The Accounting Information System

Solutions Manual and Test Bank of Intermediate Accounting Kieso Weygandt Warfield 15th edition

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Chapter 3 The Accounting Information System 

QUESTIONS

1. Give an example of a transaction that results in: (a) A decrease in an asset and a decrease in a liability.
(b) A decrease in one asset and an increase in another asset. (c) A decrease in one liability and an increase in another liability.
2. Do the following events represent business transactions? Explain your answer in each case. (a) A computer is purchased on account.
(b) A customer returns merchandise and is given credit on account. (c) A prospective employee is interviewed.
(d) The owner of the business withdraws cash from the business for personal use.
(e) Merchandise is ordered for delivery next month.
3. Name the accounts debited and credited for each of the following transactions. (a) Billing a customer for work done.
(b) Receipt of cash from customer on account. (c) Purchase of office supplies on account.
(d) Purchase of 15 gallons of gasoline for the delivery truck.
4. Why are revenue and expense accounts called temporary or nominal accounts?
5. Andrea Pafko, a fellow student, contends that the double entry system means that each transaction must be recorded twice. Is Andrea correct? Explain.
6. Is it necessary that a trial balance be taken periodically? What purpose does it serve?
7. Indicate whether each of the items below is a real or nominal account and whether it appears in the balance sheet or the income statement.
(a) Prepaid Rent.
(b) Salaries and Wages Payable.
(c) Inventory.
(d) Accumulated DepreciationEquipment.
(e) Equipment.
(f) Service Revenue.
(g) Salaries and Wages Expense.
(h) Supplies.
8. Employees are paid every Saturday for the preceding work week. If a balance sheet is prepared on Wednesday, December 31, what does the amount of wages earned during the first three days of the week (12/29, 12/30, 12/31) represent? Explain.
9. (a) How are the components of revenues and expenses different for a merchandising company?
(b) Explain the income measurement process of a merchandising company.
10. What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?
(a) Accounts Payable.
(b) Expense accounts.
(c) Revenue accounts.
(d) Retained Earnings account.
(e) Cash.
11. What are adjusting entries and why are they necessary?
12. What are closing entries and why are they necessary?
13. Jay Hawk, maintenance supervisor for Boston Insurance Co., has purchased a riding lawnmower and accessories to be used in maintaining the grounds around corporate headquarters. He has sent the following information to the accounting department. Cost of mower and Date purchased 7/1/12 accessories $4,000 Monthly salary of Estimated useful life 5 yrs groundskeeper $1,100 Salvage value $0 Estimated annual fuel cost $150 Compute the amount of depreciation expense (related to the mower and accessories) that should be reported on Bostons December 31, 2012, income statement. Assume straight-line depreciation.
14. Midwest Enterprises made the following entry on December 31, 2012. Interest Expense 10,000 Interest Payable 10,000 (To record interest expense due on loan from Anaheim National Bank.) What entry would Anaheim National Bank make regarding its outstanding loan to Midwest Enterprises? Explain why this must be the case.
* 15. Distinguish between cash-basis accounting and accrualbasis accounting. Why is accrual-basis accounting acceptable for most business enterprises and the cash-basis unacceptable in the preparation of an income statement and a balance sheet?
* 16. When salaries and wages expense for the year is computed, why are beginning accrued salaries and wages subtracted from, and ending accrued salaries and wages added to, salaries and wages paid during the year?
* 17. List two types of transactions that would receive different accounting treatment using (a) strict cash-basis accounting, and
(b) a modified cash basis.
* 18. What are reversing entries, and why are they used?
* 19. A worksheet is a permanent accounting record, and its use is required in the accounting cycle. Do you agree? Explain.

