Accounting 04

CHAPTER 4
Accrual Accounting Concepts

ANSWERS TO QUESTIONS
1.
(a) Under the time period assumption, an accountant is required to determine the effect of each
accounting transaction on specific accounting periods.
(b) An accounting time period that is one year in length is referred to as a fiscal year.
2.
The two generally accepted accounting principles that pertain to adjusting the accounts are:
The revenue recognition principle, which states that revenue should be recognized in the time
period in which it is earned.
The matching principle which states that efforts (expenses) be matched with accomplishments
(revenues) that they helped generate.
3.
The law firm should recognize the revenue in April. The revenue recognition principle states that
revenue should be recognized in the accounting period in which it is earned.
4.
Expenses of $4,500 should be deducted from the revenues in April. Under the matching principle
efforts (expenses) should be matched with accomplishments (revenues).
5.
No, adjusting entries are required by the revenue recognition and matching principles.
6.
The financial information in a trial balance may not be up-to-date because:

(1) Some events are not journalized daily because it is not useful or efficient to do so.
(2) The expiration of some costs occurs with the passage of time rather than as a result of
recurring daily transactions.
(3) Some items may be unrecorded because the transaction data are not known.
7.
The two categories of adjusting entries are deferrals and accruals. Deferrals consist of revenues
and expenses paid before they are earned or incurred. Accruals consist of revenues and expenses
earned or incurred prior to payment.
8.
In a prepaid expense adjusting entry, expenses are debited and assets are credited.
9.
No. Depreciation is the process of allocating the cost of an asset to expense over its useful life.
Depreciation results in the presentation of the book value of the asset, not its market value.
10.
Depreciation expense is an expense account whose normal balance is a debit. This account
shows the cost that has expired during the current accounting period. Accumulated depreciation
is a contra asset account whose normal balance is a credit. The balance in this account is the
depreciation that has been recognized from the date of acquisition to the balance sheet date.
11.
Equipment .................................................................................................
Less: Accumulated Depreciation..............................................................
Copyright 2010 John Wiley & Sons, Inc.
Kimmel, Financial Accounting, 5/e, Solutions Manual
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4-1
Questions Chapter 4 (Continued)

12.
In an unearned revenue adjusting entry, liabilities are debited and revenues are credited.
13.
The sale of a three-year maintenance contract on December 29, 2009 will have no effect on the
2009 income statement but receipt of $100,000 on December 29, 2009 will increase an asset,
cash, and a liability, unearned revenue. As Computer Technologies provides service to its
customer during 2010, 2011, and 2012, the liability will decrease and revenue will be recognized.
Accrual accounting rules require that revenue be recognized as it is earned rather than when
cash is received.
14.
This promotion plan sounds like a bad idea for two reasons.
(1) GAAP requires that the sale of a gift card be recorded as unearned revenue (a liability)
rather than sales revenue. Revenue recognition is delayed until the gift card is used or
expires. Mickeys plan will not help the company meet its target revenue unless customers
use the cards by year-end.
(2) Selling a $50 card for $40 will probably not help the company meet its target net income.
Although this promotion may result in additional sales revenue as the cards are used, the
income resulting from the cards will be much less than usual since they eliminate $10 of
normal gross profit.
15.
Asset and revenue. An asset is debited and revenue is credited.
16.
Expense and liability. An expense is debited and a liability is credited.
17.
Net income was understated $300 because prior to adjustment revenues are understated by
$800 and expenses are understated by $500. The difference in this case is $300 ($800 $500).
18.
The entry is:

Jan. 9 Salaries Payable ................................................................................
Salaries Expense ...............................................................................
Cash..........................................................................................
1,100
4,900
6,000
19.
(a) Accrued revenues.

(b) Unearned revenues.
(c) Accrued expenses.
(d) Accrued expenses or prepaid expenses.

(e) Prepaid expenses.
(f) Accrued revenues or unearned revenues.
20.
(a) Salaries Payable.

(b) Accumulated Depreciation.
(c) Interest Expense.
(d) Supplies Expense.

(e) Service Revenue.
(f) Service Revenue.
21.
Disagree. An adjusting entry affects only one balance sheet account and one income statement
account.
22.
Tootsie Roll reports Accounts Receivable. This suggests that it records revenue when it has
delivered goods, even though it hasnt received payment. If it used a cash basis it wouldnt record
revenue until cash was received, and it would therefore not establish receivables.
23.
Financial statements can be prepared from an adjusted trial balance because the balances of all
accounts have been adjusted to show the effects of all financial events that have occurred during
the accounting period.
4-2
Questions Chapter 4 (Continued)

24.
(a) Information presented on an accrual basis is useful because it reveals important information
about the relationship between efforts and results. This information is useful in predicting
future results. Trends in revenues and expenses are thus more meaningful.
(b) Information presented on a cash basis is useful for predicting the future availability of cash.
Cash basis financial statements provide useful information about a companys sources and
uses of cash.
25.
The amount shown in the adjusted trial balance column for an account equals the account
balance in the ledger after adjusting entries have been journalized and posted.
26.
(1)
(2)
(3)
(4)
27.
Financial information is used by managers to direct and evaluate a companys performance. The
sooner such information is made available; the sooner changes can be made to get a company
back on track. A virtual close speeds up the reporting process and allows managers to react
much faster to changing economic conditions.
28.
Income Summary is a temporary account that is used in the closing process. The account is
debited for expenses and credited for revenues. The difference, either net income or net loss, is
then closed to Retained Earnings.
29.
The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove the
equality of the permanent account balances that are carried forward into the next accounting period.
30.
The accounts that will not appear in the post-closing trial balance are: Depreciation Expense;
Dividends; and Service Revenue.
31.
The steps that involve journalizing are (1) journalize the transactions, (2) journalize the adjusting
entries, and (3) journalize the closing entries.
32.
The three trial balances are the (1) trial balance, (2) adjusted trial balance, and (3) post-closing
trial balance.
33.
Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out
bumps in net income. Such action is undertaken to help a company meet target financial numbers.
(Dr) Individual revenue accounts and (Cr) Income Summary.

(Dr) Income Summary and (Cr) Individual expense accounts.
(Dr) Income Summary and (Cr) Retained Earnings (for net income).
(Dr) Retained Earnings and (Cr) Dividends.
Quality of earnings indicates the level of full and transparent information that a company provides to
users of financial statements.
34.
Examples of ways a company can manage earnings include the following.

Use of one-time items to prop up earnings numbers. A company may decide to sell property
that has appreciated in value in order to record a gain on the sale. Such a gain will increase the
current years net income but future income will probably not include a similar increase.
Inflating revenue in the short-run to the detriment of the long-run. A company may implement
changes in its promotion activities near the end of an accounting period to boost year-end
revenues. Offering a special rebate or a twoforone package is likely to increase sales for the
time the promotion runs but usually results in lower sales in subsequent periods. Savvy
customers may even postpone purchases until special deals are available.
4-3
Recording improper adjusting entries. Some adjusting entries require estimates and judgment to
properly recognize revenue and match expenses. By recognizing revenue sooner and delaying
the recognition of expenses, earnings can be overstated in early periods and understated in
subsequent periods. This type of management is most prevalent with multi-year contracts and
prepaid expenses.
*35. The worksheet is a working paper designed to make it easier to prepare adjusting entries and
financial statements.
*36. The columns of the worksheet from left to right are two columns each for the trial balance,
adjustments, adjusted trial balance, income statement, and balance sheet.
4-4
SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-1
(a)
(b)
(c)
(d)
(e)
(f)
Cash
$100
0
0
+800
2,500
0
Net Income
$0
40
+1,300
0
0
600
BRIEF EXERCISE 4-2

(a) Prepaid Insuranceto recognize insurance expired during the period.
(b) Depreciation Expenseto account for the allocation of the cost of an
asset to expense during its useful life.
(c) Unearned Service Revenueto account for unearned revenue that has
been earned during the period.
(d) Interest Payableto recognize interest accrued but unpaid on notes
payable.
BRIEF EXERCISE 4-3
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Prepaid Expenses
Assets Overstated
Expenses Understated
(b)
Accrued Revenues
Assets Understated
Revenues Understated
(c)
Accrued Expenses
Liabilities Understated
(d)
Unearned Revenues
Liabilities Overstated
4-5
BRIEF EXERCISE 4-4

Dec. 31
Advertising Supplies Expense........................

Advertising Supplies................................
Advertising Supplies
8,800 12/31
7,400
12/31 Bal. 1,400
7,400
7,400
Advertising Supplies Expense

12/31
7,400
BRIEF EXERCISE 4-5

Dec. 31
Depreciation Expense......................................
Accumulated Depreciation
Equipment .............................................
2,200
2,200
Equipment
12/31
2,200
Depreciation Expense
12/31
2,200
Balance Sheet:
Equipment...................................................................
Less: Accumulated Depreciation.............................
$22,000
2,200
$19,800
BRIEF EXERCISE 4-6

July 1
Dec. 31
Prepaid Insurance ............................................

Cash...........................................................
10,800
Insurance Expense ($10,800 X 6/24)...............

Prepaid Insurance ....................................
2,700
Prepaid Insurance
7/1
10,800 12/31
12/31 Bal. 8,100
4-6
2,700
12/31
10,800
2,700
Insurance Expense
2,700
BRIEF EXERCISE 4-7

July 1
Dec. 31
Cash ..................................................................
Unearned Insurance Revenue.................
10,800
Unearned Insurance Revenue ........................

Insurance Revenue ($10,800 X 6/24) ......
2,700
Unearned Insurance Revenue

12/31
2,700 7/1
10,800
12/31 Bal. 8,100
10,800
2,700
Insurance Revenue
12/31
2,700
BRIEF EXERCISE 4-8

(a) Dec. 31
(b)
(c)
31
31
Interest Expense ......................................

Interest Payable................................
300
Accounts Receivable ...............................

Service Revenue...............................
1,400
Salaries Expense......................................
Salaries Payable ...............................
780
300
1,400
780
BRIEF EXERCISE 4-9

(1)
Type of Adjustment
Account
(2)
Related Account
(a)
Accounts Receivable
Accrued Revenues
Service Revenue
(b)
Prepaid Insurance
Prepaid Expenses
Insurance Expense
(c)
Equipment
Not required
(d)
Accum. Depreciation
Equipment
Prepaid Expenses
(e)
Notes Payable
Not required
(f)
Interest Payable
Accrued Expenses
Interest Expense
(g)
Unearned Service
Revenue
Unearned Revenues
Service Revenue
4-7
BRIEF EXERCISE 4-10

ROSE CORPORATION
Income Statement
For the Year Ended December 31, 2010
Revenues
Service revenue.....................................................
Expenses
Salaries expense ...................................................
Rent expense .........................................................
Insurance expense ................................................
Supplies expense ..................................................
Depreciation expense ...........................................
Total expenses...............................................
Net income.....................................................................
$32,000
$13,000
3,500
1,800
1,200
1,000
20,500
$11,500
BRIEF EXERCISE 4-11

ROSE CORPORATION
Retained Earnings Statement
For the Year Ended December 31, 2010
Retained earnings, January 1 ..........................................................
Add: Net income .............................................................................
Less: Dividends ...............................................................................
Retained earnings, December 31 ....................................................
$17,200
10,000
27,200
6,000
$21,200
BRIEF EXERCISE 4-12

Account
(a)
(b)
(c)
(d)
(e)
(f)
(g)
4-8
Retained Earnings
Dividends
Service Revenue
Supplies
Accounts Payable
Balance Sheet
Income Statement
Retained Earnings Statement and Balance Sheet
Income Statement
Balance Sheet
Balance Sheet
BRIEF EXERCISE 4-13

The accounts that will appear in the post-closing trial balance are:
Retained Earnings
Supplies
Accounts Payable
BRIEF EXERCISE 4-14
(a)
July 31
Closing Entries
Green Fees Revenue................................
Income Summary ..............................
(To close revenue account)
16,000
16,000
Income Summary .....................................

