cash and accrual revenue.
An alternative calculation:
Revenues $78,850
Less: Expenses 67,220
Profit $11,630
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c) I recommend that Northland use the accrual basis of accounting. The cash basis does
not correctly show when the revenue was earned or when the expenses were incurred
and therefore does not measure performance effectively. Because of this, the accrual
basis is a better indicator of future performance. The cash basis of accounting is not in
accordance with generally accepted accounting principles for these reasons.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-2B
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-3B
1. (a) Nov. 30 Salaries Expense ................................................. 3,600
Salaries Payable ($6,000 × 6/10 days) ........... 3,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-4B
1. (a) Mar. 1, 2015 Supplies ........................................................... 5,250
Cash .......................................................... 5,250
(b) Dec. 31, 2015 Unearned Revenue ($216,000 × 4/9) ............... 96,000
Ticket Revenue ......................................... 96,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-5B
(a)
1. Prepaid Advertising
The unadjusted Prepaid Advertising account balance is $14,160 because no adjustment has
yet been made for the expiry of any portion of this asset for the fiscal year ending on October
31, 2015.
Contract A650 covers a 12-month period starting March 1, 2015 for $520 per month and cost
$6,240 ($520 × 12). Contract B974 covers a 16-month period starting July 1, 2015 for $495
per month and cost $7,920 ($495 × 16). When purchased, the Prepaid Advertising account
would have been debited for these amounts. The total amount of prepaid advertising on the
unadjusted trial balance would therefore be $6,240 relating to the first contract plus $7,920
for a total of $14,160.
2. Unearned Revenue
Unearned revenue has a balance of $303,000 because all amounts received during the year for
leasing contracts were recorded into this account as follows:
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
2015
1. Oct. 31 Advertising Expense .............................................. 6,140
Prepaid Advertising ............................... 6,140
A650 – $520 × 8 months = $4,160
) B974 – $495 × 4 months = 1,980
$6,140
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-6B
(a) Cash Balance, April 30, 2015 = $86,500 cash receipts – $70,370 cash payments =
$16,130.
Revenues
Service revenue ($66,500 + $1,440) ............................. $67,940
Expenses
Salaries expense ($7,200 + $4,240).............................. $11,440
Rent expense ($4,550 – $650) ...................................... 3,900
Depreciation expense ($47,040 ÷ 8 × 6/12)................... 2,940
Utilities expense ............................................................ 1,900
Insurance expense ($2,760 × 6/12) ............................... 1,380
Advertising expense ...................................................... 920
Total expenses ..................................................... 22,480
Profit before income tax.......................................................... 45,460
Income tax expense ($6,000 + $800) ..................................... 6,800
Profit ..................................................................................... $38,660
(2)
THE RADICAL EDGE LTD.
Statement of Changes in Equity
Six Months Ended April 30, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
(3)
Assets
Current assets
Cash ......................................................................... $16,130
Accounts receivable ................................................ 1,440
Prepaid insurance ($2,760 – $1,380) ....................... 1,380
Rent deposit ............................................................. 650
Total current assets ......................................... 19,600
Property, plant, and equipment
Equipment ................................................................ $47,040
Less: Accumulated depreciation .............................. 2,940 44,100
Total assets....................................................................... $63,700
Current liabilities
Salaries payable ....................................................... $ 4,240
Income tax payable .................................................. 800
Total current liabilities ...................................... 5,040
Shareholders’ equity
Common shares ....................................................... $20,000
Retained earnings .................................................... 38,660
Total shareholders’ equity ............................... 58,660
Total liabilities and shareholders’ equity ............................ $63,700
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-7B
(a) and (b)
Cash
Dec. 31 Bal. 4,600 Accumulated Depreciation—
Furniture
Dec. 31 Bal. 4,000
Accounts Receivable Dec. 31 Adj. 1,600
Dec. 31 Bal. 8,220 Dec. 31 Bal. 5,600
Dec. 31 Adj. 1,750
Dec. 31 Bal. 9,970 Salaries Payable
Dec. 31 Adj. 690
Supplies Dec. 31 Bal. 690
Dec. 31 Bal. 2,500
Dec. 31 Adj. 1,930 Interest Payable
Dec. 31 Bal. 570 Dec. 31 Adj. 481
Dec. 31 Bal. 481
Prepaid Insurance
Dec. 31 Bal. 3,600 Income Tax Payable
Dec. 31 Adj. 3,000 Dec. 31 Adj. 850
Dec. 31 Bal. 600 Dec. 31 Bal. 850
Furniture Dividends
Dec. 31 Bal. 16,000 Dec. 31 Bal. 3,800
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
ORTEGA LIMO SERVICE LTD.