BRIEF EXERCISES
BE3-1 Transactions for Mehta Company for the month of May are presented below. Prepare journal entries for each of these transactions. (You may omit explanations.) May 1 B.D. Mehta invests $4,000 cash in exchange for common stock in a small welding corporation. 3 Buys equipment on account for $1,100. 13 Pays $400 to landlord for May rent. 21 Bills Noble Corp. $500 for welding work done.
BE3-2 Agazzi Repair Shop had the following transactions during the first month of business as a proprietorship. Journalize the transactions. (Omit explanations.) Aug. 2 Invested $12,000 cash and $2,500 of equipment in the business. 7 Purchased supplies on account for $500. (Debit asset account.) 12 Performed services for clients, for which $1,300 was collected in cash and $670 was billed to the clients. 15 Paid August rent $600. 19 Counted supplies and determined that only $270 of the supplies purchased on August 7 are still on hand.
BE3-3 On July 1, 2012, Crowe Co. pays $15,000 to Zubin Insurance Co. for a 3-year insurance policy. Both companies have fiscal years ending December 31. For Crowe Co., journalize the entry on July 1 and the adjusting entry on December 31.
BE3-4 Using the data in BE3-3, journalize the entry on July 1 and the adjusting entry on December 31 for Zubin Insurance Co. Zubin uses the accounts Unearned Service Revenue and Service Revenue.
BE3-5 Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years insurance coverage. Prepare P&Gs February 1 journal entry and the annual adjusting entry on June 30.
BE3-6 LaBouche Corporation owns a warehouse. On November 1, it rented storage space to a lessee (tenant) for 3 months for a total cash payment of $2,400 received in advance. Prepare LaBouches November 1 journal entry and the December 31 annual adjusting entry. BE3-7 Dresser Companys weekly payroll, paid on Fridays, totals $8,000. Employees work a 5-day week. Prepare Dressers adjusting entry on Wednesday, December 31, and the journal entry to record the $8,000 cash payment on Friday, January 2.
BE3-8 Included in Gonzalez Companys December 31 trial balance is a note receivable of $12,000. The note is a 4-month, 10% note dated October 1. Prepare Gonzalezs December 31 adjusting entry to record $300 of accrued interest, and the February 1 journal entry to record receipt of $12,400 from the borrower.
BE3-9 Prepare the following adjusting entries at August 31 for Walgreens.
(a) Interest on notes payable of $300 is accrued.
(b) Services earned but unbilled total $1,400.
(c) Salaries and wages earned by employees of $700 have not been recorded.
(d) Bad debt expense for year is $900. Use the following account titles: Service Revenue, Accounts Receivable, Interest Expense, Interest Payable, Salaries and Wages Expense, Salaries and Wages Payable, Allowance for Doubtful Accounts, and Bad Debt Expense.
BE3-10 At the end of its first year of operations, the trial balance of Alonzo Company shows Equipment $30,000 and zero balances in Accumulated DepreciationEquipment and Depreciation Expense. Depreciation for the year is estimated to be $2,000. Prepare the adjusting entry for depreciation at December 31, and indicate the balance sheet presentation for the equipment at December 31.
BE3-11 Side Kicks has year-end account balances of Sales Revenue $808,900; Interest Revenue $13,500; Cost of Goods Sold $556,200; Administrative Expenses $189,000; Income Tax Expense $35,100; and Dividends $18,900. Prepare the year-end closing entries.
* BE3-12 Kelly Company had cash receipts from customers in 2012 of $142,000. Cash payments for operating expenses were $97,000. Kelly has determined that at January 1, accounts receivable was $13,000, and prepaid expenses were $17,500. At December 31, accounts receivable was $18,600, and prepaid expenses were $23,200. Compute (a) service revenue and
(b) operating expenses.
* BE3-13 Assume that Best Buy made a December 31 adjusting entry to debit Salaries and Wages Expense and credit Salaries and Wages Payable for $4,200 for one of its departments. On January 2, Best Buy paid the weekly payroll of $7,000. Prepare Best Buys (a) January 1 reversing entry;
(b) January 2 entry (assuming the reversing entry was prepared); and
(c) January 2 entry (assuming the reversing entry was not prepared).

EXERCISES

E3-1 (Transaction AnalysisService Company) Christine Ewing is a licensed CPA. During the first month of operations of her business (a sole proprietorship), the following events and transactions occurred. April 2 Invested $30,000 cash and equipment valued at $14,000 in the business. 2 Hired a secretary-receptionist at a salary of $290 per week payable monthly. 3 Purchased supplies on account $700. (debit an asset account.) 7 Paid office rent of $600 for the month. 11 Completed a tax assignment and billed client $1,100 for services rendered. (Use Service Revenue account.) 12 Received $3,200 advance on a management consulting engagement. 17 Received cash of $2,300 for services completed for Ferengi Co. 21 Paid insurance expense $110. 30 Paid secretary-receptionist $1,160 for the month. 30 A count of supplies indicated that $120 of supplies had been used. 30 Purchased a new computer for $5,100 with personal funds. (The computer will be used exclusively for business purposes.)
Instructions  Journalize the transactions in the general journal. (Omit explanations.)

E3-2 (Corrected Trial Balance) The trial balance of Geronimo Company, shown on the next page, does not balance. Your review of the ledger reveals the following: (a) Each account had a normal balance.
(b) The debit footings in Prepaid Insurance, Accounts Payable, and Property Tax Expense were each understated $1,000.
(c) A transposition error was made in Accounts Receivable and Service Revenue; the correct balances for Accounts Receivable and Service Revenue are $2,750 and $6,690, respectively.
(d) A debit posting to Advertising Expense of $300 was omitted.
(e) A $3,200 cash drawing by the owner was debited to Owner’s Capital and credited to Cash.
Instructions  Prepare a correct trial balance.  

E3-3 (Corrected Trial Balance) The following trial balance of Scarlatti Corporation does not balance. GERONIMO COMPANY TRIAL BALANCE APRIL 30, 2012 Debit Credit Cash $ 2,100 Accounts Receivable 2,570 Prepaid Insurance 700 Equipment $ 8,000 Accounts Payable 4,500 Property Taxes Payable 560 Owners Capital 11,200 Service Revenue 6,960 Salaries and Wages Expense 4,200 Advertising Expense 1,100 Property Tax Expense 800 $18,190 $24,500 SCARLATTI CORPORATION TRIAL BALANCE APRIL 30, 2012 Debit Credit Cash $ 5,912 Accounts Receivable 5,240 Supplies 2,967 Equipment 6,100 Accounts Payable $ 7,044 Common Stock 8,000 Retained Earnings 2,000 Service Revenue 5,200 Office Expense 4,320 $24,539 $22,244 An examination of the ledger shows these errors.
1. Cash received from a customer on account was recorded (both debit and credit) as $1,580 instead of $1,850.
2. The purchase on account of a computer costing $1,900 was recorded as a debit to Office Expense and a credit to Accounts Payable.
3. Services were performed on account for a client, $2,250, for which Accounts Receivable was debited $2,250 and Service Revenue was credited $225.
4. A payment of $95 for telephone charges was entered as a debit to Office Expenses and a debit to Cash. 5. The Service Revenue account was totaled at $5,200 instead of $5,280.
Instructions  From this information, prepare a corrected trial balance. balances for Accounts Receivable and Service Revenue are $2,750 and $6,690, respectively.
(d) A debit posting to Advertising Expense of $300 was omitted.
(e) A $3,200 cash drawing by the owner was debited to Owners Capital and credited to Cash.