Salaries Expense...............................
Maintenance Tax Expense ...............
Income Tax Expense.........................
(To close expense accounts)
11,900
Income Summary .....................................

Retained Earnings.............................
(To close net income to
retained earnings)
4,100
Retained Earnings....................................
Dividends ...........................................
(To close dividends to retained
earnings)
1,000
8,400
2,500
1,000
4,100
1,000
(b)
Retained Earnings
1,000
20,000
4,100
7/31 Bal. 23,100
4-9
BRIEF EXERCISE 4-15

The proper sequencing of the required steps in the accounting cycle is as
follows:
1.
2.
3.
4.
5.
6.
7.
8.
9.
4-10
(c)
(e)
(i)
(d)
(h)
(b)
(g)
(f)
(a)
Analyze business transactions.

Journalize the transactions.
Post to ledger accounts.
Prepare a trial balance.
Journalize and post adjusting entries.
Prepare an adjusted trial balance.
Prepare financial statements.
Journalize and post closing entries.
Prepare a post-closing trial balance.
SOLUTIONS TO DO IT! REVIEW EXERCISES

DO IT! 4-1
1.
2.
3.
4.
Insurance Expense ........................................................

Prepaid Insurance ...................................................
(To record insurance expired)
300
Office Supplies Expense ...............................................

Office Supplies ........................................................
(To record supplies used)
1,600
Depreciation Expense ...................................................

Accumulated DepreciationOff. Equip. ...............
(To record monthly depreciation)
500
Unearned Revenue ........................................................

Service Revenue......................................................
(To record revenue for services provided)
4,000
300
1,600
500
4,000
DO IT! 4-2
1.
2.
3.
Salaries Expense ...........................................................

Salaries Payable ......................................................
(To record accrued salaries)
1,100
Interest Expense ............................................................

Interest Payable .......................................................
(To record accrued interest)
200
Accounts Receivable ....................................................

Service Revenue......................................................
(To record revenue for service provided)
1,600
1,100
200
1,600
DO IT! 4-3
Income statement: Service Revenue, Utilities Expense
Balance sheet: Accounts Receivable, Accumulated Depreciation, Notes
Payable, Common Stock.
4-11
DO IT! 4-4
Dec. 31 Income Summary ...................................................... 29,000
Retained Earnings .............................................
(To close net income to retained earnings)
29,000
Dec. 31 Retained Earnings .................................................... 22,000

Dividends............................................................
(To close dividends to retained earnings)
22,000
4-12
SOLUTIONS TO EXERCISES
EXERCISE 4-1
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
8.
1.
7.
3.
6.
4.
2.
5.
Going concern assumption.

Economic entity assumption.
Full disclosure principle.
Monetary unit assumption.
Materiality.
Time period assumption.
Matching principle.
Cost principle.
EXERCISE 4-2
(a) Since the sales effort is not complete until the flight actually occurs,
revenue should not be recognized until December. Southwest Airlines
should recognize the revenue in December when the customer has
been provided with the flight.
(b) If Ultimate Electronics is reasonably certain of collection, revenue should
be recognized at the time of sale. If the company has concerns over the
collectibility of the accounts receivable, revenue should not be recognized
until the time that collection is reasonably assured.
(c) Revenue should be recognized on a per game basis over the season
from April through October.
(d) Interest revenue should be accrued and recognized by RBC 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
collectibility.
EXERCISE 4-3
(a)
(b)
(c)
(d)
(e)
(f)
Revenue recognition principle.

Time period assumption.
No violation.
Going concern assumption.
Cost principle or conservatism.
Economic entity assumption.
4-13
EXERCISE 4-4
$ 33,640
+ 3,400
2,800
+ 1,300
1,160
2,000
+ 2,400
1,400
+ 1,600
$ 34,980
4-14
Cash basis earnings.

Accounts receivable arise from sales that have been made,
thus revenue must be recognized for balance outstanding at
the end of the current year.
Accounts receivable collected in current year, for sales made
in previous year must be deducted from earnings.
Supplies on hand at year end should be set up as an asset
rather than expensed, this increases earnings.
Supplies on hand at the end of the previous year should be
expensed this year, this decreases earnings.
Wages owing at the end of the current year should be
accrued, thus reducing earnings.
Wages owed at the end of the previous year should not be
deducted from the current years earnings, thus increasing
earnings.
Other unpaid amounts owed at the end of the current year
should be accrued, thus reducing earnings.
Other unpaid amounts owed at the end of the previous year
should not be deducted from the current years earnings, thus
increasing earnings.
Accrual basis earnings.
EXERCISE 4-5
(a)
BOULDER COMPANY
Income Statement
For the Six Months Ended April 30, 2010
Revenues
Repair services ($32,150 + $350).....................
Expenses
Income tax expense..........................................
Wages expense ($2,600 + $420) ......................
Rent expense ($1,225 $175) ..........................
Utilities expense ...............................................
Depreciation expense [($9,200 5) X 6/12].....
Advertising expense.........................................
Total expenses ...........................................
Net income ................................................................
(b)
$32,500
$10,000
3,020
1,050
970
920
375
16,335
$16,165
BOULDER COMPANY
Balance Sheet
April 30, 2010
Assets
Current Assets
Cash................................................................
Accounts receivable ......................................
Prepaid rent ....................................................
Total current assets................................
Property, plant, and equipment
Equipment.......................................................
Less: Accumulated depreciation.................
Total assets ...........................................................
$27,780
350
175
9,200
920
Liabilities and Stockholders Equity

Current Liabilities
Wages payable..............................................
Stockholders equity
Common stock..............................................
$20,000
Retained earnings.........................................
16,165
Total stockholders equity ..............
Total liabilities and stockholders
equity ...................................................
$28,305
8,280
$36,585
420
36,165
$36,585
4-15
EXERCISE 4-6
Item
(1)
Type of Adjustment
(2)
Accounts Before Adjustment
(a)
Accrued Revenues
Assets Understated
(b)
Prepaid Expenses
Assets Overstated
(c)
Accrued Expenses
(d)
Unearned Revenues
Liabilities Overstated
(e)
Accrued Expenses
(f)
Prepaid Expenses
Assets Overstated
4-16
EXERCISE 4-7
1.
2.
3.
Jan. 31
31
31
31
4.
5.
31
31
Accounts Receivable ....................................

Service Revenue ....................................
680
Utilities Expense............................................
Utilities Payable .....................................
520
Depreciation Expense...................................
Dental Equipment ..............................
400
Interest Expense............................................
Interest Payable .....................................
500
Insurance Expense ($24,000 12) ...............

Prepaid Insurance .................................
2,000
Supplies Expense ($1,750 $550) ...............

Supplies..................................................
1,200
680
520
400
500
2,000
1,200
4-17
EXERCISE 4-8
1.
2.
3.
4.
5.
6.
7.
Oct. 31
31
31
31
31
31
31
Advertising Supplies Expense .....................

Advertising Supplies
($2,500 $500)....................................
2,000
Insurance Expense ........................................

Prepaid Insurance ..................................
100
Depreciation Expense ...................................

Office Equipment ...............................
50
Unearned Service Revenue ..........................

Service Revenue ....................................
800
Accounts Receivable.....................................
Service Revenue ....................................
200
Interest Expense ............................................

Interest Payable......................................
70
Salaries Expense ...........................................

Salaries Payable.....................................
1,400
2,000
100
50
800
200
70
1,400
EXERCISE 4-9
MARX CO.
Income Statement
For the Month Ended July 31, 2010
Revenues
Service revenue ($5,500 + $700) .............................
Expenses
Wages expense ($2,300 + $300)..............................
Utilities expense .......................................................
Supplies expense ($900 $200)..............................
Insurance expense ...................................................
Depreciation expense ..............................................
Total expenses..................................................
Net income........................................................................
4-18
$6,200
$2,600
800
700
350
150
4,600
$1,600
EXERCISE 4-10
Computation
Answer
(a) Supplies balance = $1,000
Supplies expense
Add: Supplies (1/31)
Less: Supplies purchased
Supplies (1/1)
(b) Total premium = $6,240
Total premium = Monthly premium X

12; $520 X 12 = $6,240
Purchase date = May 1, 2009
(c) Salaries payable = $1,900
$ 950)
700)
(650)
$1,000)
Purchase date: On Jan. 31, there are

3 months coverage remaining ($520 X 3).
Thus, the purchase date was 9 months
earlier on May 1, 2009.
Cash paid
Salaries payable (1/31/10)
Less: Salaries expense
Salaries payable (12/31/09)
(d) Service revenue = $950
Service revenue
Unearned revenue (1/31/10)
Cash received in Jan.
Unearned revenue (12/31/09)
$2,500
1,200
3,700
1,800
$1,900
$2,000
750
2,750
1,800
$ 950
4-19
EXERCISE 4-11
Jan. 31
31
31
Service Revenue ...................................................

Income Summary ..........................................
2,000
Income Summary ..................................................

Salaries Expense...........................................
Supplies Expense..........................................
Insurance Expense........................................
3,270
Retained Earnings ................................................

Income Summary ..........................................
1,270
2,000
1,800
950
520
1,270
EXERCISE 4-12
(a) July 10
14
15
20
(b) July 31
31
31
31
4-20
Supplies..........................................................
Cash ........................................................
200
Cash ................................................................
Service Revenue ....................................
4,100

Cash ........................................................
1,200
Cash ................................................................
Unearned Service Revenue...................
600
Supplies Expense ..........................................

Supplies ..................................................
750
Service Revenue ....................................
500

1,200
Unearned Service Revenue ..........................

Service Revenue ....................................
900
200
4,100
1,200
600
750
500
1,200
900
EXERCISE 4-13
Aug. 31
31
31
31
31
31
Accounts Receivable ...........................................

Service Revenue ...........................................
600
Office Supplies Expense......................................

Office Supplies..............................................
2,000
Insurance Expense...............................................
Prepaid Insurance.........................................
1,500
Depreciation Expense ..........................................