Adjusted Trial Balance
December 31, 2015
Debit Credit
Cash .................................................................................. $ 4,600
Accounts receivable ........................................................... 9,970
Supplies ............................................................................. 570
Prepaid insurance .............................................................. 600
Prepaid rent ....................................................................... 1,150
Vehicles ............................................................................. 58,000
Accumulated depreciation—vehicles ................................. $ 29,000
Furniture............................................................................. 16,000
Accumulated depreciation—furniture ................................. 5,600
Salaries payable ................................................................ 690
Interest payable ................................................................. 481
Income tax payable ............................................................ 850
Unearned revenue ............................................................. 2,400
Bank loan payable, due September 1, 2019 ...................... 27,475
Common shares................................................................. 5,000
Retained earnings .............................................................. 7,600
Dividends ........................................................................... 3,800
Service revenue ................................................................. 118,550
Salaries expense ............................................................... 57,690
Depreciation expense ........................................................ 16,100
Rent expense ..................................................................... 13,800
Repairs and maintenance expense.................................... 4,690
Insurance expense............................................................. 3,000
Supplies expense............................................................... 1,930
Interest expense ................................................................ 2,896
Income tax expense ........................................................... 2,850
Totals ........................................................................... $197,646 $197,646
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-8B
(a), (b), and (d)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Dividends
Sept. 28 500
Sept.30 Bal. 500
Service Revenue
Sept. 11 8,800
Sept. 26 1,600
Sept. 30 Bal. 10,400
Sept. 30 Adj. 600
Sept. 30 Adj. 800
Sept. 30 Bal. 11,800
Depreciation Expense
Sept. 30 Adj. 250
Sept. 30 Bal. 250
Supplies Expense
Sept. 30 Adj. 2,800
Sept. 30 Bal. 2,800
Salaries Expense
Sept. 4 800
Sept. 25 2,200
Sept. 30 Bal. 3,000
Sept. 30 Adj. 1,600
Sept. 30 Bal. 4,600
Rent Expense
Sept. 24 1,000
Sept. 30 Bal. 1,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
2015
Sept. 4 Salaries Payable ......................................................... 1,400
Salaries Expense ......................................................... 800
Cash ................................................................... 2,200
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Before After
Adjustment Adjustment
Dr. Cr. Dr. Cr.