E3-4 (Corrected Trial Balance) The following trial balance of Oakley Co. does not balance. OAKLEY CO. TRIAL BALANCE JUNE 30, 2012 Debit Credit Cash $ 2,870 Accounts Receivable $ 3,231 Supplies 800 Equipment 3,800 Accounts Payable 2,666 Unearned Service Revenue 1,200 Common Stock 6,000 Retained Earnings 3,000 Service Revenue 2,380 Salaries and Wages Expense 3,400 Office Expense 940 $13,371 $16,916 Each of the listed accounts should have a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.
1. Cash received from a customer on account was debited for $370, and Accounts Receivable was credited for the same amount. The actual collection was for $730.
2. The purchase of a computer printer on account for $500 was recorded as a debit to Supplies for $500 and a credit to Accounts Payable for $500.
3. Services were performed on account for a client for $890. Accounts Receivable was debited for $890 and Service Revenue was credited for $89.
4. A payment of $65 for telephone charges was recorded as a debit to Office Expense for $65 and a debit to Cash for $65.
5. When the Unearned Service Revenue account was reviewed, it was found that $225 of the balance was earned prior to June 30.
6. A debit posting to Salaries and Wages Expense of $670 was omitted.
7. A payment on account for $206 was credited to Cash for $206 and credited to Accounts Payable for $260.
8. A dividend of $575 was debited to Salaries and Wages Expense for $575 and credited to Cash for $575.
Instructions  Prepare a correct trial balance. (Note: It may be necessary to add one or more accounts to the trial balance.)

E3-5 (Adjusting Entries) The ledger of Chopin Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared. Debit Credit Prepaid Insurance $ 3,600 Supplies 2,800 Equipment 25,000 Accumulated DepreciationEquipment $ 8,400 Notes Payable 20,000 Unearned Rent Revenue 6,300 Rent Revenue 60,000 Interest Expense 0 Salaries and Wages Expense 14,000 An analysis of the accounts shows the following.
1. The equipment depreciates $250 per month.
2. One-third of the unearned rent was earned during the quarter.
3. Interest of $500 is accrued on the notes payable.
4. Supplies on hand total $650.
5. Insurance expires at the rate of $300 per month.
Instructions  Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are: Depreciation Expense, Insurance Expense, Interest Payable, and Supplies Expense. (Omit explanations.)  

E3-6 (Adjusting Entries) Stephen King, D.D.S., opened a dental practice on January 1, 2012. During the first month of operations, the following transactions occurred.
1. Performed services for patients who had dental plan insurance. At January 31, $750 of such services was earned but not yet billed to the insurance companies.
2. Utility expenses incurred but not paid prior to January 31 totaled $520.
3. Purchased dental equipment on January 1 for $80,000, paying $20,000 in cash and signing a $60,000, 3-year note payable. The equipment depreciates $400 per month. Interest is $500 per month.
4. Purchased a one-year malpractice insurance policy on January 1 for $15,000.
5. Purchased $1,600 of dental supplies. On January 31, determined that $400 of supplies were on hand.
Instructions  Prepare the adjusting entries on January 31. (Omit explanations.) Account titles are Accumulated DepreciationEquipment, Depreciation Expense, Service Revenue, Accounts Receivable, Insurance Expense, Interest Expense, Interest Payable, Prepaid Insurance, Supplies, Supplies Expense, Utilities Expenses, and Accounts Payable.

E3-7 (Analyze Adjusted Data) A partial adjusted trial balance of Safin Company at January 31, 2012, shows the following. 5 5 SAFIN COMPANY ADJUSTED TRIAL BALANCE JANUARY 31, 2012 Debit Credit Supplies $ 900 Prepaid Insurance 2,400 Salaries and Wages Payable $ 800 Unearned Revenue 750 Supplies Expense 950 Insurance Expense 400 Salaries and Wages Expense 1,800 Service Revenue 2,000
Instructions  Answer the following questions, assuming the year begins January
1. (a) If the amount in Supplies Expense is the January 31 adjusting entry, and $850 of supplies was purchased in January, what was the balance in Supplies on January 1?
(b) If the amount in Insurance Expense is the January 31 adjusting entry, and the original insurance premium was for one year, what was the total premium and when was the policy purchased?
(c) If $2,700 of salaries and wages was paid in January, what was the balance in Salaries and Wages Payable at December 31, 2011?
(d) If $1,600 was received in January for services performed in January, what was the balance in Unearned Service Revenue at December 31, 2011?

E3-8 (Adjusting Entries) William Bryant is the new owner of Ace Computer Services. At the end of August 2012, his first month of ownership, Bryant is trying to prepare monthly financial statements. Below is some information related to unrecorded expenses that the business incurred during August.
1. At August 31, Bryant owed his employees $2,900 in salaries and wages that will be paid on September
1.
2. At the end of the month, he had not yet received the months utility bill. Based on past experience, he estimated the bill would be approximately $600.
3. On August 1, Bryant borrowed $60,000 from a local bank on a 15-year mortgage. The annual interest rate is 8%.
4. A telephone bill in the amount of $117 covering August charges is unpaid at August 31.
Instructions  Prepare the adjusting journal entries as of August 31, 2012, suggested by the information above.