Accumulated DepreciationOffice
Equipment .................................................
1,200
Salaries Expense ..................................................

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

Rent Revenue ................................................
900
600
2,000
1,500
1,200
1,100
900
EXERCISE 4-14
IVY COMPANY
Income Statement
For the Year Ended August 31, 2010
Revenues
Service revenue .....................................................
Rent revenue ..........................................................
Total revenues................................................
Expenses
Salaries expense....................................................
Rent expense .........................................................
Office supplies expense........................................
Insurance expense ................................................
Depreciation expense............................................
Total expenses ...............................................
Net income .....................................................................
$34,600
14,100
$48,700
$18,100
12,000
2,000
1,500
1,200
34,800
$13,900
4-21
EXERCISE 4-14 (Continued)

IVY COMPANY
For the Year Ended August 31, 2010
Retained earnings, September 1, 2009 ...........................................
Add: Net income .............................................................................
Less: Dividends ...............................................................................
Retained earnings, August 31, 2010 ...............................................
$ 5,600
13,900
19,500
2,800
$16,700
IVY COMPANY
Balance Sheet
August 31, 2010
Assets
Current Assets
Cash .........................................................................
Accounts receivable ...............................................
Office supplies ........................................................
Prepaid insurance ...................................................
Total current assets ........................................
Office equipment .....................................................
Less: Accum. depreciationoffice equipment .....
Total assets......................................................
$10,900
9,400
500
2,500
$23,300
$16,000
4,800
11,200
$34,500

Current Liabilities
Accounts payable ...................................................
Salaries payable ......................................................
Unearned rent revenue ...........................................
Total current liabilities ....................................
Stockholders equity
Common stock ........................................................
Retained earnings ...................................................
Total stockholders equity ..........................
Total liabilities and stockholders equity ......
4-22
$ 5,800
1,100
900
$ 7,800
10,000
16,700
26,700
$34,500
EXERCISE 4-15
Aug. 31
31
31
31
Service Revenue..............................................
Rent Revenue...................................................
Income Summary.....................................
34,600
14,100
Income Summary.............................................
Salaries Expense .....................................
Rent Expense ...........................................
Office Supplies Expense .........................
Insurance Expense ..................................
Depreciation Expense .............................
34,800
Income Summary.............................................
Retained Earnings ...................................
13,900
Retained Earnings ...........................................

Dividends..................................................
2,800
48,700
18,100
12,000
2,000
1,500
1,200
13,900
2,800
4-23
SOLUTIONS TO PROBLEMS
PROBLEM 4-1A
(a)
1.
2.
3.
4.
5.
(b)
Cash ..................................................................
19,000
Unearned Rent Revenue .................................

Rent Revenue ...........................................
38,000
Cash ..................................................................
Unearned Rent Revenue..........................
89,000
Unearned Rent Revenue ($89,000 $30,000) ...

Rent Revenue ...........................................
59,000
Accounts Receivable.......................................
Dues Revenue...........................................
162,000
Cash .................................................................
Accounts Receivable ($162,000 $15,000)...
147,000
Collection of 2006 dues

Collection of rent
Collection of 2007 dues
Accounts Receivable
2006 Bal. 19,000
4.
162,000 1.
19,000
5.
147,000
2007 Bal. 15,000
4-24
38,000
89,000
59,000
162,000
147,000
Cash received with respect to rent and dues

1.
3.
5.
2.
3.
19,000
Unearned Rent Revenue

2006 Bal. 38,000
89,000
38,000 3.
59,000
2007 Bal. 30,000
$ 19,000
89,000
147,000
$255,000
Dues Revenue
4.
162,000
2007 Bal. 162,000
Rent Revenue
2.
38,000
3.
59,000
2007 Bal. 97,000
Cash
1.
19,000
3.
89,000
5.
147,000
2007 Bal. 255,000
PROBLEM 4-2A
(a)
1.
Date
2007
April 30
2.
3.
4.
5.
6.
7.
30
30
30
30
30
30
Account Titles
Debit
Supplies Expense.....................................
Supplies ($1,000 $320) ..................
680
Phone Expense.........................................
Phone Payable ..................................
120
Rent Expense............................................
Prepaid Rent......................................
($2,700 3 months)
900
Unearned Service Revenue .....................

Service Revenue ...............................
2,200
Salaries Expense......................................
1,460
Depreciation Expense ..............................

Office Equipment ..........................
300

Service Revenue ...............................
2,800
Credit
680
120
900
2,200
1,460
300
2,800
(b)
4/30 Bal.
Cash
9,300
Prepaid Rent
4/30 Bal. 2,700 4/30
4/30 Bal. 1,800
Accounts Receivable
4/30 Bal. 5,000
4/30
2,800
4/30 Bal. 7,800
4/30 Bal.
4/30 Bal.
Supplies
1,000 4/30
320
900
680
4-25
PROBLEM 4-2A (Continued)

Office Equipment
4/30 Bal. 20,000
Office Equipment
4/30
300
4/30 Bal.
300
Accounts Payable
4/30 Bal.
5,100
Phone Payable
4/30
4/30 Bal.
120
120
Salaries Payable
4/30
4/30 Bal.
1,460
1,460
Unearned Service Revenue

4/30
2,200 4/30 Bal. 3,100
4/30 Bal.
900
Salaries Expense
4/30 Bal. 3,800
4/30
1,460
4/30 Bal. 5,260
Insurance Expense
4/30 Bal.
400
4/30
300
4/30 Bal.
300
Rent Expense
4/30
900
4/30 Bal.
900
Phone Expense
4/30
120
4/30 Bal.
120
Supplies Expense
4/30
680
4/30 Bal.
680
Common Stock
4/30 Bal. 25,000
Service Revenue
4/30 Bal. 9,000
4/30
2,200
4/30
2,800
4/30 Bal. 14,000
4-26

(c)
DO IT NOW CONSULTING
Adjusted Trial Balance
April 30, 2007
Cash .....................................................................
Accounts Receivable..........................................
Prepaid Rent........................................................
Supplies ...............................................................
Office Equipment ................................................
Equipment .......................................................
Accounts Payable ...............................................
Phone Payable ....................................................
Salaries Payable .................................................
Unearned Service Revenue................................
Common Stock....................................................
Service Revenue .................................................
Salaries Expense ................................................
Insurance Expense .............................................
Depreciation Expense ........................................
Rent Expense ......................................................
Phone Expense ...................................................
Supplies Expense ...............................................
Debit
$ 9,300
7,800
1,800
320
20,000
Credit
5,260
400
300
900
120
680
$46,880
300
5,100
120
1,460
900
25,000
14,000
$46,880
4-27
PROBLEM 4-3A
(a) 1. March 31
2.
31
3.
31
31
4.
31
5.
31
6.
31

Prepaid Insurance ............................
400
Supplies Expense ....................................

Supplies ............................................
($3,300 $1,900)
1,400
Depreciation ExpenseLodge ...............

($4,440 X 1/12)
Lodge ............................................
370
Depreciation ExpenseFurniture ..........

($3,600 X 1/12)
Furniture .......................................
300
Interest Expense ......................................

Interest Payable................................
[($50,000 X 9%) X 1/12]
375
Unearned Rent Revenue .........................

Rent Revenue ...................................
1,300

Salaries Payable...............................
960
400
1,400
370
300
375
1,300
960
(b)
3/31 Bal.
Cash
2,700
Prepaid Insurance
3/31 Bal. 2,400 3/31
3/31 Bal. 2,000
4-28
3/31 Bal.
3/31 Bal.
400
Supplies
3,300 3/31
1,900
1,400
Land
3/31 Bal. 25,000

Lodge
3/31 Bal. 85,000
Mortgage Payable
3/31 Bal. 50,000
Lodge
3/31
370
3/31 Bal.
370
Furniture
3/31 Bal. 22,400
Furniture
3/31
300
3/31 Bal.
300
Accounts Payable
3/31 Bal.
9,200

3/31
1,300 3/31 Bal. 2,800
3/31 Bal. 1,500
Salaries Payable
3/31
3/31 Bal.
Interest Payable
3/31
3/31 Bal.
960
960
375
375
Common Stock
3/31 Bal. 72,000
Rent Revenue
3/31 Bal. 11,000
3/31
1,300
3/31 Bal. 12,300
Salaries Expense
3/31 Bal. 3,000
3/31
960
3/31 Bal. 3,960
Utilities Expense
3/31 Bal.
800
Advertising Expense
3/31 Bal.
400
Interest Expense
3/31
375
3/31 Bal.
375
Insurance Expense
3/31
400
3/31 Bal.
400
4-29

Supplies Expense
3/31
1,400
3/31 Bal. 1,400
Depreciation ExpenseFurniture
3/31
300
3/31 Bal.
300
Depreciation LodgeLodge
3/31
370
3/31 Bal.
370
(c)
WELCOME INN
March 31, 2007
Cash...................................................................
Prepaid Insurance ............................................
Supplies ............................................................
Land...................................................................
Lodge.................................................................
Accumulated DepreciationLodge................
Furniture............................................................
Accumulated DepreciationFurniture...........
Accounts Payable ............................................
Unearned Rent Revenue..................................
Salaries Payable ...............................................
Interest Payable................................................
Mortgage Payable.............................................
Common Stock .................................................
Rent Revenue ...................................................
Salaries Expense..............................................
Utilities Expense...............................................
Advertising Expense........................................
Interest Expense...............................................
Insurance Expense...........................................
Supplies Expense.............................................
Depreciation ExpenseLodge .......................
Depreciation ExpenseFurniture ..................
4-30
Debit
$ 2,700
2,000
1,900
25,000
85,000
Credit
370
22,400
300
9,200
1,500
960
375
50,000
72,000
12,300
3,960
800
400
375
400
1,400
370
300
$147,005
$147,005

(d)
WELCOME INN
Income Statement
For the Month Ended March 31, 2007
Revenues
Rent revenue ...................................................
Expenses
Salaries expense .............................................
Supplies expense............................................
Utilities expense..............................................
Advertising expense .......................................
Insurance expense..........................................
Interest expense..............................................
Depreciation expenselodge........................
Depreciation expensefurniture...................
Total expenses ........................................
Net income ..............................................................
$12,300
$3,960
1,400
800
400
400
375
370
300
8,005
$ 4,295
WELCOME INN
For the Month Ended March 31, 2007
Retained earnings, March 1 ...................................
Add: Net income ...................................................
Retained earnings, March 31 .................................
0
4,295
$4,295
4-31

WELCOME INN
Balance Sheet
March 31, 2007
Assets
Current Assets
Cash .........................................
Supplies ...................................
Prepaid insurance ...................
Total current assets ........
Land..........................................
Lodge .......................................
Less: Accumulated deprec....
Furniture ..................................
Less: Accumulated deprec....
Total assets......................
$ 2,700
1,900
2,000
$
6,600
25,000
$85,000
370
22,400
300
84,630
22,100
131,730
$138,330

Current Liabilities
Accounts payable ..............................................
Unearned rent revenue ......................................
Salaries payable .................................................
Interest payable ..................................................
Total current liabilities ...............................
Long-term Liabilities
Mortgage payable...............................................
Total liabilities.............................................
Stockholders equity
Common stock ...................................................
Retained earnings ..............................................
Total stockholders equity .................
equity .......................................................
$ 9,200
1,500
960
375
$ 12,035
50,000
$ 62,035
72,000
4,295
76,295
$138,330
(e) The following accounts would be closed:

Rent Revenue, Salaries Expense, Utilities Expense, Advertising Expense,
Interest Expense, Insurance Expense, Supplies Expense, Depreciation
ExpenseLodge, Depreciation ExpenseFurniture.
4-32
PROBLEM 4-4A
(a) June 30
30
30
30
30
30
30
(b)
Dues Revenue ........................................
400

600

Supplies ..................................................
690

Accum. DepreciationEquipment .......
750

100
Unearned Rent Revenue ...............................

Rent Revenue .........................................
500

900
400
600
690
750
100
500
900
GREEN ACRES GOLF INC.