Cash ..................................................... $15,760 $15,760
Accounts receivable ............................. 3,640 4,240
Supplies ................................................ 3,600 800
Prepaid rent .......................................... 1,000 1,000
Equipment ............................................ 30,000 30,000
Accumulated depreciation—equipment $ 3,000 $ 3,250
Accounts payable ................................. 1,200 1,200
Unearned revenue ................................ 2,100 1,300
Salaries payable ................................... 0 1,600
Common shares ................................... 25,000 25,000
Retained earnings ................................ 17,400 17,400
Dividends .............................................. 500 500
Service revenue .................................... 10,400 11,800
Salaries expense .................................. 3,000 4,600
Supplies expense ................................. 0 2,800
Rent expense ....................................... 1,000 1,000
Depreciation expense ........................... 0 250
Income tax expense ............................. 600 000 000 600 000 000
Totals $59,100 $59,100 $61,550 $61,550
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d) 2015
1. Sept. 30 Supplies Expense ................................................. 2,800
Supplies ($3,600 – $800)............................. 2,800
(f)
(1)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(f) (Continued)
(2)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(f) (Continued)
(3)
Assets
Current assets
Cash ................................................................................................... $15,760
Accounts receivable ........................................................................... 4,240
Supplies .............................................................................................. 800
Prepaid rent ........................................................................................ 1,000
Total current assets ................................................................... 21,800
Property, plant, and equipment
Equipment ................................................................... $30,000
Less: Accumulated depreciation ................................. 3,250 26,750
Total assets ................................................................................................. $48,550
Current liabilities
Accounts payable ............................................................................... $ 1,200
Salaries payable ................................................................................. 1,600
Unearned revenue .............................................................................. 1,300
Total current liabilities ................................................................ 4,100
Shareholders’ equity
Common shares .......................................................... $25,000
Retained earnings ....................................................... 19,450
Total shareholders’ equity.......................................................... 44,450
Total liabilities and shareholders’ equity ...................................................... $48,550
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-9B
(a) 2015
Sept. 30 Service Revenue......................................................... 11,800
Income Summary ............................................... 11,800
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Cash
Sept. 1 Bal. 9,760 Accounts Payable
Sept. 6 5,400 Sept. 4 2,200 Sept. 1 Bal. 6,200
Sept. 11 8,800 Sept. 21 7,000 Sept. 21 7,000 Sept. 17 2,000
Sept. 12 5,000 Sept. 24 2,000 Sept. 30 Bal. 1,200
Sept. 27 1,300 Sept. 25 2,200
Sept. 28 500 Unearned Revenue
Sept. 28 600 Sept. 1 Bal. 800
Sept. 30 Bal. 15,760 Sept. 27 1,300
Sept. 30 Bal. 2,100
Accounts Receivable Sept. 30 Adj. 800
Sept. 1 Bal. 7,440 Sept. 30 Bal. 1,300
Sept. 26 1,600 Sept. 6 5,400
Sept. 30 Bal. 3,640 Salaries Payable
Sept. 30 Adj. 600 Sept. 1 Bal. 1,400
Sept. 30 Bal. 4,240 Sept. 4 1,400
Sept.30 Bal. 0
Supplies Sept. 30 Adj. 1,600
Sept. 1 Bal. 1,600 Sept. 30 Bal. 1,600
Sept. 17 2,000
Sept. 30 Bal. 3,600 Common Shares
Sept. 30 Adj. 2,800 Sept. 1 Bal. 20,000
Sept. 30 Bal. 800 Sept. 12 5,000
Sept. 30 Bal. 25,000
Prepaid Rent
Sept. 24 1,000 Retained Earnings
Sept. 30 Bal. 1,000 Sept. 1 Bal. 17,400
Sept. 30 Bal. 17,400
Equipment Sept. 30 CE4 500 Sept. 30 CE3 2,550
Sept. 1 Bal. 30,000 Sept. 30 Bal. 19,450
Sept. 30 Bal. 30,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Income Summary
Sept. 30 CE2 9,250 Sept. 30 CE1 11,800
Sept. 30 CE3 2,550
Sept. 30 Bal. 0
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
Debit Credit
Cash ..................................................... $15,760
Accounts receivable ............................. 4,240
Supplies................................................ 800
Prepaid rent .......................................... 1,000
Equipment ............................................ 30,000
Accumulated depreciation—equipment $ 3,250
Accounts payable ................................. 1,200
Unearned revenue ................................ 1,300
Salaries payable ................................... 1,600
Common shares ................................... 25,000
Retained earnings ................................ 19,450
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-10B
(a)
GRANT ADVERTISING AGENCY LIMITED
Adjusted Trial Balance
December 31, 2015
Debit Credit
Cash ..................................................................................... $ 11,000
Trading investments.............................................................. 10,850
Accounts receivable ............................................................. 19,750
Supplies ............................................................................... 1,265
Prepaid insurance ................................................................. 800
Equipment ............................................................................. 66,000
Accumulated depreciation—equipment ................................ $ 39,600
Accounts payable ................................................................. 4,800