E3-9 (Adjusting Entries) Selected accounts of Leno Company are shown below. UHURA RESORT TRIAL BALANCE AUGUST 31, 2012 Debit Credit Cash $ 19,600 Prepaid Insurance 4,500 Supplies 2,600 Land 20,000 Buildings 120,000 Equipment 16,000 Accounts Payable $ 4,500 Unearned Rent Revenue 4,600 Mortgage Payable 50,000 Common Stock 100,000 Dividends 5,000 Rent Revenue 86,200 Salaries and Wages Expense 44,800 Utilities Expenses 9,200 Maintenance and Repairs Expense 3,600 $245,300 $245,300 Other data:
1. The balance in prepaid insurance is a one-year premium paid on June 1, 2012.
2. An inventory count on August 31 shows $650 of supplies on hand.
3. Annual depreciation rates are buildings (4%) and equipment (10%). Salvage value is estimated to be 10% of cost.
4. Unearned Rent Revenue of $3,800 was earned prior to August 3
5. Salaries of $375 were unpaid at August 3
6. Rentals of $800 were due from tenants at August 3
7. The mortgage interest rate is 8% per year.
Instructions  (a) Journalize the adjusting entries on August 31 for the 3-month period June 1August 3
1. (Omit explanations.)
(b) Prepare an adjusted trial balance on August 31. 5 5 Supplies Accounts Receivable Beg. Bal. 800 10 31 470 10 17 2,100 10 31 1,650 Salaries and Wages Expense Salaries and Wages Payable 10 15 800 10 31 600 10 31 600 Unearned Service Revenue Supplies Expense 10 31 400 10 20 650 10 31 470 Service Revenue 10 17 2,100 10 31 1,650 10 31 400
Instructions  From an analysis of the T-accounts, reconstruct (a) the October transaction entries, and
(b) the adjusting journal entries that were made on October 31, 2012. Prepare explanations for each journal entry.

E3-10 (Adjusting Entries) Uhura Resort opened for business on June 1 with eight air-conditioned units. Its trial balance on August 31 is as follows.

E3-11 (Prepare Financial Statements) The adjusted trial balance of Cavamanlis Co. as of December 31, 2012, contains the following.  
Instructions  (a) Prepare an income statement.
(b) Prepare a statement of retained earnings.
(c) Prepare a classified balance sheet.

E3-12 (Prepare Financial Statements) Flynn Design Agency was founded by Kevin Flynn in January 2006. Presented below is the adjusted trial balance as of December 31, 2012.
Instructions  (a) Prepare an income statement and a statement of retained earnings for the year ending December 31, 2012, and an unclassified balance sheet at December 31. Exercises 139 140 Chapter 3 The Accounting Information System
(b) Answer the following questions.
(1) If the note has been outstanding 6 months, what is the annual interest rate on that note?
(2) If the company paid $17,500 in salaries and wages in 2012, what was the balance in Salaries and Wages Payable on December 31, 2011?

E3-13 (Closing Entries) The adjusted trial balance of Faulk Company shows the following data pertaining to sales at the end of its fiscal year, October 31, 2012: Sales Revenue $800,000, Freight-out $12,000, Sales Returns and Allowances $24,000, and Sales Discounts $12,000.
Instructions  (a) Prepare the sales revenue section of the income statement.
(b) Prepare separate closing entries for
(1) sales revenue and
(2) the contra accounts to sales revenue.

E3-14 (Closing Entries) Presented below is information related to Russell Corporation for the month of January 2012. Cost of goods sold $202,000 Salaries and wages expense $ 61,000 Freight-out 7,000 Sales discounts 8,000 Insurance expense 12,000 Sales returns and allowances 13,000 Rent expense 20,000 Sales revenue 340,000
Instructions  Prepare the necessary closing entries.

E3-15 (Missing Amounts) Presented below is financial information for two different companies. Shabbona Company Jenkins Company Sales revenue $90,000
(d) Sales returns and allowances (a) $ 5,000 Net sales 85,000 90,000 Cost of goods sold 56,000
(e) Gross profit
(b) 38,000 Operating expenses 15,000 23,000 Net income
(c) 15,000
Instructions  Compute the missing amounts.

E3-16 (Closing Entries for a Corporation) Presented below are selected account balances for Alistair Co. as of December 31, 2012. Inventory 12/31/12 $ 60,000 Cost of Goods Sold $235,700 Common Stock 75,000 Selling Expenses 16,000 Retained Earnings 45,000 Administrative Expenses 38,000 Dividends 18,000 Income Tax Expense 30,000 Sales Returns and Allowances 12,000 Sales Discounts 15,000 Sales Revenue 390,000
Instructions  Prepare closing entries for Alistair Co. on December 31, 2012. (Omit explanations.)