Income Statement
For the Quarter Ended June 30, 2007
Revenues
Dues revenue ..................................................
Rent revenue ...................................................
Total revenues .........................................
Expenses
Insurance expense..........................................
Depreciation expense .....................................
Total expenses ........................................
Net income ..............................................................
$15,000
1,200
$16,200
11,000
1,800
750
690
660
100
15,000
$ 1,200
4-33

Retained earnings, April 1, 2007 ................................................
Add: Net income .......................................................................
Less: Dividends..........................................................................
Retained earnings, June 30, 2007..............................................
0
1,200
1,200
450
$ 750

Balance Sheet
June 30, 2007
Assets
Current Assets
Cash................................................................
Accounts receivable......................................
Supplies..........................................................
Prepaid insurance .........................................
Total current assets...............................
Equipment ......................................................
Less: Accumulated depreciation
equipment ......................................................
Total assets ............................................
$ 7,890
1,900
1,410
1,800
$13,000
18,000
750

Current Liabilities
Notes payable ................................................
$ 7,500
Accounts payable..........................................
2,200
Salaries payable ............................................
900
Unearned rent revenue .................................
800
Interest payable .............................................
100
Total current liabilities...........................
Stockholders equity
Common stock...............................................
18,000
Retained earnings .........................................
750
Total stockholders equity ....................
equity ..................................................
4-34
17,250
$30,250
$11,500
18,750
$30,250

(c) The following accounts would be closed: Dues Revenue, Rent Revenue,
Salaries Expense, Insurance Expense, Utilities Expense, Depreciation
Expense, Supplies Expense, Interest Expense, Dividends.
(d) Interest of 8% per year equals a monthly rate of .67%; monthly interest
is $50 ($7,500 X .67%). Since total interest expense is $100, the note
has been outstanding two months.
4-35
PROBLEM 4-5A
1.
2.
3.
4.
4-36
Dec. 31
Dec. 31
Dec. 31
Dec. 31

[($11,400 3)
= $3,800
[($8,800 2 X 6/12) = 2,200
$6,000]
6,000
Unearned Subscription Revenue .................

Subscription Revenue ...........................
[Sept. 240 X $24 X 4/12 = $1,920
[Oct. 260 X $24 X 3/12 = 1,560
[Nov. 330 X $24 X 2/12 = 1,320
[Dec. 380 X $24 X 1/12 =
760
$5,560]
5,560

($16,000 X 9% X 5/12)
600

[4 X $480 X 4/5 = $1,536
[2 X $600 X 4/5 = 960
$2,496]
2,496
6,000
5,560
600
2,496
PROBLEM 4-6A
(a) 1. April 30
2.
3.
4.
5.
6.
7.
30
30
30
30
30
30
Tuition Revenue..........................................
Unearned Tuition Revenue ..................
70,000
Books and Supplies Expense....................

Books and Supplies ($9,800 $2,600)...
7,200
Insurance Expense ($12,000 12 X 3) ........

Prepaid Insurance.................................
3,000
Advertising Expense ..................................

Repairs Expense.........................................
Utilities Expense .........................................
Accounts Payable .................................
80
2,560
530
Wages Expense ($1,380 X 3)......................

Wages Payable......................................
4,140
Interest Expense ($15,000 X 8% X 3/12) .....

Interest Payable ....................................
300
Income Tax Expense ..................................

Income Tax Payable .............................
15,200
70,000
7,200
3,000
3,170
4,140
300
15,200
4-37

(b)
A-PLUS TEST PREP

Income Statement
For the Quarter Ended April 30, 2007
Revenues
Tuition revenues ($240,000 $70,000) .................
Expenses
Wages expense ($92,000 + $4,140) .......................
Income tax expense ...............................................
Books and supplies expense ................................
Advertising expense ($6,400 + $80)......................
Repairs expense ($1,700 + $2,560) .......................
Insurance expense .................................................
Depreciation expense ............................................
Utilities expense ($1,300 + $530)...........................
Interest expense .....................................................
Total expenses .......................................................
Net income ..............................................................
(c)
$170,000
$96,140
15,200
7,200
6,480
4,260
3,000
2,400
1,830
300
136,810
$ 33,190
The generally accepted accounting principles pertaining to the income

statement not recognized by Denise were the revenue recognition
principle and the matching principle.
The revenue recognition principle states that revenue is recognized
when it is earned. The cash payments of $70,000 for summer classes
have not been earned and, therefore, should not be reported as
income for the quarter ended April 30.
The matching principle dictates that efforts (expenses) be matched with
accomplishments (revenue) whenever it is reasonable and practicable
to do so. This means that the expenses should include amounts
incurred in April but not paid until May, and any other costs related
to the operations of the business during the period FebruaryApril.
The difference in reported expenses was $33,010 ($136,810 $103,800).
The overstatement of revenues ($70,000) plus the understatement
of expenses ($33,010) equals the difference in reported income of
$103,010 ($136,200 $33,190).
4-38
PROBLEM 4-7A
(a), (c) & (e)

8/1 Bal.
8/5
8/12
8/29
8/31 Bal.
Cash
6,040 8/10
1,200 8/20
2,800 8/22
780 8/25
1,920
3,120
2,500
380
2,900
Accounts Receivable
8/1 Bal.
2,910 8/5
1,200
8/27
3,130
8/31 Bal. 4,840
8/1 Bal.
8/17
8/31 Bal.
Supplies
1,030 8/31
860
960
930
Store Equipment
8/1 Bal. 10,000
8/15
2,000
8/31 Bal. 12,000
Store Equipment
8/1 Bal.
600
8/31
320
8/31 Bal.
920
8/20
8/31
8/10
Accounts Payable
2,500 8/1 Bal.
8/15
8/17
8/31 Bal.
2,300
2,000
860
2,660
Unearned
Service Revenue
800 8/1 Bal.
8/29
8/31 Bal.
1,260
780
1,240
Salaries Payable
1,420 8/1 Bal.
8/31
8/31 Bal.
1,420
1,540
1,540
Common Stock
8/1 Bal. 10,000
8/31 Bal. 10,000
Retained Earnings
8/1 Bal.
8/31 Bal.
4,400
4,400
4-39

Service Revenue
8/12
8/27
8/31
8/31 Bal.
2,800
3,130
800
6,730
8/31
320
8/31 Bal.
320
Salaries Expense
8/10
1,700
8/25
2,900
8/31
1,540
8/31 Bal. 6,140
Rent Expense
8/22
380
8/31 Bal.
380
Supplies Expense
8/31
930
8/31 Bal.
930
4-40

(b)
General Journal
Date
Aug. 5
10
12
15
17
20
22
25
27
29
Account Titles
Cash .................................................................
Accounts Receivable ..............................
Debit
1,200
Salaries Payable..............................................
Salaries Expense ............................................
Cash .........................................................
1,420
1,700
Cash .................................................................
Service Revenue .....................................
2,800
Store Equipment .............................................

Accounts Payable ...................................
2,000
Supplies ...........................................................
Accounts Payable ...................................
860
Accounts Payable ...........................................

Cash .........................................................
2,500
Rent Expense ..................................................

Cash .........................................................
380

Cash .........................................................
2,900
Accounts Receivable......................................
Service Revenue .....................................
3,130
Cash .................................................................
Unearned Service Revenue ....................
780
Credit
1,200
3,120
2,800
2,000
860
2,500
380
2,900
3,130
780
4-41

(d) & (f)
BOB AND NORM REPAIR SERVICES

Trial Balances
August 31, 2007
Before
Adjustment
Cash ............................................
Accounts Receivable .................
Supplies ......................................
Store Equipment ........................
Accumulated Depreciation ........
Accounts Payable ......................
Unearned Service Revenue .......
Salaries Payable .........................
Common Stock ...........................
Retained Earnings......................
Service Revenue ........................
Salaries Expense........................
Rent Expense .............................
Supplies Expense ......................
Depreciation Expense................
(e)
Aug. 31
31
31
31
4-42
Dr.
$ 1,920
4,840
1,890
12,000
Cr.
After
Adjustment
Dr.
$ 1,920
4,840
960
12,000
$
600
2,660
2,040
10,000
4,400
5,930
920
2,660
1,240
1,540
10,000
4,400
6,730
4,600
380
6,140
380
930
320
$25,630 $25,630 $27,490 $27,490
1.
Supplies Expense...........................................
Supplies ($1,890 $960).........................
930
2.
Salaries Payable .....................................
1,540
3.
Depreciation Expense ....................................
Accum. Depr.Store Equipment ..........
320
4.
Unearned Service Revenue ...........................
Service Revenue .....................................
800
Cr.
930
1,540
320
800

(g)

Income Statement
For the Month Ended August 31, 2007
Revenues
Service revenue...............................................
Expenses
Rent expense...................................................
Total expenses ........................................
Net loss....................................................................
($6,730)
$6,140
930
380
320
7,770)
($1,040)

For the Month Ended August 31, 2007
Retained earnings, August 1 .................................
Less: Net loss ........................................................
Retained earnings, August 31 ...............................
$4,400
(1,040)
$3,360
4-43

Balance Sheet
August 31, 2007
Assets
Current assets
Cash................................................................
Supplies..........................................................
Property, plant and equipment
Store equipment ............................................
Less: Accumulated depreciationstore
equipment ..................................................
Total assets ............................................
$ 1,920
4,840
960
$ 7,720
12,000
920
11,080
$18,800

Current liabilities
Accounts payable...............................................
Unearned service revenue.................................
Total current liabilities................................
Stockholders equity
Common stock....................................................
Total stockholders equity .........................
Total liabilities and stockholders equity..
4-44
$ 2,660
1,240
1,540
$ 5,440
10,000
3,360
13,360
$18,800
PROBLEM 4-8A
(a)
General Journal
Date
Jan. 1
1
3
5
12
18
20
21
25
31
31
Account Titles
Cash..................................................................
Common Stock ........................................
Debit
18,000
Equipment........................................................
Cash ..........................................................
Accounts Payable....................................
12,000
Cleaning Supplies ...........................................