Salaries payable ................................................................... 1,625
Interest payable .................................................................... 700
Unearned revenue ................................................................ 6,200
Bank loan payable ................................................................ 10,000
Income tax payable .............................................................. 7,000
Common shares ................................................................... 20,000
Retained earnings ................................................................. 10,400
Dividends .............................................................................. 2,000
Fees earned .......................................................................... 60,600
Salaries expense .................................................................. 13,625
Depreciation expense ........................................................... 13,200
Rent expense ....................................................................... 7,200
Supplies expense ................................................................. 5,935
Insurance expense................................................................ 1,600
Interest expense ................................................................... 700
Income tax expense .............................................................. 7,000
Totals ............................................................................. $160,925 $160,925
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
2015
Dec. 31 Fees Earned ................................................................... 60,600
Income Summary................................................... 60,600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
GRANT ADVERTISING AGENCY LIMITED
Post-Closing Trial Balance
December 31, 2015
Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-11B
(a) and (b)
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Depreciation Expense
Salaries Expense
Aug. 31 Adj. 5,800
Aug. 31 Bal. 306,000 Aug. 31 Adj. 5,720
Aug. 31 Adj. 1,680
Aug. 31 Bal. 11,520
Aug. 31 Bal. 307,680
Interest Expense
Utilities Expense
Aug. 31 Bal. 75,200 Aug. 31 Bal. 7,700
Aug. 31 Adj. 3,120 Aug. 31 Adj. 700
Aug. 31 Bal. 78,320 Aug. 31 Bal. 8,400
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) 2015
1. Aug. 31 Insurance Expense ($12,720 × 3/12) .................. 3,180
Prepaid Insurance ...................................... 3,180
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
ROCKY MOUNTAIN RESORT INC.
Adjusted Trial Balance
August 31, 2015
Debit Credit
Cash .............................................................................. $ 38,820
Supplies .......................................................................... 1,380
Prepaid insurance ........................................................... 9,540
Land................................................................................ 70,000
Buildings ......................................................................... 290,000
Accumulated depreciation—buildings ............................. $ 92,800
Furniture ......................................................................... 57,200
Accumulated depreciation—furniture .............................. 28,600
Accounts payable ........................................................... 16,120
Salaries payable ............................................................. 1,680
Interest payable .............................................................. 700
Income tax payable......................................................... 2,000
Unearned revenue .......................................................... 15,000
Mortgage payable, due 2019 .......................................... 120,000
Common shares ............................................................. 40,000
Retained earnings........................................................... 72,000
Dividends ........................................................................ 10,000
Rent revenue .................................................................. 553,000
Salaries expense ............................................................ 307,680
Utilities expense.............................................................. 78,320
Repairs and maintenance expense ................................ 28,250
Depreciation expense ..................................................... 11,520
Interest expense ............................................................. 8,400
Supplies expense ........................................................... 5,610
Insurance expense ......................................................... 3,180 ,
Income tax expense........................................................ 22,000 000000 0
Totals ........................................................................ $941,900 $941,900
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(1)
ROCKY MOUNTAIN RESORT INC.
Income Statement
Year Ended August 31, 2015
Revenues
Rent revenue ............................................................... $553,000
Expenses
Salaries expense ......................................................... $307,680
Utilities expense .......................................................... 78,320
Repairs and maintenance expense ............................. 28,250
Depreciation expense .................................................. 11,520
Interest expense .......................................................... 8,400
Supplies expense ........................................................ 5,610
Insurance expense ...................................................... 3,180
Total expenses ................................................... 442,960
Profit before income tax........................................................ 110,040
Income tax expense ............................................................. 22,000
Profit .................................................................................... $ 88,040
(2)
ROCKY MOUNTAIN RESORT INC.
Statement of Changes in Equity
Year Ended August 31, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d) (Continued)
(3)
ROCKY MOUNTAIN RESORT INC.