E3-17 (Transactions of a Corporation, Including Investment and Dividend) Snyder Miniature Golf and Driving Range Inc. was opened on March 1 by Mickey Snyder. The following selected events and transactions occurred during March. Mar. 1 Invested $60,000 cash in the business in exchange for common stock. 3 Purchased Michelle Wies Golf Land for $38,000 cash. The price consists of land $10,000; building $22,000; and equipment $6,000. (Make one compound entry.) 5 Advertised the opening of the driving range and miniature golf course, paying advertising expenses of $1,600. 6 Paid cash $1,480 for a one-year insurance policy. 10 Purchased golf equipment for $2,500 from Young Company, payable in 30 days. 18 Received golf fees of $1,200 in cash. 25 Declared and paid a $1,000 cash dividend. 30 Paid wages of $900. 30 Paid Young Company in full. 31 Received $750 of fees in cash. Snyder uses the following accounts: Cash, Prepaid Insurance, Land, Buildings, Equipment, Accounts Payable, Common Stock, Dividends, Service Revenue, Advertising Expense, and Salaries and Wages Expense.
Instructions  Journalize the March transactions. (Provide explanations for the journal entries.)

*E 3-18 (Cash to Accrual Basis) Corinne Dunbar, M.D., maintains the accounting records of Dunbar Clinic on a cash basis. During 2012, Dr. Dunbar collected $142,600 from her patients and paid $60,470 in expenses. At January 1, 2012, and December 31, 2012, she had accounts receivable, unearned service revenue, accrued expenses, and prepaid expenses as follows. (All long-lived assets are rented.) January 1, 2012 December 31, 2012 Accounts receivable $11,250 $15,927 Unearned service revenue 2,840 4,111 Accrued expenses 3,435 2,108 Prepaid expenses 1,917 3,232
Instructions  Prepare a schedule that converts Dr. Dunbars excess of cash collected over cash disbursed for the year 2012 to net income on an accrual basis for the year 2012.

*E 3-19 (Cash and Accrual Basis) Latta Corp. maintains its financial records on the cash basis of accounting. Interested in securing a long-term loan from its regular bank, Latta Corp. requests you as its independent CPA to convert its cash-basis income statement data to the accrual basis. You are provided with the following summarized data covering 2011, 2012, and 2013. 2011 2012 2013 Cash receipts from sales: On 2011 sales $290,000 $160,000 $ 30,000 On 2012 sales 0 355,000 90,000 On 2013 sales 408,000 Cash payments for expenses: On 2011 expenses 185,000 67,000 25,000 On 2012 expenses 40,000a 170,000 55,000 On 2013 expenses 45,000b 218,000 aPrepayments of 2012 expenses. bPrepayments of 2013 expenses.
Instructions  (a) Using the data above, prepare abbreviated income statements for the years 2011 and 2012 on the cash basis.
(b) Using the data above, prepare abbreviated income statements for the years 2011 and 2012 on the accrual basis.

*E 3-20 (Adjusting and Reversing Entries) When the accounts of Constantine Inc. are examined, the adjusting data listed below are uncovered on December 31, the end of an annual fiscal period.
1. The prepaid insurance account shows a debit of $6,000, representing the cost of a 2-year fire insurance policy dated August 1 of the current year.
2. On November 1, Rent Revenue was credited for $2,400, representing revenue from a subrental for a 3-month period beginning on that date.
3. Purchase of advertising supplies for $800 during the year was recorded in the Advertising Expense account. On December 31, advertising supplies of $290 are on hand.
4. Interest of $770 has accrued on notes payable.
Instructions  Prepare the following in general journal form. (a) The adjusting entry for each item.
(b) The reversing entry for each item where appropriate. *

E3-21 (Worksheet) Presented below are selected accounts for Acevedo Company as reported in the worksheet at the end of May 2012.
Instructions  Complete the worksheet by extending amounts reported in the adjusted trial balance to the appropriate columns in the worksheet. Do not total individual columns.

*E 3-22 (Worksheet and Balance Sheet Presentation) The adjusted trial balance for Madrasah Co. is presented in the following worksheet for the month ended April 30, 2012.
Instructions  Complete the worksheet and prepare a classified balance sheet. *

E3-23 (Partial Worksheet Preparation) Letterman Co. prepares monthly financial statements from a worksheet. Selected portions of the January worksheet showed the following data.
During February no events occurred that affected these accounts, but at the end of February the following information was available. (a) Supplies on hand $515
(b) Monthly depreciation $257
(c) Accrued interest $ 50
Instructions  Reproduce the data that would appear in the February worksheet, and indicate the amounts that would be shown in the February income statement.


PROBLEMS

P3-1 (Transactions, Financial StatementsService Company) Listed below are the transactions of Yasunari Kawabata, D.D.S., for the month of September. Sept. 1 Kawabata begins practice as a dentist and invests $20,000 cash. 2 Purchases dental equipment on account from Green Jacket Co. for $17,280. 4 Pays rent for office space, $680 for the month. 4 Employs a receptionist, Michael Bradley. 5 Purchases dental supplies for cash, $942. 8 Receives cash of $1,690 from patients for services performed. 10 Pays miscellaneous office expenses, $430. 14 Bills patients $5,820 for services performed. 18 Pays Green Jacket Co. on account, $3,600. 19 Withdraws $3,000 cash from the business for personal use. 20 Receives $980 from patients on account. 25 Bills patients $2,110 for services performed. 30 Pays the following expenses in cash: Salaries and wages $1,800; miscellaneous office expenses $85. 30 Dental supplies used during September, $330.
Instructions  (a) Enter the transactions shown above in appropriate general ledger accounts (use T-accounts). Use the following ledger accounts: Cash, Accounts Receivable, Supplies, Equipment, Accumulated Depreciation Equipment, Accounts Payable, Owners Capital, Service Revenue, Rent Expense, Office Expense, Salaries and Wages Expense, Supplies Expense, Depreciation Expense, and Income Summary. Allow 10 lines for the Cash and Income Summary accounts, and 5 lines for each of the other accounts needed. Record depreciation using a 5-year life on the equipment, the straight-line method, and no salvage value. Do not use a drawing account.
(b) Prepare a trial balance.
(c) Prepare an income statement, a statement of owners equity, and an unclassified balance sheet.
(d) Close the ledger.
(e) Prepare a post-closing trial balance.

