sm chap004

Chapter 04 - Adjustments, Financial Statements, and Financial Results

Chapter 4Adjustments, Financial Statements, and

ANSWERS TO MINI-EXERCISES

M4-7

Assets = Liabilities + Stockholders’ Equitya

=Utilities

Payable+600 Utilities

Expense (+E)600

b=

Wages Payable

+3,000* Wages Expense (+E)

3,000

c Interest Receivable

+100°=

Interest Revenue (+R)

+100

* $3,000 = 10 employees x 3 days x $100 per day° $1,200 ÷ 12 months = $100 for one month.

M4-8

(a) dr Utilities Expense (+E, SE)........................... 600 cr Utilities Payable (+L)........................... 600To record utilities expense incurred but not yet paid.

(b) dr Wages Expense (+E, SE)............................ 3,000 cr Wages Payable (+L)........................... 3,000To record wages expense incurred but not yet paid,calculated as 10 employees x 3 days x $100 per day.

(c) dr Interest Receivable (+A)............................... 100 cr Interest Revenue (+R, +SE)............... 100To record interest earned but not yet collected, calculated as $1,200 x 1/12.

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ANSWERS TO EXERCISES

E4-4

Req. 1

The annual reporting period for this company is January 1 through December 31.

Req. 2

Both transactions are accruals because revenue has been earned and expenses incurred but no cash has yet been received or paid.

Req. 3

Assets = Liabilities + Stockholders’ Equitya.

=Wages

Payable+6,000 Wage

Expense (+E) -6,000

b.

Interest Receivable

+3,000=

Interest Revenue (+R)

+3,000

Req. 4

Adjustments are needed to ensure the financial statements are up-to-date and complete. Adjusting entries are necessary at the end of the accounting period to ensure that all revenues earned and expenses incurred and the related assets and liabilities are measured properly. The entries above are accruals; entry (a) is an accrued expense (incurred but not yet recorded) and entry (b) is an accrued revenue (earned but not yet recorded). In applying the accrual basis of accounting, revenues should be recognized when earned and expenses should be recognized when incurred in generating revenues.

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E4-5

(a) December 31, 2009:

dr Wage Expense (+E, SE)....................................... 6,000cr Wages Payable (+L).................................... 6,000

To record wages incurred during 2009, but not yet paid.

(b) December 31, 2009:

dr Interest Receivable (+A)........................................ 3,000cr Interest Revenue (+R, +SE)........................ 3,000

To record interest revenue earned during 2009, but not yet collected.

E4-6

Req. 1

2010 Income statement: Insurance Expense ($7,200 x 12/24) = $3,600 used.

2010 Balance sheet: Prepaid Insurance ($7,200 x 12/24) = $3,600 unused.

Req. 2

2010 Income statement: Shipping Supplies Expense: $72,000 + ($15,000 $10,000) = $77,000 used.

2010 Balance sheet: Shipping Supplies (given) = $10,000

Req. 3

Assets = Liabilities + Stockholders’ Equitya.

Prepaid Insurance

3,600=

Insurance Expense (+E)

3,600

b.

Shipping Supplies

5,000=

Supplies Expense (+E)

5,000

ANSWERS TO GROUP A PROBLEMS

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PA4-1

Req. 1STARBOOKS CORPORATION

Adjusted Trial BalanceAt September 30, 2009

(in thousands)

Account Titles Debit CreditCash $ 307Accounts Receivable 191Supplies 546Prepaid Expenses 94Other Current Assets 71Property and Equipment 2,142Accumulated Depreciation $ 300Other Long-lived Assets 461Accounts Payable 221Accrued Liabilities 354Unearned Revenue 175Short-term Bank Loan 476Long-term Debt 196Contributed Capital 151Retained Earnings 1,445Service Revenues 6,369Interest Revenue 92Selling Expenses 2,605Store Operating Expenses 2,166Other Operating Expenses 197Depreciation Expense 340General and Administrative Expenses 357Income Tax Expense 302 Totals $ 9,779 $ 9,779

No. The amount to be reported for retained earnings on the balance sheet would be the amount reported on the statement of retained earnings. The $1,445 in the adjusted trial balance does not yet include the net income generated by Starbooks for the year ended September 30, 2009.