940
Prepaid Insurance ...........................................

Cash ..........................................................
7,200
Accounts Receivable ......................................

Service Revenue ......................................
4,100
Accounts Payable ...........................................

Cash ..........................................................
900
Salaries Expense.............................................
Cash ..........................................................
2,600
Cash..................................................................
Accounts Receivable...............................
2,300

Service Revenue ......................................
2,850
Gas & Oil Expense ..........................................

Cash ..........................................................
450
Dividends .........................................................
Cash ..........................................................
600
Credit
18,000
4,000
8,000
940
7,200
4,100
900
2,600
2,300
2,850
450
600
4-45

(b), (e) & (h)
Cash
1/1
18,000 1/1
1/21
2,300 1/5
1/18
1/20
1/31
1/31
1/31 Bal. 4,550
4,000
7,200
900
2,600
450
600
1/18
Accounts Payable
900 1/1
1/3
1/31 Bal.
8,000
940
8,040
Salaries Payable
1/31
1/31 Bal.
760
760
Accounts Receivable
2,300
1/12
4,100 1/21
1/25
2,850
1/31
2,340
1/31 Bal. 6,990
Cleaning Supplies
1/3
940 1/31
1/31 Bal.
210
Prepaid Insurance
1/5
7,200 1/31
1/31 Bal. 6,600
730
Retained Earnings
600 1/31
1/31 Bal.
600
Dividends
600 1/31
0
1/31
Equipment
1/31
320
1/31 Bal.
320
1/31
1/31 Bal.
1/31
1/31
Equipment
1/1
12,000
1/31 Bal. 12,000
4-46
Common Stock
1/1
18,000
1/31 Bal. 18,000
1/31
Income Summary
5,460 1/31
3,830
1/31 Bal.
Service Revenue
9,290 1/12
1/25
1/31
1/31 Bal.
3,830
3,230
600
9,290
0
4,100
2,850
2,340
0

Gas & Oil Expense
1/31
450 1/31
1/31 Bal.
0
450
Cleaning Supplies Expense

1/31
730 1/31
730
1/31 Bal.
0
1/31
320 1/31
1/31 Bal.
0
Insurance Expense
1/31
600 1/31
1/31 Bal.
0
Salaries Expense
1/20
2,600 1/31
1/31
760
1/31 Bal.
0
600
3,360
320
4-47

(c) & (f)
MAGIC CARPET CLEANERS INC.

Trial Balance
January 31, 2007
Before
Adjustment
Cash ....................................................
Accounts Receivable.........................
Cleaning Supplies..............................
Prepaid Insurance..............................
Equipment ..........................................
Equipment ......................................
Accounts Payable ..............................
Salaries Payable.................................
Common Stock...................................
Dividends............................................
Service Revenue ................................
Salaries Expense ...............................
Gas & Oil Expense .............................
Depreciation Expense .......................
Insurance Expense ............................
Cleaning Supplies Expense ..............
4-48
Debit
$ 4,550
4,650
940
7,200
12,000
Credit
After
Adjustment
Debit
$ 4,550
6,990
210
6,600
12,000
320
$ 8,040
760
18,000
$ 8,040
18,000
600
Credit
600
6,950
9,290
2,600
450
3,360
450
320
600
730
$32,990 $32,990 $36,410 $36,410

(d)
1.
2.
3.
4.
5.
(g)
General Journal
Date
Jan. 31
31
31
31
31
Account Titles
Debit
Accounts Receivable ...................................... 2,340
Service Revenue ......................................
Depreciation Expense .....................................
Accumulated DepreciationEquipment .
320
Insurance Expense ($7,200 X 1/12) ................

Prepaid Insurance....................................
600
Cleaning Supplies Expense ($940 $210) ....

Cleaning Supplies....................................
730
Salaries Expense .............................................

Salaries Payable ......................................
760
Credit
2,340
320
600
730
760

Income Statement
For the Month Ended January 31, 2007
Revenues
Service revenue.................................................
Expenses
Salaries expense ...............................................
Cleaning supplies expense ..............................
Insurance expense............................................
Gas & oil expense .............................................
Depreciation expense .......................................
Total expenses ..........................................
Net income ................................................................
$9,290
$3,360
730
600
450
320
5,460
$3,830
4-49

(g)

For the Month Ended January 31, 2007
Retained earnings, January 1 ................................
Add: Net income ...................................................
0
3,830
3,830
600
$3,230
Less: Dividends.....................................................
Retained earnings, January 31 .............................

Balance Sheet
January 31, 2007
Assets
Current assets
Cash..................................................................
Accounts receivable........................................
Cleaning supplies............................................
Prepaid insurance ...........................................
Total current assets.................................
Equipment ........................................................
Less: Accumulated depreciation ..................
Total assets ..............................................
$ 4,550
6,990
210
6,600
$18,350
12,000
320
11,680
$30,030

Current liabilities
Accounts payable............................................
Salaries payable ..............................................
Total current liabilities.............................
Stockholders equity
Common stock.................................................
Retained earnings ...........................................
Total stockholders equity ......................
equity ....................................................
4-50
$ 8,040
760
$ 8,800
18,000
3,230
21,230
$30,030

(h)
General Journal
Date
Jan. 31
31
31
31
Account Titles
Service Revenue..............................................
Income Summary.....................................
Debit
9,290
Income Summary ............................................

Cleaning Supplies Expense....................
Gas & Oil Expense...................................
5,460
Income Summary ............................................

3,830
Retained Earnings...........................................
Dividends..................................................
600
(i)
Credit
9,290
3,360
320
600
730
450
3,830
600

Post-Closing Trial Balance
January 31, 2007
Cash .....................................................................
Cleaning Supplies...............................................
Prepaid Insurance...............................................
Equipment ...........................................................
Accumulated DepreciationEquipment ..........
Salaries Payable .................................................
Common Stock....................................................
Retained Earnings ..............................................
Debit
$ 4,550
6,990
210
6,600
12,000
$30,350
Credit
320
8,040
760
18,000
3,230
$30,350
4-51
PROBLEM 4-1B
(a)
1. Cash ........................................................................
Accounts Receivable .......................................
6,000
2. Unearned Fees Revenue .......................................

Fees Revenue ...................................................
18,000
3. Cash ........................................................................
Unearned Fees Revenue..................................
40,000
Unearned Fees Revenue ($40,000 $17,000) ........

Fees Revenue ...................................................
23,000
6,000
18,000
40,000
23,000
4. Accounts Receivable ............................................. 121,000

Fees Revenue
($162,000 $18,000 $23,000) .....................
121,000
5. Cash ........................................................................ 101,000
Accounts Receivable ($121,000 $20,000) ....
101,000
(b)
Cash received with respect to fees:

1. Collection of accounts receivable ..................
3. Gift certificates.................................................
5. Partial collection of fees receivable ...............
T-accounts (not required)
Bal.
4.
Bal.
Accounts Receivable
6,000
121,000 1.
6,000
5.
101,000
20,000
Fees Revenue
2.
18,000
3.
23,000
4.
121,000
Bal.
162,000
4-52
2.
3.
1.
3.
5.
Bal.
6,000
40,000
101,000
$147,000
Unearned Fees Revenue

Bal.
18,000
40,000
18,000 3.
23,000
Bal.
17,000
Cash
6,000
40,000
101,000
147,000
PROBLEM 4-2B
(a)
1.
Date
2010
June 30
2.
3.
4.
5.
6.
7.
30
30
30
30
30
30
Account Titles
Debit
Supplies Expense.....................................
Supplies ($2,000 $980) ..................
1,020
Utilities Expense.......................................
Utilities Payable ................................
180
Insurance Expense...................................
Prepaid Insurance
($2,640 12 months) ....................
220
Unearned Service Revenue .....................

Service Revenue ...............................
3,900
Salaries Expense ......................................

1,250
Depreciation Expense ..............................

Office Equipment ..........................
250

Service Revenue ...............................
3,500
Credit
1,020
180
220
3,900
1,250
250
3,500
(b)
6/30 Bal.
Cash
6,850
Prepaid Insurance
6/30 Bal. 2,640 6/30
6/30 Bal. 2,420
Accounts Receivable
6/30 Bal. 7,000
6/30
3,500
6/30 Bal. 10,500
Copyright
2010
2009 John
John Wiley
Wiley &
& Sons,
Sons, Inc.
Inc.
Copyright
6/30 Bal.
6/30 Bal.
Supplies
2,000 6/30
980
Kimmel, Financial
Financial Accounting,
Accounting, 5/e,
5/e, Solutions
Solutions Manual
Manual
Kimmel,
(For Instructor
Instructor Use
Use Only)
Only)
(For
220
1,020
4-53
4-53
PROBLEM 4-2B (Continued)

Office Equipment
6/30 Bal. 15,000
Office Equipment
6/30
250
6/30 Bal.
250
Accounts Payable
6/30 Bal.
4,540
Utilities Payable
6/30
6/30 Bal.
180
180
Salaries Payable
6/30
6/30 Bal.
1,250
1,250
Unearned Service Revenue

6/30
3,900 6/30 Bal. 5,200
6/30 Bal. 1,300
Salaries Expense
6/30 Bal. 4,000
6/30
1,250
6/30 Bal. 5,250
Rent Expense
6/30 Bal. 2,000
6/30
250
6/30 Bal.
250
Insurance Expense
6/30
220
6/30 Bal.
220
Utilities Expense
6/30
180
6/30 Bal.
180
Supplies Expense
6/30
1,020
6/30 Bal. 1,020
Common Stock
6/30 Bal. 21,750
Service Revenue
6/30 Bal. 8,000
6/30
3,900
6/30
3,500
6/30 Bal. 15,400
4-54

(c)
WAEGELEIN CONSULTING
June 30, 2010
Cash .....................................................................
Supplies ...............................................................
Office Equipment ................................................
Equipment .......................................................
Utilities Payable ..................................................
Salaries Payable..................................................
Unearned Service Revenue................................
Common Stock....................................................
Service Revenue .................................................
Salaries Expense ................................................
Rent Expense ......................................................
Depreciation Expense ........................................
Insurance Expense .............................................
Utilities Expense .................................................
Supplies Expense ...............................................
Debit
$ 6,850
10,500
2,420
980
15,000
Credit
5,250
2,000
250
220
180
1,020
$44,670
250
4,540
180
1,250
1,300
21,750
15,400
$44,670
4-55
PROBLEM 4-3B
(a) 1. Aug. 31
2.
3.
31
31
31
4.
5.
6.
7.
31
31
31
31
Insurance Expense ($450 X 3)................

Prepaid Insurance ...........................
1,350
Supplies Expense ($4,300 $700) .........

Supplies ...........................................
3,600
1,350
3,600
Depreciation ExpenseCottages
($4,400 X 1/4) .......................................
Accum. Depr.Cottages ................
1,100
Depreciation ExpenseFurniture
($4,000 X 1/4) .......................................
Accum. Depr.Furniture ................
1,000
1,100
1,000
Unearned Rent Revenue.........................