Statement of Financial Position
August 31, 2015
Assets
Current assets
Cash .......................................................... $ 38,820
Supplies ..................................................... 1,380
Prepaid insurance...................................... 9,540
Total current assets ............................. 49,740
Property, plant, and equipment
Land .......................................................... $ 70,000
Buildings .................................................... $290,000
Less: Accumulated depreciation ............... 92,800 197,200
Furniture .................................................... $57,200
Less: Accumulated depreciation ............... 28,600 28,600
Total property, plant, and equipment .. 295,800
Total assets ........................................................ $345,540
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(e) The financial position and performance of a company can be evaluated in terms of
its liquidity, profitability and solvency.
Liquidity
Rocky Mountain Resort seems to being enjoying a strong liquidity position. It has a
large cash balance of $38,820. The company has a positive current ratio of 1.4:1
($49,740 ÷ $35,500) which would indicate that there are more than enough current
assets on hand to meet currently maturing liabilities.
Profitability
According to the income statement, Rocky Mountain Resort was profitable in 2015
with after tax profit of over $88,000. The resort also has a positive balance in
retained earnings, which indicates it has been profitable in the past.
The company also paid out dividends of $10,000 in the past year, which may be of
interest to your friend if your friend is considering an equity investment.
Solvency
The company has a large mortgage, but this represents less than half of the value
of the property, plant, and equipment so the bank should not be worried about
security for the loan. Shareholders’ equity is greater than total liabilities so the level
of debt held by the company is not too high which mitigates the risk of not being
able to make interest payments. This, combined with strong liquidity and positive
profits, indicates that the company is not experiencing any solvency problems.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
PROBLEM 4-12B
(a) Closing Entries:
2015
Aug. 31 Rent Revenue................................................................. 553,000
Income Summary................................................... 553,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Land
Aug. 31 Bal. 70,000 Interest Payable
Aug. 31 Adj. 700
Aug. 31 Bal. 700
Buildings
Aug. 31 Bal.290,000
Income Tax Payable
Aug. 31 Adj. 2,000
Accumulated Depreciation— Aug. 31 Bal. 2,000
Buildings
Aug. 31 Bal. 87,000
Aug. 31 Adj. 5,800 Mortgage Payable
Aug. 31 Bal. 92,800 Aug. 31 Bal. 120,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
ROCKY MOUNTAIN RESORT INC.
Post-Closing Trial Balance
August 31, 2015
Debit Credit
Cash .............................................................................. $ 38,820
Supplies .......................................................................... 1,380
Prepaid insurance ........................................................... 9,540
Land................................................................................ 70,000
Buildings ......................................................................... 290,000
Accumulated depreciation—buildings ............................. $ 92,800
Furniture ......................................................................... 57,200
Accumulated depreciation—furniture .............................. 28,600
Accounts payable ........................................................... 16,120
Salaries payable ............................................................. 1,680
Interest payable .............................................................. 700
Income tax payable......................................................... 2,000
Unearned revenue .......................................................... 15,000
Mortgage payable ........................................................... 120,000
Common shares ............................................................. 40,000
Retained earnings........................................................... 00 00000 150,040
Totals...................................................................... $466,940 $466,940
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a) 1. Accounts appearing on Shoppers’ balance sheet which may have been used in an
adjusting entry for prepayments include:
The related statement of earnings account which most likely include adjusting
entries at the end of the year for prepayments include:
2. Accounts appearing on Shoppers’ balance sheet which may have been used in an
adjusting entry for accruals include:
The related statement of earnings account which most likely include adjusting
entries at the end of the year for accruals include:
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a) Shopper’s Prepaid Expenses and Deposits and Jean Coutu’s Prepaid Expenses
accounts likely represent payments required by these businesses such as insurance
and rent which must be made to suppliers ahead of being consumed. The types of
adjustments at the end of the year would be an adjusting entry for prepayments. The
related income statement accounts would be Insurance Expense and Rent Expense.
(b) For Shoppers and Jean Coutu, the current liability Income Taxes Payable likely
represents amounts due by these businesses to the Federal and Provincial
governments resulting from taxes payable on corporate income. The types of
adjustments at the end of the year would be an adjusting entry for accruals. The related
income statement accounts would be Income Tax Expense.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a) Since First Capital Realty is required to release financial statements quarterly, it would
need to post adjusting entries at least quarterly. Since First Pro Shopping Centres only
releases financial statements annually, it will need to prepare adjusting entries at least
annually.