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Req. 2 dr Service Revenues (R)....................................... 6,369dr Interest Revenue (R)......................................... 92 cr Selling Expenses (E) ............................... 2,605 cr Store Operating Expenses (E) ................. 2,166 cr Other Operating Expenses (E) ................ 197 cr Depreciation Expense (E) ........................ 340 cr General and Administrative Expenses (E) 357 cr Income Tax Expense (E) ......................... 302 cr Retained Earnings (+SE) .......................... 494

Req. 3STARBOOKS CORPORATION

Post-closing Trial BalanceAt September 30, 2009

(in thousands)

Account Titles Debit CreditCash $ 307Accounts Receivable 191Supplies 546Prepaid Expenses 94Other Current Assets 71Property and Equipment 2,142Accumulated Depreciation $ 300Other Long-lived Assets 461Accounts Payable 221Accrued Liabilities 354Unearned Revenue 175Short-term Bank Loan 476Long-term Debt 196Contributed Capital 151Retained Earnings 1,939Service Revenues 0Interest Revenue 0Selling Expenses 0Store Operating Expenses 0Other Operating Expenses 0Depreciation Expense 0General and Administrative Expenses 0Income Tax Expense 0 Totals $ 3,812 $ 3,812

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PA4-2

Req. 1

Assets = Liabilities + Stockholders’ Equitya. Prepaid

Insurance100

=Insurance

Expense (+E)100

b. Supplies 700=

Supplies Expense (+E)

700

c.=

Accrued Liabilities

+800 Repairs and Maintenance Expense (+E)

800

d.=

Property Tax Payable

+1,600 Property Tax Expense (+E)

1,600

e. Accounts Receivable

+7,900=

Service Revenue (+R)

+7,900

f. Accumulated Depreciation (+xA)

2,750=

Depreciation Expense (+E)

2,750

g.=

Interest Payable

+500 Interest Expense (+E)

500

h.=

Income Taxes Payable

+9,435* Income Tax Expense (+E)

9,435

* ($30,000 – 100 – 700 – 800 – 1,600 + 7,900 – 2,750 – 500) x 30% = $9,435.

Req. 2

a. dr Insurance Expense (+E, SE).................................. 100 cr Prepaid Insurance (A)................................. 100

$600 ÷ 36 months x 6 months of coverage. This entry reduces the asset (Prepaid Insurance) because part of it has been used and only $500 represents future benefits (an asset) to the company.

b. dr Supplies Expense (+E, SE).................................... 700 cr Supplies (A).................................................. 700

The Supplies account is decreased (credited) to record the use of supplies during the year because this expense was incurred in 2010, calculated as Unadjusted balance of $1,000 – Ending balance of $300.

c. dr Repairs and Maintenance Expense (+E, SE)........ 800

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cr Accrued Liabilities (+L).................................. 800

Repairs and Maintenance Expense is increased (debited) because this expense was incurred in 2010. A liability (accrued liabilities) is credited because this amount is owed but will not be paid until 2011.

d. dr Property Tax Expense (+E, SE)............................. 1,600 cr Property Tax Payable (+L).............................. 1,600

Property Tax Expense is increased (debited) because this expense was incurred in 2010. A liability (Property Tax Payable) is credited because this amount is owed but will not be paid until 2011.

e. dr Accounts Receivable (+A)....................................... 7,900 cr Service Revenue (+R, +SE).......................... 7,900

This entry records an asset for the amount due from customers and recognizes the revenue because it was earned in 2010.

f. dr Depreciation Expense (+E, SE)............................. 2,750 cr Accumulated Depreciation (+xA, A) .............. 2,750

To record depreciation on van for six months (amount is given).

g. dr Interest Expense (+E, SE)..................................... 500 cr Interest Payable (+L)....................................... 500