P3-2 (Adjusting Entries and Financial Statements) Mason Advertising Agency was founded in January 2008. Presented below are adjusted and unadjusted trial balances as of December 31, 2012.
Instructions  
(a) Journalize the annual adjusting entries that were made. (Omit explanations.)

(b) Prepare an income statement and a statement of retained earnings for the year ending December 31, 2012, and an unclassified balance sheet at December 31.
(c) Answer the following questions.
(1) If the note has been outstanding 3 months, what is the annual interest rate on that note?
(2) If the company paid $12,500 in salaries and wages in 2012, what was the balance in Salaries and Wages Payable on December 31, 2011?

P3-3 (Adjusting Entries) A review of the ledger of Baylor Company at December 31, 2012, produces the following data pertaining to the preparation of annual adjusting entries.
1. Salaries and Wages Payable $0. There are eight employees. Salaries and wages are paid every Friday for the current week. Five employees receive $700 each per week, and three employees earn $600 each per week. December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December.
2. Unearned Rent Revenue $429,000. The company began subleasing office space in its new building on November
1. Each tenant is required to make a $5,000 security deposit that is not refundable until occupancy is terminated. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease. Date Term (in months) Monthly Rent Number of Leases Nov. 1 6 $6,000 5 Dec. 1 6 $8,500 4
3. Prepaid Advertising $13,200. This balance consists of payments on two advertising contracts. The contracts provide for monthly advertising in two trade magazines. The terms of the contracts are as shown below. Contract Date Amount Number of Magazine Issues A650 May 1 $6,000 12 B974 Oct. 1 7,200 24 The first advertisement runs in the month in which the contract is signed.
4. Notes Payable $60,000. This balance consists of a note for one year at an annual interest rate of 12%, dated June
1.
Instructions  Prepare the adjusting entries at December 31, 2012. (Show all computations).

P3-4 (Financial Statements, Adjusting and Closing Entries) The trial balance of Bellemy Fashion Center contained the following accounts at November 30, the end of the companys fiscal year.
Adjustment data:
1. Supplies on hand totaled $1,500.
2. Depreciation is $15,000 on the equipment.
3. Interest of $11,000 is accrued on notes payable at November 30.
Other data:
1. Salaries expense is 70% selling and 30% administrative.
2. Rent expense and utilities expense are 80% selling and 20% administrative.
3. $30,000 of notes payable are due for payment next year.
4. Maintenance and repairs expense is 100% administrative.
Instructions  
(a) Journalize the adjusting entries.

(b) Prepare an adjusted trial balance.
(c) Prepare a multiple-step income statement and retained earnings statement for the year and a classified balance sheet as of November 30, 2012.
(d) Journalize the closing entries.
(e) Prepare a post-closing trial balance.

P3-5 (Adjusting Entries) The accounts listed below appeared in the December 31 trial balance of the Savard Theater. Debit Credit Equipment $192,000 Accumulated DepreciationEquipment $ 60,000 Notes Payable 90,000 Admissions Revenue 380,000 Advertising Expense 13,680 Salaries and Wages Expense 57,600 Interest Expense 1,400
Instructions  
(a) From the account balances listed above and the information given below, prepare the annual adjusting entries necessary on December 31. (Omit explanations.)
(1) The equipment has an estimated life of 16 years and a salvage value of $24,000 at the end of that time. (Use straight-line method.)
(2) The note payable is a 90-day note given to the bank October 20 and bearing interest at 8%. (Use 360 days for denominator.)
(3) In December, 2,000 coupon admission books were sold at $30 each. They could be used for admission any time after January 1.
(4) Advertising expense paid in advance and included in Advertising Expense $1,100. (5) Salaries and wages accrued but unpaid $4,700.
(b) What amounts should be shown for each of the following on the income statement for the year?
(1) Interest expense. (3) Advertising expense.
(2) Admissions revenue. (4) Salaries and wages expense.

P3-6 (Adjusting Entries and Financial Statements) Presented below are the trial balance and the other information related to Yorkis Perez, a consulting engineer. YORKIS PEREZ, CONSULTING ENGINEER TRIAL BALANCE DECEMBER 31, 2012 Debit Credit Cash $ 29,500 Accounts Receivable 49,600 Allowance for Doubtful Accounts $ 750 Inventory 1,960 Prepaid Insurance 1,100 Equipment 25,000 Accumulated DepreciationEquipment 6,250 Notes Payable 7,200 Owners Capital 35,010 Service Revenue 100,000 Rent Expense 9,750 Salaries and Wages Expense 30,500 Utilities Expenses 1,080 Office Expense 720 $149,210 $149,210 5 5 6 Problems 145 146 Chapter 3 The Accounting Information System
1. Fees received in advance from clients $6,000.
2. Services performed for clients that were not recorded by December 31, $4,900.
3. Bad debt expense for the year is $1,430.
4. Insurance expired during the year $480.
5. Equipment is being depreciated at 10% per year.
6. Yorkis Perez gave the bank a 90-day, 10% note for $7,200 on December 1, 2012.
7. Rent of the building is $750 per month. The rent for 2012 has been paid, as has that for January 2013.
8. Office salaries and wages earned but unpaid December 31, 2012, $2,510.
Instructions  
(a) From the trial balance and other information given, prepare annual adjusting entries as of December 31, 2012. (Omit explanations.)