Rent Revenue ..................................
5,000
Salaries Expense.....................................
Salaries Payable ..............................
600
Accounts Receivable ..............................

Rent Revenue ..................................
1,200
Interest Expense .....................................

Interest Payable
[($120,000 X 8%) X 1/12]..............
800
5,000
600
1,200
800
(b)
Cash
8/31 Bal. 24,600
Accounts Receivable
8/31
1,200
8/31 Bal. 1,200
4-56
Prepaid Insurance
8/31 Bal. 5,400 8/31
8/31 Bal. 4,050
8/31 Bal.
8/31 Bal.
Supplies
4,300 8/31
700
1,350
3,600

Land
8/31 Bal. 40,000
Interest Payable
8/31
8/31 Bal.
Cottages
8/31 Bal. 132,000
Mortgage Payable
8/31 Bal. 120,000
Cottages
8/31
1,100
8/31 Bal. 1,100
Furniture
8/31 Bal. 36,000
Common Stock
8/31 Bal. 100,000
8/31 Bal.
Furniture
8/31
1,000
8/31 Bal. 1,000
Accounts Payable
8/31 Bal.
6,500

8/31
5,000 8/31 Bal. 6,800
8/31 Bal. 1,800
Salaries Payable
8/31
8/31 Bal.
800
800
600
600
Dividends
5,000
Rent Revenue
8/31 Bal. 80,000
8/31
5,000
8/31
1,200
8/31 Bal. 86,200
Salaries Expense
8/31 Bal. 53,000
8/31
600
8/31 Bal. 53,600
Utilities Expense
8/31 Bal. 9,400
Repair Expense
8/31 Bal. 3,600
4-57

Insurance Expense
8/31
1,350
8/31 Bal. 1,350
Supplies Expense
8/31
3,600
8/31 Bal. 3,600
Furniture
8/31
1,000
8/31 Bal. 1,000
Interest Expense
8/31
800
8/31 Bal.
800
Cottages
8/31
1,100
8/31 Bal. 1,100
4-58

(c)
FLINT HILLS RESORT

August 31, 2010
Cash ..................................................................
Accounts Receivable.......................................
Prepaid Insurance............................................
Supplies ............................................................
Land ..................................................................
Cottages............................................................
Accumulated DepreciationCottages...........
Furniture ...........................................................
Accumulated DepreciationFurniture ..........
Accounts Payable ............................................
Unearned Rent Revenue .................................
Salaries Payable...............................................
Interest Payable ...............................................
Mortgage Payable ............................................
Common Stock.................................................
Dividends..........................................................
Rent Revenue ...................................................
Utilities Expense ..............................................
Repair Expense ................................................
Insurance Expense ..........................................
Supplies Expense ............................................
Depreciation ExpenseCottages ..................
Depreciation ExpenseFurniture ..................
Interest Expense ..............................................
Debit
$ 24,600
1,200
4,050
700
40,000
132,000
Credit
1,100
36,000
1,000
6,500
1,800
600
800
120,000
100,000
5,000
86,200
53,600
9,400
3,600
1,350
3,600
1,100
1,000
800
$318,000
$318,000
4-59

(d)
FLINT HILLS RESORT

Income Statement
For the Three Months Ended August 31, 2010
Revenues
Rent revenue..................................................
Expenses
Salaries expense ...........................................
Utilities expense ............................................
Repair expense ..............................................
Supplies expense ..........................................
Insurance expense ........................................
Depreciation expensecottages .................
Depreciation expensefurniture .................
Interest expense ............................................
Total expenses .......................................
Net income .............................................................
$86,200
$53,600
9,400
3,600
3,600
1,350
1,100
1,000
800
74,450
$11,750
FLINT HILLS RESORT

For the Three Months Ended August 31, 2010
Retained earnings, June 1....................................
Add: Net income .................................................
Less: Dividends....................................................
Retained earnings, August 31..............................
4-60
0
11,750
11,750
5,000
$ 6,750

FLINT HILLS RESORT
Balance Sheet
August 31, 2010
Assets
Current assets
Cash ..........................................
Accounts receivable ................
Supplies ....................................
Prepaid insurance....................
Total current assets...........
Land ..........................................
Cottages....................................
Less: Accum. depreciation ....
Furniture ...................................
Less: Accum. depreciation ....
Total assets ........................
$ 24,600
1,200
700
4,050
$ 30,550
40,000
$132,000
1,100
36,000
1,000
130,900
35,000

Current liabilities
Accounts payable ........................................ $ 6,500
Unearned rent revenue................................
1,800
Interest payable ...........................................
800
Salaries payable...........................................
600
Total current liabilities ..........................
Long-term liabilities
Mortgage payable ........................................
Total liabilities........................................
Stockholders equity
Common stock.............................................
100,000
Retained earnings........................................
6,750
Total stockholders equity...............
equity ..................................................
205,900
$236,450
9,700
120,000
129,700
106,750
$236,450
4-61

(e) The following accounts would be closed:
Rent Revenue, Salaries Expense, Utilities Expense, Repair Expense,
Supplies Expense, Depreciation ExpenseCottages, Insurance Expense,
Interest Expense, Depreciation ExpenseFurniture, Dividends.
4-62
PROBLEM 4-4B
(a) Sept. 30
30
30
30
30
30
30
(b)
Dues Revenue ........................................
600
Rent Expense .................................................

Prepaid Rent ...........................................
900

Supplies ..................................................
840

Accum. DepreciationEquipment .......
350

50
Unearned Rent Revenue ...............................

Rent Revenue .........................................
200

600
600
900
840
350
50
200
600
FOUR OAKS GOLF INC.

Income Statement
For the Quarter Ended September 30, 2010
Revenues
Dues revenue ..................................................
Rent revenue ...................................................
Total revenues .........................................
Expenses
Rent expense...................................................
Total expenses ........................................
Net income ..............................................................
$14,400
600
$15,000
9,400
1,800
840
510
350
50
12,950
$ 2,050
4-63

FOUR OAKS GOLF INC.
For the Quarter Ended September 30, 2010
Retained earnings, July 1, 2010 .................................................
Add: Net income .......................................................................
Less: Dividends..........................................................................
Retained earnings, September 30, 2010....................................
0
2,050
2,050
600
$1,450
FOUR OAKS GOLF INC.

Balance Sheet
September 30, 2010
Assets
Current Assets
Cash................................................................
Supplies..........................................................
Prepaid rent....................................................
Property, Plant and Equipment
Equipment ......................................................
Less: Accumulated depreciation
equipment...........................................
Total assets ............................................
$ 6,700
1,000
360
900
$ 8,960
15,000
350

Current Liabilities
Notes payable ................................................
$ 5,000
Accounts payable..........................................
1,710
Unearned rent revenue .................................
800
Salaries payable ............................................
600
Interest payable .............................................
50
Total current liabilities...........................
Stockholders equity
Common stock...............................................
14,000
Retained earnings .........................................
1,450
Total stockholders equity.................
equity ..................................................
4-64
14,650
$23,610
$ 8,160
15,450
$23,610

(c) The following accounts would be closed: Dues Revenue, Rent Revenue,
Salaries Expense, Rent Expense, Utilities Expense, Depreciation Expense,
Supplies Expense, Interest Expense, Dividends.
(d) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
4-65
PROBLEM 4-5B
1.
2.
3.
4.
4-66
Dec. 31
31
31
31
Salaries Expense ......................................

Salaries Payable................................
(6 X $800 X 3/5 = $2,880)
(2 X $600 X 3/5 = $ 720)
3,600
Unearned Rent Revenue ..........................

Rent Revenue ....................................
(5 X $4,000 X 2 = $40,000)
(4 X $7,500 X 1 =
30,000)
Total rent earned $70,000)
70,000
Advertising Expense ................................

Prepaid Advertising ..........................
(A650 $500 per month
for 8 months = $4,000)
(B974 $400 per month
for 4 months = 1,600)
$5,600)
5,600
Interest Expense .......................................

Interest Payable
($80,000 X 7% X 3/12)....................
1,400
3,600
70,000
5,600
1,400
PROBLEM 4-6B
(a) 1. June
2.
3.
4.
5.
6.
7.
30
30
30
30
30
30
30
Travel Court Rental Revenue ..........

Unearned Rental Revenue.....
55,000
Supplies Expense ............................

Supplies ($8,200 $1,800).....
6,400
Insurance Expense
($14,400 X 3/12) .............................
Prepaid Insurance ..................
55,000
6,400
3,600
3,600
Advertising Expense .......................

Repairs Expense ..............................
Utilities Expense ..............................
Accounts Payable ..................
110
4,450
215
Wages Expense ($300 X 2) ..............

Wages Payable .......................
600
Interest Expense
($12,000 X 8% X 2/12)....................
Interest Payable .....................
Income Tax Expense .......................
Income Tax Payable...............
4,775
600
160
160
13,400
13,400
4-67

(b)
HAPPY CAMPER TRAVEL COURT

Income Statement
Revenues
Travel court rental revenues ($216,000 $55,000)
$161,000
Expenses
Wages expense ($80,500 + $600) .......................... $81,100
Income tax expense ...............................................
13,400
Repairs expense ($4,000 + $4,450) .......................
8,450
Supplies expense ...................................................
6,400
Advertising expense ($3,800 + $110)....................
3,910
Insurance expense .................................................
3,600
Depreciation expense ............................................
2,700
Utilities expense ($900 + $215)..............................
1,115
Interest expense .....................................................
160
Total expenses .......................................................
120,835
Net income ..............................................................
$ 40,165
(c)
The generally accepted accounting principles pertaining to the income

statement not recognized by Kristen were the revenue recognition
principle and the matching principle.
The revenue recognition principle states that revenue is recognized
when it is earned. The cash payments of $55,000 for summer rentals
have not been earned and, therefore, should not be reported as
income for the quarter ended June 30.
The matching principle dictates that efforts (expenses) be matched
with accomplishments (revenue) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts
incurred in June but not paid until July, and any other costs related
to the operations of the business during the period AprilJune.
The difference in reported expenses was $28,935 ($120,835 $91,900).
The overstatement of revenues ($55,000) plus the under-statement of
expenses ($28,935) equals the difference in reported income of $83,935
($124,100 $40,165).
4-68
PROBLEM 4-7B
(a), (c) & (e)

9/1 Bal.
9/10
9/12
9/29
9/30 Bal.
Cash
4,880 9/8
1,500 9/20
3,400 9/22
650 9/25
3,230
1,100
4,500
400
1,200
Accounts Receivable
9/1 Bal.
3,820 9/10
1,500
9/27
1,850
9/30 Bal. 4,170
9/1 Bal.
9/17
9/30 Bal.
Supplies
800 9/30
2,000
1,800
1,000
Store Equipment
9/1 Bal. 15,000
9/15
3,000
9/30 Bal. 18,000
9/1 Bal.
1,600
9/30
200
9/30 Bal. 1,800
9/20
9/30
9/8
Accounts Payable
4,500 9/1 Bal.
9/15
9/17
9/30 Bal.
3,100
3,000
2,000
3,600
Unearned
Service Revenue
250 9/1 Bal.
9/29
9/30 Bal.
400
650
800
Salaries Payable
700 9/1 Bal.
9/30
9/30 Bal.
700
400
400
Common Stock
9/1 Bal. 10,000
9/30 Bal. 10,000
Retained Earnings
9/1 Bal.
9/30 Bal.
8,700
8,700
4-69

Service Revenue
9/12
9/27
9/30
9/30 Bal.
3,400
1,850
250
5,500
9/30
200
9/30 Bal.
200
Salaries Expense
9/8
400
9/25
1,200
9/30
400
9/30 Bal. 2,000
Rent Expense
9/22
400
9/30 Bal.
400
Supplies Expense
9/30
1,000
9/30 Bal. 1,000
4-70

(b)
General Journal
Date
Sept. 8
10
12
15
17
20
22
25
27
29
Account Titles
Salaries Payable ............................................
Cash ........................................................
Debit
700
400
Cash ................................................................
Accounts Receivable .............................
1,500
Cash ................................................................
Service Revenue ....................................
3,400
Store Equipment ............................................