To accrue interest expense incurred but not paid (given).h. dr Income Tax Expense (+E, SE)............................... 9,435

cr Income Tax Payable (+L)................................ 9,435

To accrue income tax expense incurred but not paid: Income before adjustments (given) $30,000Effect of adjustments (a) through (g) +1,450 (100 700 800 1,600Income before income taxes 31,450 + 7,900 2,750 500)Income tax rate 30%Income tax expense $ 9,435

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PA4-5Req. 1, 2, 4, and 7 (T-accounts)

+ Cash (A) Accounts

+ Receivable (A) + Supplies (A) Bal. 7 b 25 Bal. 3 g 9 Bal. 3a 22 e 25 d 8 i 7c 5 f 3 10d 47 h 10 l 7g 9 k 4j 3Bal. 26 Bal. 2 Bal. 3

+ Equipment (A) Accumulated

Depreciation (xA) + + Other Assets (A) Bal. 6 Bal.

1 Bal. 6

b 25 m 4 f 3Bal. 31 Bal. 5 Bal. 9

Accounts Payable (L) + Notes Payable (L) + Wages Payable (L) +

h 10 Bal. 5 a 22 o 3e 5i 7Bal. 7 Bal. 22 Bal. 3

Interest Payable (L) + Income Taxes Payable (L) +

Unearned Revenue (L) +

n 1 p 4 j 3Bal. 1 Bal. 4 Bal. 3

Contributed Capital (SE) +

Retained Earnings (SE) +

Bal. 15 Bal. 4c 5 CE2 4 CE1 6Bal. 20 Bal. 6

Dividends + Declared (D) Service Revenue (R) +

Income Tax + Expense (E)

k 4 d 55 p 4CE2 4 CE1 55 CE1 4

Bal. 0 Bal. 0 Bal. 0

Interest + Expense (E)

Depreciation + Expense (E)

Operating + Expenses (E)

n 1 m 4 e 30CE1 1 CE1 4 l 7

o 3 CE1 40Bal. 0 Bal. 0 Bal. 0

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Req. 2

a. dr Cash (+A)........................................................... 22 cr Note Payable (+L)..................................... 22Borrowed cash on note.

b. dr Equipment (+A)................................................... 25 cr Cash (A)................................................... 25Purchased equipment.

c. dr Cash (+A)........................................................... 5 cr Contributed Capital (+SE)......................... 5Sold capital stock for cash.

d. dr Cash (+A)........................................................... 47dr Accounts Receivable (+A).................................. 8 cr Service Revenue (+R, +SE)...................... 55Service revenues earned.

e. dr Operating Expenses (+E, SE) 30 cr Accounts Payable (+L).............................. 5 cr Cash (A)................................................... 25Operating expenses incurred.

f. dr Other Assets (+A)............................................... 3 cr Cash (A)................................................... 3Purchased additional assets.

g. dr Cash (+A)........................................................... 9 cr Accounts Receivable (A)......................... 9Collected on customers' accounts.

h. dr Accounts Payable (L)........................................ 10 cr Cash (A).................................................. 10Paid on accounts payable.

i. dr Supplies (+A)...................................................... 7 cr Accounts Payable (+L).............................. 7Purchased supplies for future use.

j. dr Cash (+A)........................................................... 3 cr Unearned Revenue (+L).......................... 3Deposit received for revenue not yet earned.

k. dr Dividends Declared (+D,SE).............................. 4 cr Cash (A).................................................. 4 Declared and paid a dividend.

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Req. 3NORTHLAND PHYSICAL THERAPY

Unadjusted Trial BalanceAt December 31, 2009

(in thousands)

Account Titles Debit CreditCash $ 26Accounts Receivable 2Supplies 10Equipment 31Accumulated Depreciation (Equipment) $ 1Other Assets 9Accounts Payable 7Notes Payable 22Wages PayableInterest PayableIncome Taxes PayableUnearned Revenue 3Contributed Capital 20Retained Earnings 4Dividends Declared 4Service Revenue 55Depreciation ExpenseIncome Tax ExpenseInterest ExpenseOperating Expenses 30 Totals $ 112 $ 112

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Req. 4

l. dr Operating Expenses (+E, SE)..................... 7 cr Supplies (A)........................................ 7To record supplies used ($10 – 3).

m. dr Depreciation Expense (+E, SE).................. 4 cr Accumulated Depreciation (+xA, A). . . 4To record depreciation for the year (amount is given).

n. dr Interest Expense (+E, SE)........................... 1 cr Interest Payable (+L)........................... 1To accrue interest for July - December, 2009.

o. dr Operating Expenses (+E, SE)..................... 3 cr Wages Payable (+L)............................ 3To accrue wages incurred but not paid.

p. dr Income Tax Expense (+E, SE).................... 4 cr Income Taxes Payable (+L)................. 4To accrue income tax.