Although external financial statements are released on a quarterly basis for First Capital
and on an annual basis for First Pro it is likely that management of both companies
would need monthly financial statements so that they can assess the company’s
performance on a timely basis. For this reason it is likely that the adjusting entries are
prepared on a monthly basis for each of the companies and that there are no significant
differences in the accounting cycle for each company.
(b) First Pro would not be required to prepare a statement of changes in equity, but rather
would prepare a statement of retained earnings. First Pro would also not report any
other comprehensive income in the shareholders’ equity section of its statement of
financial position and it would not prepare a statement of comprehensive income. First
Capital Realty would prepare a statement of changes in equity and a statement of
comprehensive income (if it had any other comprehensive income). Otherwise, the
remaining financial statements would be the same for each company. Compared with
ASPE, additional disclosure is required by companies reporting under IFRS in the notes
to the financial statements.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Note to instructors: All of the material supplementing this group activity, including a suggested
solution, can be found in the Collaborative Learning section of the Instructor Resource site
accompanying this textbook as well as in the Prepare and Present section of WileyPLUS.
To increase the accrual for operating expenses by $80,000 ($230,000 – $150,000) the
following entry would be made:
Note that the reclassification of bonus to salary has no effect on total profit.
(c) Anna suggested that the useful lives of furniture and fixture be lowered to increase the
amount of depreciation recorded in each year. This would lower profit and strengthen
management’s argument that the company could not afford to increase salaries.
(d) In order to accrue an expense such as severance pay, it must have been incurred. Since
the decision to shut down the stores has not yet been made, it would be inappropriate to
record such an expense.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(f) In prior years, the management bonus was recorded separately from salary expense so
that users of the financial statements could understand the difference between these two
forms of compensation. A bonus is discretionary in nature while recurring salary expenses
are not. By reclassifying the bonus into salary expense, management may be intending to
mislead users into thinking that a bonus did not occur this year, or that the bonuses have
become “regular” and there is no intention of reducing them in order to meet the demands
of the union.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
• Sundream’s controller
• Sundream’s Chief Executive Officer
• Sundream’s shareholders
• Sundream’s creditors.
(b) By adding $12,000 to sales revenue and reducing interest expense by $3,000, the profit
increases by $15,000. Unearned revenue reduces by $12,000 and interest payable
reduces by $3,000. Consequently, the current and total liabilities would reduce by
$15,000 and the shareholders’ equity would increase by $15,000 on the statement of
financial position. Sundream Travel Agency’s liquidity improves by the changes
suggested by the CEO. The current ratio should be 1.9:1 ($400,000 ÷ $210,000) but it
changes to 2.1:1 [($400,000 ÷ ($210,000 – $12,000 – $3,000)].
(c) Intentionally misrepresenting the company’s financial condition and its results of
operations is unethical and is also illegal. It is obvious from the request that the CEO’s
intention is to manipulate the amount of the current liabilities, to ensure that the current
ratio conforms to the 2:1 requirement of the bank loan conditions.
(d) Accounting standards are known and understood by the users and the preparers of the
financial statements. Those who prepare the financial statements are bound by the
accounting standards. An intentional breach of these standards, as is suggested by the
CEO in this case, cannot be passed off as an oversight or ignorance of the fundamental
rules of accounting. Consequently the CEO is aware of the breach in the accounting
standards when he suggests the changes to the controller. He knows that his behaviour
is unethical and he should be dissuaded from his request, as his suggestions will be
challenged by his controller.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a) The shoe store records revenue at the point of sale when the sale is complete. At that
point, the customer has paid for the shoes that have been purchased and the customer
has taken the shoes from the store.
(b) Your incentive to overstate revenues would be to improve the commission you would
earn on shoes sold.
(c) The store has preprogrammed the selling price of the shoes in the register. It is
assumed that you cannot change the price of shoes to be sold. A sale cannot be
processed unless the transaction has been approved–it is likely that the cash register
will not process a sale until the bank has approved the debit or credit card transaction.