Accounts Payable ..................................
3,000
Supplies..........................................................
Accounts Payable ..................................
2,000
Accounts Payable ..........................................

Cash ........................................................
4,500
Rent Expense .................................................

Cash ........................................................
400

Cash ........................................................
1,200
Service Revenue ....................................
1,850
Cash ................................................................
Unearned Service Revenue...................
650
Credit
1,100
1,500
3,400
3,000
2,000
4,500
400
1,200
1,850
650
4-71

(d) & (f)
PITTSBURG EQUIPMENT REPAIR

Trial Balances
September 30, 2010
Before
Adjustment
Cash.............................................
Accounts Receivable .................
Supplies ......................................
Store Equipment.........................
Accumulated Depreciation ........
Accounts Payable ......................
Unearned Service Revenue .......
Salaries Payable .........................
Common Stock ...........................
Retained Earnings......................
Service Revenue.........................
Depreciation Expense................
Supplies Expense.......................
Salaries Expense........................
Rent Expense..............................
(e) 1. Sept. 30
2.
3.
4.
4-72
30
30
30
Dr.
$ 3,230
4,170
2,800
18,000
Cr.
After
Adjustment
Dr.
$ 3,230
4,170
1,800
18,000
10,000
8,700
5,250
$ 1,800
3,600
800
400
10,000
8,700
5,500
200
1,000
1,600
2,000
400
400
$30,200 $30,200 $30,800
$30,800
$ 1,600
3,600
1,050
Supplies Expense....................................
Supplies ($2,800 $1,800) ..............
1,000
Salaries Expense.....................................
Salaries Payable ..............................
400
Depreciation Expense.............................
Accumulated Depreciation .............
200
Unearned Service Revenue ....................

Service Revenue ..............................
250
Cr.
1,000
400
200
250

(g)

Income Statement
For the Month Ended September 30, 2010
Revenues
Service revenue..................................................
Expenses
Salaries expense ................................................
Supplies expense...............................................
Rent expense......................................................
Depreciation expense ........................................
Total expenses ...........................................
Net income .................................................................
$5,500
$2,000
1,000
400
200
3,600
$1,900

For the Month Ended September 30, 2010
Retained earnings, September 1 ...............................................
Add: Net income .......................................................................
Retained earnings, September 30 .............................................
$ 8,700
1,900
$10,600
4-73

Balance Sheet
September 30, 2010
Assets
Current assets
Cash....................................................................
Accounts receivable..........................................
Supplies..............................................................
Total current assets...................................
Store equipment ................................................
Less: Accumulated depreciationstore
equipment...................................................
Total assets ................................................
$ 3,230
4,170
1,800
$ 9,200
$18,000
1,800
16,200
$25,400

Current liabilities
Accounts payable...............................................
Unearned service revenue.................................
Total current liabilities................................
Stockholders equity
Common stock....................................................
Total stockholders equity ......................
Total liabilities and stockholders equity....
4-74
$ 3,600
800
400
$ 4,800
10,000
10,600
20,600
$25,400
PROBLEM 4-8B
(a)
General Journal
Date
July 1
1
3
5
12
18
20
21
25
31
31
Account Titles
Cash..................................................................
Common Stock ........................................
Debit
11,000
Equipment ........................................................
Cash ..........................................................
9,000
Cleaning Supplies ...........................................

900
Prepaid Insurance ...........................................

Cash ..........................................................
1,800

Service Revenue ......................................
3,200
Accounts Payable............................................
Cash ..........................................................
1,500

Cash ..........................................................
2,000
Cash..................................................................
Accounts Receivable...............................
1,400

Service Revenue ......................................
2,500
Gas & Oil Expense...........................................

Cash ..........................................................
260
Dividends .........................................................
Cash ..........................................................
600
Credit
11,000
2,000
7,000
900
1,800
3,200
1,500
2,000
1,400
2,500
260
600
4-75

(b), (e) & (h)
Cash
7/1
11,000 7/1
7/21
1,400 7/5
7/18
7/20
7/31
7/31
7/31 Bal. 4,240
2,000
1,800
1,500
2,000
260
600
7/18
Accounts Receivable
1,400
7/12
3,200 7/21
7/25
2,500
7/31
1,700
7/31 Bal. 6,000
Cleaning Supplies
7/3
900 7/31
7/31 Bal.
360
Prepaid Insurance
7/5
1,800 7/31
7/31 Bal. 1,650
7/1
7/31 Bal.
540
7/31
Salaries Payable
7/31
7/31 Bal.
400
400
Retained Earnings
600 7/31
7/31 Bal.
Dividends
600 7/31
3,800
3,200
600
150
7/31
7/31
Equipment
9,000
9,000
7,000
900
6,400
Common Stock
7/1
11,000
7/31 Bal. 11,000
7/31
Equipment
7/31
250
7/31 Bal.
250
4-76
Accounts Payable
1,500 7/1
7/3
7/31 Bal.
7/31
Income Summary
3,600 7/31
3,800
7/31 Bal.
Service Revenue
7,400 7/12
7/25
7/31
7/31 Bal.
7,400
0
3,200
2,500
1,700
0

Gas & Oil Expense
7/31
260 7/31
7/31 Bal.
0
260
Cleaning Supplies Expense

7/31
540 7/31
540
7/31 Bal.
0
7/31
250 7/31
7/31 Bal.
0
2009 John Wiley & Sons, Inc.

Copyright 2010
Insurance Expense
7/31
150 7/31
7/31 Bal.
0
Salaries Expense
7/20
2,000 7/31
7/31
400
7/31 Bal.
0
150
2,400
250
4-77

(c) & (f)
CARDINAL WINDOW WASHING INC.

Trial Balance
July 31, 2010
Before
Adjustment
Cash ....................................................
Accounts Receivable.........................
Cleaning Supplies..............................
Prepaid Insurance..............................
Equipment ..........................................
Equipment ......................................
Accounts Payable..............................
Salaries Payable ................................
Common Stock ..................................
Dividends............................................
Service Revenue ................................
Salaries Expense ...............................
Gas & Oil Expense.............................
Depreciation Expense .......................
Insurance Expense ............................
Cleaning Supplies Expense ..............
4-78
Debit
$ 4,240
4,300
900
1,800
9,000
Credit
After
Adjustment
Debit
$ 4,240
6,000
360
1,650
9,000
250
$ 6,400
400
11,000
$ 6,400
11,000
600
Credit
600
5,700
7,400
2,000
260
2,400
260
250
150
540
$23,100 $23,100 $25,450 $25,450

(d)
General Journal
1.
2.
3.
4.
5.
(g)
Date
July 31
31
31
31
31
Account Titles
Accounts Receivable .......................................
Service Revenue .........................................
Debit
1,700
Depreciation Expense ......................................

Accumulated DepreciationEquipment ....
250
Insurance Expense ($1,800 X 1/12) .................

Prepaid Insurance ......................................
150
Cleaning Supplies Expense ($900 $360) .....

Cleaning Supplies ......................................
540
Salaries Expense ..............................................

Salaries Payable .........................................
400
Credit
1,700
250
150
540
400

Income Statement
Revenues
Service revenue.................................................
Expenses
Salaries expense ...............................................
Cleaning supplies expense ..............................
Gas & oil expense .............................................
Depreciation expense .......................................
Insurance expense............................................
Total expenses ..........................................
Net income ................................................................
$7,400
$2,400
540
260
250
150
3,600
$3,800
4-79

(g)

Retained earnings, July 1 .......................................
Add: Net income ...................................................
$
0
3,800
3,800
600
$3,200
Less: Dividends.....................................................
Retained earnings, July 31 ....................................

Balance Sheet
July 31, 2010
Assets
Current assets
Cash..................................................................
Accounts receivable........................................
Cleaning supplies............................................
Prepaid insurance ...........................................
Total current assets.................................
Equipment ........................................................
Less: Accumulated depreciation ..................
Total assets ..............................................
$ 4,240
6,000
360
1,650
$12,250
9,000
250
8,750
$21,000

Current liabilities
Accounts payable............................................
Salaries payable ..............................................
Total current liabilities.............................
Stockholders equity
Common stock.................................................
Retained earnings ...........................................
Total stockholders equity .................
equity ....................................................
4-80
$ 6,400
400
$ 6,800
11,000
3,200
14,200
$21,000

(h)
Date
July 31
31
31
31
(i)
General Journal
Account Titles and Explanation
Service Revenue..............................................
Income Summary.....................................
Debit
7,400
Credit
7,400
Income Summary.............................................
Cleaning Supplies Expense ....................
Gas & Oil Expense...................................
3,600
Income Summary.............................................
3,800
Retained Earnings ...........................................