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Adjusted Trial BalanceAt December 31, 2009

(in thousands)

Account Titles Debit CreditCash $ 26Accounts Receivable 2Supplies 3Equipment 31Accumulated Depreciation (Equipment) $ 5Other Assets 9Accounts Payable 7Notes Payable 22Wages Payable 3Interest Payable 1Income Taxes Payable 4Unearned Revenue 3Contributed Capital 20Retained Earnings 4Dividends Declared 4Service Revenue 55Depreciation Expense 4Income Tax Expense 4Interest Expense 1Operating Expenses 40 Totals $ 124 $ 124


Income StatementFor the Year Ended December 31, 2009

(in thousands)

Revenues:Service Revenue $ 55

Expenses:Operating Expenses 40Depreciation Expense 4Interest Expense 1Income Tax Expense 4

Total Expenses 49

Net Income $ 6

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NORTHLAND PHYSICAL THERAPYStatement of Retained Earnings

For the Year Ended December 31, 2009(in thousands)

Balance, January 1, 2009 $ 4 Add: Net Income 6 Subtract: Dividends Declared (4)Balance, December 31, 2009 $ 6

NORTHLAND PHYSICAL THERAPYBalance Sheet

At December 31, 2009(in thousands)

Assets: Liabilities:Current Assets: Current Liabilities:Cash $ 26 Accounts Payable $ 7Accounts Receivable 2 Notes Payable 22Supplies 3 Wages Payable 3 Total Current Assets 31 Interest Payable 1

Income Taxes Payable 4Equipment $ 31 Unearned Revenue 3Less: Accum. Depr. 5 26 Total Current Liabilities 40 Other Assets 9 Stockholders' Equity:

Contributed Capital 20Retained Earnings 6 Total Stockholders' Equity 26

Total Assets $ 66Total Liabilities and Stockholders' Equity $ 66

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Req. 7

1 dr Service Revenue (R)................................... 55 cr Depreciation Expense (E) .................... 4 cr Income Tax Expense (E) ...................... 4 cr Interest Expense (E) ............................. 1 cr Operating Expenses (E)........................ 40 cr Retained Earnings (+SE) ....................... 6

2 dr Retained Earnings (SE) .............................. 4 cr Dividends Declared (D)......................... 4

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Req. 8

NORTHLAND PHYSICAL THERAPYPost-Closing Trial Balance

At December 31, 2009(in thousands)

Account Titles Debit CreditCash $ 26Accounts Receivable 2Supplies 3Equipment 31Accumulated Depreciation (Equipment) $ 5Other Assets 9Accounts Payable 7Notes Payable 22Wages Payable 3Interest Payable 1Income Taxes Payable 4Unearned Revenue 3Contributed Capital 20Retained Earnings 6Dividends Declared 0Service Revenue 0Depreciation Expense 0Income Tax Expense 0Interest Expense 0Operating Expenses 0 Totals $ 71 $ 71

Req. 9

The business generated $6 (thousand) in net income during 2009. The company is financed primarily by liabilities, with liabilities providing financing for $40 (thousand) of total assets and stockholders’ equity providing financing of $26 (thousand).

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ANSWERS TO SKILLS DEVELOPMENT CASES

S4-6

Req.1

(a) dr Supplies Expense (+E, SE)………………… 4,200cr Supplies (A)………………………………. 4,200

To record supplies used ($6,000 $1,800 = $4,200).

(b) dr Insurance Expense (+E, SE)……………………. 2,000cr Prepaid Insurance (A)…………………… 2,000

To record expired insurance at December 31, 2009.