You will only receive a commission if you make a sale and the sale is recorded.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b)
1. June 30 Advertising Expense .......................................... 600
Supplies .................................................... 600
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Cash
June Bal. 18,674 Accumulated Depreciation-Equipment
June Bal. 14,000
Accounts Receivable 30 Adj. 7,035
June Bal. 10,490 June Bal. 21,035
30 Adj. 1,600
June Bal. 12,090 Vehicles
June Bal. 52,500
Merchandise Inventory
June Bal. 16,250 Accumulated Depreciation-Vehicles
June 30 Adj. 5,250
Supplies
June Bal. 4,375 Accounts Payable
June 30 Adj. 600 June Bal. 6,140
June Bal. 3,775 30 Adj. 1,025
June Bal. 7,165
Prepaid Insurance
June Bal. 27,360 Unearned Revenue
June 30 Adj. 1,280 June Bal. 500
30 Adj. 6,000
June Bal. 20,080 Salaries Payable
June 30 Adj. 208
Land
June Bal. 100,000 Interest Payable
June 30 Adj. 55
Buildings
June Bal. 165,000
Accumulated Depreciation-Buildings
June Bal. 137,500
30 Adj. 5,500
June Bal. 143,000
Equipment
June Bal. 44,520
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Salaries Expense
June Bal. 290,782
30 Adj. 208
June Bal. 290,990
Depreciation Expense
June 30 Adj. 5,500
30 Adj. 7,035
30 Adj. 5,250
June Bal. 17,785
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d)
KOEBEL’S FAMILY BAKERY LTD.
Adjusted Trial Balance
June 30, 2014
Debit Credit
Cash $ 18,674
Accounts receivable 12,090
Merchandise inventory 16,250
Supplies 3,775
Prepaid insurance 20,080
Land 100,000
Buildings 165,000
Accumulated depreciation—buildings $143,000
Equipment 44,520
Accumulated depreciation—equipment 21,035
Vehicles 52,500
Accumulated depreciation—vehicles 5,250
Accounts payable 7,165
Unearned revenue 500
Salaries payable 208
Interest payable 55
Bank loan payable 22,500
Mortgage payable 53,200
Common shares 300
Retained earnings 66,788
Dividends 30,000
Rent revenue 6,000
Sales 645,358
Sales returns and allowances 5,000
Cost of goods sold 102,386
Salaries expense 290,990
Depreciation expense 17,785
Freight out 18,000
Utilities expense 13,125
Advertising expense 9,600
Insurance expense 7,280
Property tax expense 5,950
Interest expense 5,354
Income tax expense 33,000 0000000
Total $971,359 $971,359
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(a)
Date Account Titles Debit Credit
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
Cash
July 1 Bal. 5,230 July 3 3,600
2 50,000 3 8,000
10 1,200 6 3,800
16 12,000 7 4,000
27 15,000 14 400
18 11,000
July 31 Bal. 52,630
Accounts Receivable
July 1 Bal. 1,200 July 10 1,200
20 28,000 27 15,000
July 31 Bal. 13,000
Prepaid Insurance
July 3 3,600 July 31 Adj. 300
July 31 Bal. 3,300
Supplies
July 1 Bal. 690 July 31 Adj. 1,250
4 3,800
July 31 Bal. 3,240
Prepaid Rent
July 3 8,000 July 31 Adj. 4,000
July 31 Bal. 4,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
Equipment
July 7 24,000
July 31 Bal. 24,000
Accumulated Depreciation—Equipment
July 31 Adj. 500
July 31 Bal 500
Accounts Payable
July 14 400 July 1 Bal. 400
20 2,200
31 Adj. 800
July 31 Bal. 3,000
Interest Payable
July 31 Adj. 100
July 31 Bal. 100
Salaries Payable
July 31 Adj. 11,000
July 31 Bal. 11,000
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
Unearned Revenue
July 13 1,120 July 1 Bal. 1,120
23 10,000 16 12,000
July 31 Bal. 2,000
Common Shares
July 1 Bal. 3,600
2 50,000
July 31 Bal. 53,600
Retained Earnings
July 1 Bal. 2,000
July 31 Bal. 2,000
July 31 CE3 6,770
July 31 Bal. 8,770
Fees Earned
July 13 1,120
20 28,000
23 10,000
July 31 Bal. 39,120
July 31 CE1 39,120
July 31 Bal. 0
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
Salaries Expense
July 18 11,000
July 31 Adj. 11,000
July 31 Bal. 22,000
July 31 CE2 22,000
July 31 Bal. 0
Rent Expense
July 31 Adj. 4,000
July 31 Bal. 4,000
July 31 CE2 4,000
July 31 Bal. 0
Supplies Expense
July 31 Adj. 1,250
July 31 Bal. 1,250
July 31 CE2 1,250
July 31 Bal. 0
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(b) (Continued)
Utilities Expense
July 31 Adj. 800
July 31 Bal. 800
July 31 CE2 800
July 31 Bal. 0
Depreciation Expense
July 31 Adj. 500
July 31 Bal. 500
July 31 CE2 500
July 31 Bal. 0
Insurance Expense
July 31 Adj. 300
July 31 Bal. 300