Dividends..................................................
600
2,400
250
150
540
260
3,800
600

Post-Closing Trial Balance
July 31, 2010
Cash .....................................................................
Cleaning Supplies...............................................
Equipment ...........................................................
Accumulated DepreciationEquipment...........
Salaries Payable..................................................
Common Stock....................................................
Retained Earnings ..............................................
Debit
$ 4,240
6,000
360
1,650
9,000
$21,250
Credit
250
6,400
400
11,000
3,200
$21,250
4-81
BYP 4-1
FINANCIAL REPORTING PROBLEM
(a) Items that may result in adjusting entries for prepayments are:
a.
b.
c.
Prepaid expenses.
Accumulated depreciation.
Deferred income taxes.
(b) Accrual adjusting entries are often made for other income (i.e., interest)
and provision for income taxes, as well as interest expense on bank
loans and bonds.
(c) Depreciation expense was $15,859,000 in 2007 and $15,816,000 in 2006.
Accumulated depreciation was reported in the balance sheet as a
deduction from total Property, Plant, and Equipment, at cost.
(d) The statement of cash flows (at the bottom) reports income taxes paid
in 2007 of $11,343,000. The income statement reports income tax expense
of $25,542,000. Income taxes payable is reported under current liabilities
in the consolidated balance sheet.
4-82
BYP 4-2
COMPARATIVE ANALYSIS PROBLEM
Accounts that provide evidence of the use of accrual accounting are:

Balance Sheet
Income Statement
(a) Hershey Foods

1. Accounts receivabletrade
2. Prepaid expenses
3. Accrued income taxes
4. Accrued liabilities
1.
2.
3.
4.
Sales
Insurance (or supplies) expense
Income tax expense
Miscellaneous expense
1.
2.
3.
4.
5.
Insurance (or supplies) expense

Depreciation expense
Sales
Miscellaneous expense
Income tax expense
(b) Tootsie Roll

1. Prepaid expenses
2. Accumulated depreciation
3. Accounts receivable trade
4. Accrued liabilities
5. Income taxes payable
4-83
BYP 4-3
RESEARCH CASE
(a) Under so-called cookie-jar accounting companies will over accrue for
an expense, reducing current period income. In a future period they will
reverse part of the previous accrual, thus reducing the expense and
increasing income in the future period. The article suggests that one
motivation for using cookie-jar accounting is to smooth net income.
That is, if income is extremely high this period, by increasing an
accrued expense in the current period you can reduce current period
income, and therefore make it a little easier to report strong income in
the next period.
(b) If a company provides unaudited financial statements, it means that
they have not been examined by independent certified public accountants.
It also means that the financial statements have not received an expression of an opinion from the independent accounting saying that they were
prepared in accordance with generally accepted accounting principles.
As a consequence, financial statement users should be reluctant to
rely very heavily on Beazers unaudited financial statements.
(c) As part of the agreement that Beazer would have signed when it issued
bonds to borrow money, it agreed to provide audited financial statements
to bondholders within a specified number of days of its year-end. In
the event that it does not meet this deadline, it will have violated its
agreement, and the bondholders can demand full payment. This could
create a cash crisis for Beazer, since it would be unlikely that it would
have enough available cash on hand to repay all of the bondholders.
4-84
BYP 4-4
INTERPRETING FINANCIAL STATEMENTS
LASER RECORDING SYSTEMS

(a)
Laser Recording is handling legal expense via an accrued expense

adjustment. This is explained by the fact that accrued professional
services increased during the year.
(b)
Each of the three adjustments is an accrued expense adjustment. Since

this type of adjustment increases expenses, net income is decreased
by each adjustment.
(c)
In recording accrued interest, Laser Recording debited Interest Expense

and credited Interest Payable.
4-85
BYP 4-5
FINANCIAL ANALYSIS ON THE WEB
(a) The SEC was created by Congress after the stock market crash of 1929.
The SEC was created to restore investor confidence in our capital
markets by providing more structure and government oversight.
(b) Division of Corporation Finance. The Division of Corporation Finance
oversees corporate disclosure of important information to the investing public. Corporations are required to comply with regulations pertaining to disclosure that must be made when stock is initially sold and
then on a continuing and periodic basis. The Divisions staff routinely
reviews the disclosure documents filed by companies. The staff also
provides companies with assistance interpreting the Commissions rules
and recommends to the Commission new rules for adoption.
Division of Trading and Markets. The Division of Trading and Markets
establishes and maintains standards for fair, orderly, and efficient markets.
It does this primarily by regulating the major securities market participants: broker-dealer firms; self-regulatory organizations (SROs), which
include the stock exchanges and the National Association of Securities
Dealers (NASD), Municipal Securities Rulemaking Board (MSRB), and
clearing agencies (SROs that help facilitate trade settlement); transfer
agents (parties that maintain records of stock and bond owners); and
securities information processors. (A self-regulatory organization is a
member organization that creates and enforces rules for its members
based on the federal securities laws. SROs, which are overseen by the
SEC, are the front line in regulating broker-dealers.)
Division of Investment Management. The Division of Investment Management oversees and regulates the $15 trillion investment management industry and administers the securities laws affecting investment
companies (including mutual funds) and investment advisers. In applying the federal securities laws to this industry, the Division works to
improve disclosure and minimize risk for investors without imposing
undue costs on regulated entities.
Division of Enforcement. The Division of Enforcement investigates
possible violations of securities laws, recommends Commission action
when appropriate, either in a federal court or before an administrative
law judge, and negotiates settlements on behalf of the Commission.
4-86
BYP 4-5 (Continued)

While the SEC has civil enforcement authority only, it works closely
with various criminal law enforcement agencies throughout the country to
develop and bring criminal cases when the misconduct warrants more
severe action.
(c) The Chief Accountant is the principal adviser to the Commission on
accounting and auditing matters. The Office of the Chief Accountant also
works closely with domestic and international private-sector accounting
and auditing standards-setting bodies (e.g., the Financial Accounting
Standards Board, the International Accounting Standards Board, the
American Institute of Certified Public Accountants, and the Public
Company Accounting Oversight Board), consults with Registrants,
auditors, and other Commission staff regarding the application of accounting standards and financial disclosure requirements, and assists
in addressing problems that may warrant enforcement actions.
4-87
BYP 4-6
(a)
GROUP DECISION CASE
GRAND VALLEY PARK

Income Statement
For the Quarter Ended March 31, 2010
Revenues
Rental revenues ($89,000 $21,000) ...........
Expenses
Wages expense [$27,600 + ($290 X 3)] ........
Advertising expense ($4,200 + $110) ...........
Supplies expense ($5,200 $1,800).............
Repairs expense ($2,800 + $380)..................
Insurance expense ($7,200 X 3/12) ..............
Utilities expense ($900 + $240).....................
Depreciation expense ...................................
Interest expense ($20,000 X 8% X 3/12).......
Total expenses .......................................
Net income .............................................................
$68,000
$28,470
4,310
3,400
3,180
1,800
1,140
800
400
43,500
$24,500
(b) The generally accepted accounting principles pertaining to the income

statement that were not recognized by Janet were the revenue recognition
principle and the matching principle. The revenue recognition principle
states that revenue is recognized when it is earned. The revenue of
$21,000 for summer rentals has not been earned and, therefore, should
not be reported in income for the quarter ended March 31. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do
so. This means that the expenses should include amounts incurred in
March but not paid until April. The difference in expenses was $7,200
($43,500 $36,300). The overstatement of revenues ($21,000) plus the
understatement of expenses ($7,200) equals the difference in reported
income of $28,200 ($52,700 $24,500).
4-88
BYP 4-7
COMMUNICATION ACTIVITY
(a) Accrual basis accounting records the events that change an entitys
financial statements in the periods in which the events occur, rather than
in the periods in which the entity receives or pays cash. Information
presented on an accrual basis is useful because it reveals relationships
that are likely to be important in predicting future results. Conversely,
under cash basis accounting, revenue is recorded only when cash is
received, and an expense is recognized only when cash is paid. As a
result, the cash basis of accounting often results in misleading financial
statements.
(b) Politicians might desire a cash basis accounting system over an accrual
basis system because if an accrual accounting system is used, it could
mean that billions in government liabilities presently unrecorded would
have to be reported in the federal budget immediately. Currently, the
federal government is facing a huge budget deficit. The recognition of
these additional liabilities would make the deficit even worse. This is not
what politicians would like to see and be held responsible for.
(c) Dear Senator,
It is my understanding, after having taken a beginning course in accounting principles, that the federal government uses a cash basis system
rather than an accrual basis accounting system.
I am shocked at such a practice! There must be billions of dollars of liabilities hidden in many contracts that have not been recorded because
they havent been paid yet. I realize that the deficit would dramatically
increase if we were to implement an accrual system, but in all fairness,
we citizens should be given a more accurate picture of what our
government is up to.
Sincerely,
CONCERNED STUDENT
4-89
BYP 4-8
ETHICS CASE
(a) The stakeholders in this situation are:
Terry Holton, controller.

The president of Diamond Company.
Diamond Company stockholders and potential stockholders.
(b) 1.
It is unethical for the president to place pressure on Terry to misstate net income by requesting her to prepare incorrect adjusting
entries.
2.
It is customary for adjusting entries to be dated as of the balance

sheet date although the entries are prepared at a later date. Terry
did nothing unethical by dating the adjusting entries December 31.
(c) Terry can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect
economic reality. Intentionally misrepresenting the companys financial
condition and its results of operations is unethical (it is also illegal).
4-90
BYP 4-9
ALL ABOUT YOU ACTIVITY
The following is a personal balance sheet using the classified presentation.

Note that the earnings from the part-time job as well as the tuition costs are
not listed since neither of those items is an asset, liability, or equity item.
Assets
Current assets
Cash ..................................................................
Money market account ....................................
Certificate of deposit .......................................
Accounts receivable from brother..................
Total current assets .................................
$1,200
1,800
3,000
300

Automobile .......................................................
Video and stereo equipment ...........................
Home computer................................................
Total assets...............................................
7,000
1,250
800
$ 6,300
9,050
$15,350
Liabilities and Owners Equity

Current liabilities
Current portion of automobile loan................
Current portion of credit card payable...........
Total current liabilities .............................
Long-term liabilities
Student loan .....................................................
Automobile loan...............................................
Credit card payable..........................................
Total long-term liabilities .........................
Total liabilities ....................................
$1,500
150
$ 1,650
5,000
4,000
1,650
10,650
12,300
Equity
M. Y. Own, Capital ($15,350 $12,300)...........
3,050
Total liabilities and equity ...................
$15,350
4-91

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Accounting 04

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CHAPTER 4

Accrual Accounting Concepts

The financial information in a trial balance may not be up-to-date because:

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 4 (Continued)

Asset and revenue. An asset is debited and revenue is credited.

Expense and liability. An expense is debited and a liability is credited.

The entry is:

(a) Accrued revenues.

(d) Accrued expenses or prepaid expenses.

(a) Salaries Payable.

(d) Supplies Expense.

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Questions Chapter 4 (Continued)

(Dr) Individual revenue accounts and (Cr) Income Summary.

Examples of ways a company can manage earnings include the following.

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

SOLUTIONS TO BRIEF EXERCISES

BRIEF EXERCISE 4-2

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-4

Advertising Supplies Expense........................

Advertising Supplies Expense

BRIEF EXERCISE 4-5

BRIEF EXERCISE 4-6

Prepaid Insurance ............................................

Insurance Expense ($10,800 X 6/24)...............

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-7

Unearned Insurance Revenue ........................

Unearned Insurance Revenue

BRIEF EXERCISE 4-8

Interest Expense ......................................

Accounts Receivable ...............................

BRIEF EXERCISE 4-9

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-10

BRIEF EXERCISE 4-11

BRIEF EXERCISE 4-12

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)

BRIEF EXERCISE 4-13

Income Summary .....................................

Income Summary .....................................

Copyright 2010 John Wiley & Sons, Inc.

Kimmel, Financial Accounting, 5/e, Solutions Manual

(For Instructor Use Only)