(c) dr Depreciation Expense (+E, SE)………………… 8,000cr Accumulated Depreciation (+xA, A)……. 8,000

To record depreciation for one year.

(d) dr Salaries Expense (+E, SE)……………………… 2,200cr Salaries Payable (+L)……………………… 2,200

To record salaries earned but not paid.

(e) dr Transportation Revenue (R, SE)..………… 7,000cr Unearned Transportation Revenue (+L) … 7,000

To record transportation revenue not earned butcollected in advance, previously recorded as earned.

(f) dr Income Tax Expense (+E, SE)…………………... 3,650cr Income Tax Payable (+L)…………………… 3,650

To record 2009 income taxes.Computation:Transportation revenue: $85,000 7,000 = $78,000Expenses: $47,000 + 4,200 + 2,000 + 8,000 + 2,200 = 63,400Net income before taxes $14,600 Income tax expense: $14,600 x 25% = $ 3,650

4-16


Req. 2PIRATE PETE MOVING CORPORATIONCorrections to 2009 Financial Statements

Amounts Reported

Changes Plus Minus

Correct Amounts

2009 Income Statement:Revenue: Transportation Revenue $ 85,000 e 7,000 $ 78,000 Expenses: Salaries Expense 17,000 d 2,200 19,200 Supplies Expense 12,000 a 4,200 16,200 Other Expenses 18,000 18,000 Insurance Expense 0 b 2,000 2,000 Depreciation Expense 0 c 8,000 8,000 Income Tax Expense 0 f 3,650 3,650 Total Expenses 47,000 67,050 Net Income $ 38,000 $ 10,950

December 31, 2009 Balance SheetAssets:Current Assets: Cash $ 2,000 $ 2,000 Receivables 3,000 3,000 Supplies 6,000 a 4,200 1,800 Prepaid Insurance 4,000 b 2,000 2,000 Total Current Assets 15,000 8,800 Equipment 40,000 40,000 Less: Accumulated Depn. 0 c 8,000 (8,000) Remaining Assets 27,000 27,000 Total Assets $ 82,000 $ 67,800 Liabilities:Current Liabilities: Accounts Payable $ 9,000 $ 9,000 Salaries Payable 0 d 2,200 2,200 Unearned Transportation Revenue 0 e 7,000 7,000 Income Tax Payable 0 f 3,650 3,650 Total Current Liabilities 9,000 21,850 Stockholders' Equity: Contributed Capital 35,000 35,000 Retained Earnings 38,000 10,950 Total Stockholders' Equity 73,000 45,950 Total Liabilities and Stockholders' Equity

$ 82,000 $ 67,800

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Req.3

(a) Decrease Net Income by $27,050.(b) Decrease Total Assets by $14,200.

Req. 4

(today’s date)

To the Stockholders of Pirate Pete Moving Corporation:

We regret to inform you that your request for a $20,000 loan has been denied.

Our review showed that various adjustments were required to the original set of financial statements provided to us. The original (unadjusted) financial statements overstated net income for 2009 by $27,050 (i.e., $38,000 $10,950). This overstatement was caused by incorrectly including $7,000 of revenue collected in advance that had not been earned in 2009. Further, the expenses were understated and income tax expense had not been included.

Total assets were overstated by $14,200 (i.e., $82,000 $67,800). Supplies were overstated by $4,200, prepaid insurance was overstated by $2,000, and the net book value of the equipment was overstated by $8,000 because annual depreciation was not properly recognized.

We require that there be sufficient collateral pledged against the loan before we can consider it. The current market value of the equipment may be able to provide additional collateral against which the loan could be secured. Your personal investments may also be considered viable collateral if you are willing to sign an agreement pledging these assets as collateral for the loan. This is a common requirement for small start-up businesses.

If you would like us to reconsider your application, please provide us the current market values of any assets you would pledge as collateral.

Regards,(your name)

Loan Application DepartmentYour Bank

4-18

sm chap004

Documents

dr interest

closing trial

cr interest

dr accounts

dr operating

dr interest

cr wages payable

income tax