July 31 CE2 300
July 31 Bal. 0
Interest Expense
July 31 Adj. 100
July 31 Bal. 100
July 31 CE2 100
July 31 Bal. 0
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(c)
RED RIVER COMPUTER CONSULTANTS LTD.
Adjusted Trial Balance
July 31, 2015
Debit Credit
Cash ............................................................... $ 52,630
Accounts receivable ....................................... 13,000
Prepaid insurance .......................................... 3,300
Supplies ......................................................... 3,240
Prepaid rent .................................................... 4,000
Equipment ...................................................... 24,000
Accumulated depreciation—equipment ........... $ 500
Accounts payable ........................................... 3,000
Interest payable .............................................. 100
Salaries payable ............................................. 11,000
Income tax payable ........................................ 1,200
Unearned revenue .......................................... 2,000
Bank loan payable ........................................... 20,000
Common shares ............................................. 53,600
Retained earnings .......................................... 2,000
Fees earned ................................................... 39,120
Salaries expense ............................................ 22,000
Rent expense ................................................. 4,000
Professional fees expense ............................. 2,200
Supplies expense ........................................... 1,250
Utilities expense ............................................. 800
Depreciation expense ..................................... 500
Insurance expense ......................................... 300
Interest expense ............................................. 100
Income tax expense ....................................... 1,200
$132,520 $132,520
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d)
(1)
RED RIVER COMPUTER CONSULTANTS LTD.
Income Statement
Month Ended July 31, 2015
Revenues
Service revenue.............................................. $39,120
Expenses
Salaries expense ............................................ $22,000
Rent expense ................................................. 4,000
Professional fees expense.............................. 2,200
Supplies expense ........................................... 1,250
Utilities expense ............................................. 800
Depreciation expense ..................................... 500
Insurance expense ......................................... 300
Interest expense ............................................. 100
Total expenses ...................................... 31,150
Profit before income tax........................................... 7,970
Income tax expense ................................................ 1,200
Profit ....................................................................... $ 6,770
(2)
RED RIVER COMPUTER CONSULTANTS LTD.
Statement of Changes in Equity
Month Ended July 31, 2015
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(d) (Continued)
(3)
RED RIVER COMPUTER CONSULTANTS LTD.
Statement of Financial Position
July 31, 2015
Assets
Current assets
Cash .......................................................... $52,630
Accounts receivable .................................. 13,000
Prepaid rent ............................................... 4,000
Prepaid insurance...................................... 3,300
Supplies ..................................................... 3,240
Total current assets .......................... 76,170
Property, plant, and equipment
Equipment ................................................. $24,000
Less: Accumulated depreciation ................ 500 23,500
Total assets ........................................................ $99,670
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
(e)
$76,170
= 4.4:1
$17,300
Red River has exceeded the benchmark of 2.5:1 for its current ratio.
Kimmel, Weygandt, Kieso, Trenholm, Irvine Financial Accounting, Sixth Canadian Edition
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