(b) Prepare an income statement for 2012, a statement of owners equity, and a classified balance sheet. Yorkis Perez withdrew $17,000 cash for personal use during the year.

P3-7 (Adjusting Entries and Financial Statements) Rolling Hills Golf Inc. was organized on July 1, 2012. Quarterly financial statements are prepared. The trial balance and adjusted trial balance on September 30 are shown here. ROLLING HILLS GOLF INC. TRIAL BALANCE SEPTEMBER 30, 2012 Unadjusted Adjusted Dr. Cr. Dr. Cr. Cash $ 6,700 $ 6,700 Accounts Receivable 400 1,000 Prepaid Rent 1,800 900 Supplies 1,200 180 Equipment 15,000 15,000 Accumulated DepreciationEquipment $ 350 Notes Payable $ 5,000 5,000 Accounts Payable 1,070 1,070 Salaries and Wages Payable 600 Interest Payable 50 Unearned Rent Revenue 1,000 800 Common Stock 14,000 14,000 Retained Earnings 0 0 Dividends 600 600 Service Revenue 14,100 14,700 Rent Revenue 700 900 Salaries and Wages Expense 8,800 9,400 Rent Expense 900 1,800 Depreciation Expense 350 Supplies Expense 1,020 Utilities Expenses 470 470 Interest Expense 50 $35,870 $35,870 $37,470 $37,470
Instructions  
(a) Journalize the adjusting entries that were made.

(b) Prepare an income statement and a retained earnings statement for the 3 months ending September 30 and a classified balance sheet at September 30.
(c) Identify which accounts should be closed on September 30.
(d) If the note bears interest at 12%, how many months has it been outstanding?

P3-8 (Adjusting Entries and Financial Statements) Vedula Advertising Agency was founded by Murali Vedula in January 2007. Presented on the next page are both the adjusted and unadjusted trial balances as of December 31, 2012.
 CRESTWOOD GOLF CLUB, INC. TRIAL BALANCE DECEMBER 31 Debit Credit Cash $ 15,000 Accounts Receivable 13,000 Allowance for Doubtful Accounts $ 1,100 Prepaid Insurance 9,000 Land 350,000 Buildings 120,000 Accumulated DepreciationBuildings 38,400 Equipment 150,000 Accumulated DepreciationEquipment 70,000 Common Stock 400,000 Retained Earnings 82,000 Dues Revenue 200,000 Green Fees Revenue 5,900 Rent Revenue 17,600
Instructions  
(a) Journalize the annual adjusting entries that were made.

(b) Prepare an income statement and a retained earnings statement for the year ended December 31, and a classified balance sheet at December 31.
(c) Identify which accounts should be closed on December 31.
(d) If the note has been outstanding 10 months, what is the annual interest rate on that note?
(e) If the company paid $10,500 in salaries and wages in 2012, what was the balance in Salaries and Wages Payable on December 31, 2011?

P3-9 (Adjusting and Closing) Presented below is the trial balance of the Crestwood Golf Club, Inc. as of December 31. The books are closed annually on December 31.

Instructions  
(a) Enter the balances in ledger accounts. Allow five lines for each account.

(b) From the trial balance and the information given below, prepare annual adjusting entries and post to the ledger accounts. (Omit explanations.)
(1) The buildings have an estimated life of 30 years with no salvage value (straight-line method).
(2) The equipment is depreciated at 10% per year.
(3) Insurance expired during the year $3,500.
(4) The rent revenue represents the amount received for 11 months for dining facilities. The December rent has not yet been received.
(5) It is estimated that 12% of the accounts receivable will be uncollectible.
(6) Salaries and wages earned but not paid by December 31, $3,600.
(7) Dues received in advance from members $8,900.
(c) Prepare an adjusted trial balance.
(d) Prepare closing entries and post.

P3-10 (Adjusting and Closing) Presented below is the December 31 trial balance of New York Boutique.
Instructions  
(a) Construct T-accounts and enter the balances shown.

(b) Prepare adjusting journal entries for the following and post to the T-accounts. (Omit explanations.) Open additional T-accounts as necessary. (The books are closed yearly on December 31.)
(1) Bad debt expense is estimated to be $1,400.
(2) Equipment is depreciated based on a 7-year life (no salvage value).
(3) Insurance expired during the year $2,550.
(4) Interest accrued on notes payable $3,360.
(5) Sales salaries and wages earned but not paid $2,400.
(6) Advertising paid in advance $700.
(7) Office supplies on hand $1,500, charged to Supplies Expense when purchased.
(c) Prepare closing entries and post to the accounts.
Instructions  
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $10,000 of the mortgage payable is due for payment in the next fiscal year.)
(c) Journalize the adjusting entries using the worksheet as a basis.
(d) Journalize the closing entries using the worksheet as a basis.
(e) Prepare a post-closing trial balance.

*P 3-11 (Cash and Accrual Basis) On January 1, 2012, Norma Smith and Grant Wood formed a computer sales and service enterprise in Soapsville, Arkansas, by investing $90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January.
1. Pays $6,000 in advance for 3 months rent of office, showroom, and repair space.
2. Purchases 40 personal computers at a cost of $1,500 each, 6 graphics computers at a cost of $2,500 each, and 25 printers at a cost of $300 each, paying cash upon delivery.
3. Sales, repair, and office employees earn $12,600 in salaries and wages during January, of which $3,000 was still payable at the end of January.
4. Sells 30 personal computers at $2,550 each, 4 graphics computers for $3,600 each, and 15 printers for $500 each; $75,000 is received in cash in January, and $23,400 is sold on a deferred payment basis.
5. Other operating expenses of $8,400 are incurred and paid for during January; $2,000 of incurred expenses are payable at January 31.
Instructions  
(a) Using the transaction data above, prepare
(1) a cash-basis income statement and
(2) an accrual-basis income statement for the month of January.
(b) Using the transaction data above, prepare
(1) a cash-basis balance sheet and
(2) an accrual-basis balance sheet as of January 31, 2012.
(c) Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theory underlying the elements of financial statements. *

P3-12 (Worksheet, Balance Sheet, Adjusting and Closing Entries) Cooke Company has a fiscal year ending on September 30. Selected data from the September 30 worksheet are presented below.
Instructions  Refer to these financial statements and the accompanying notes to answer the following questions.
(a) What were P&Gs total assets at June 30, 2009? At June 30, 2008?
(b) How much cash (and cash equivalents) did P&G have on June 30, 2009?
(c) What were P&Gs research and development costs in 2008? In 2009?
(d) What were P&Gs revenues in 2008? In 2009?
(e) Using P&Gs financial statements and related notes, identify items that may result in adjusting entries for deferrals and accruals.
(f) What were the amounts of P&Gs depreciation and amortization expense in 2007, 2008, and 2009?
Comparative Analysis Case The Coca-Cola Company and PepsiCo, Inc.
Instructions  Go to the books companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.
(a) Which company had the greater percentage increase in total assets from 2008 to 2009?
(b) Using the Selected Financial Data section of these two companies, determine their 5-year average growth rates related to net sales and income from continuing operations.
(c) Which company had more depreciation and amortization expense for 2009? Provide a rationale as to why there is a difference in these amounts between the two companies.
Instructions  
(a) Compute the percentage change in sales, operating profit, net cash flow less capital expenditures, and net earnings from year to year for the years presented.
(b) Evaluate Kelloggs performance. Which trend seems most favorable? Which trend seems least favorable? What are the implications of these trends for Kelloggs sustainable performance objectives? Explain. Accounting, Analysis, and Principles The Amato Theater is nearing the end of the year and is preparing for a meeting with its bankers to discuss the renewal of a loan. The accounts listed below appeared in the December 31, 2012, trial balance. Debit Credit Prepaid Advertising $ 6,000 Equipment 192,000 Accumulated DepreciationEquipment $ 60,000 Notes Payable 90,000 Unearned Ticket Revenue 17,500 Ticket Revenue 360,000 Advertising Expense 18,680 Salaries and Wages Expense 67,600 Interest Expense 1,400 Additional information is available as follows.
1. The equipment has an estimated useful life of 16 years and a salvage value of $40,000 at the end of that time. Amato uses the straight-line method for depreciation.
2. The note payable is a one-year note given to the bank January 31 and bearing interest at 10%. Interest is calculated on a monthly basis.
3. Late in December 2012, the theater sold 350 coupon ticket books at $50 each. One hundred fifty of these ticket books can be used only for admission any time after January 1, 201
3. The cash received was recorded as Unearned Ticket Revenue.
4. Advertising paid in advance was $6,000 and was debited to Prepaid Advertising. The company has used $2,500 of the advertising as of December 31, 2012.
5. Salaries and wages accrued but unpaid at December 31, 2012, were $3,500.

Accounting Prepare any adjusting journal entries necessary for the year ended December 31, 2012.
Analysis Determine Amatos income before and after recording the adjusting entries. Use your analysis to explain why Amatos bankers should be willing to wait for Amato to complete its year-end adjustment process before making a decision on the loan renewal.
Principles Although Amatos bankers are willing to wait for the adjustment process to be completed before they receive financial information, they would like to receive financial reports more frequently than annually or even quarterly. What trade-offs, in terms of relevance and faithful representation, are inherent in preparing financial statements for shorter accounting time periods?

BRIDGE TO THE PROFESSION Professional Research Recording transactions in the accounting system requires knowledge of the important characteristics of the elements of financial statements, such as assets and liabilities. In addition, accountants must understand the inherent uncertainty in accounting measures and distinctions between related accounting concepts that are important in evaluating the effects of transactions on the financial statements.
Instructions  If your school has a subscription to the FASB Codification, go to http://aaahq.org/asclogin.cfm to log in and provide explanations for the following items. (Provide paragraph citations.) When you have accessed the documents, you can use the search tool in your Internet browser.
(a) The three essential characteristics of assets.
(b) The three essential characteristics of liabilities.
(c) Uncertainty and its effect on financial statements.
(d) The difference between realization and recognition.

Professional Simulation In this simulation, you are asked to address questions regarding the accounting information system. Prepare responses to all parts. 

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