Sollution Accounting Chapter # 03 Keiso

CHAPTER 3
Adjusting the Accounts
ASSIGNMENT CLASSIFICATION TABLE
Brief A
Learning Objectives Questions Exercises Do It! Exercises Problems
*1. Explain the accrual basis of 1, 2, 3, 4, 5, 1, 2, 8 1 1, 2, 3, 4, 10,

accounting and the reasons 6, 7, 8, 18 11
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for adjusting entries.
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*2. Prepare adjusting entries for 8, 9, 10, 11, 2, 3, 4, 5, 6,8 2 4, 5, 6, 7, 8, 1A, 2A, 3A,
deferrals. 12, 13, 18, 9, 10, 11, 12, 4A, 5A, 6A
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19, 20 13, 14, 15,
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17, 19
*3.
accruals.
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Prepare adjusting entries for
x 8, 14, 15, 16,

17, 18, 19,
7, 8 3 4, 5, 6, 7, 8,
9, 10, 11, 12,
1A, 2A, 3A,
4A, 5A, 6A
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20 13, 14, 16,
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17, 19
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*4. Describe the nature and
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21 9, 10 4 6, 10, 11, 17, 1A, 2A, 3A,
purpose of an adjusted trial 18 5A, 6A
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balance.
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*5. Prepare adjusting entries for 22 11 20, 21 6A
the alternative treatment of
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deferrals.
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*6. Discuss financial reporting 23, 24, 25, 12, 13, 14, 22, 23, 24,
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concepts. 26, 27, 28 15 25, 26
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*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the
chapter.
Copyright © 2018 WILEY. Weygandt, Accounting Principles, 13/e, Solutions Manual (For Instructor Use Only) 3-1
ASSIGNMENT CHARACTERISTICS TABLE
Problem Difficulty Time

Number Description Level Allotted (min.)
1A Prepare adjusting entries, post to ledger accounts, Easy 40–50

and prepare an adjusted trial balance.
2A Prepare adjusting entries, post, and prepare adjusted Easy 50–60

trial balance, and financial statements.
3A Prepare adjusting entries and financial statements. Moderate 40–50
4A Prepare adjusting entries. Moderate 30–40
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5A Journalize transactions and follow through accounting Moderate 60–70
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cycle to preparation of financial statements.
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*6A* Prepare adjusting entries, adjusted trial balance, Moderate 40–50
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and financial statements using appendix.
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3-2 Copyright © 2018 WILEY Weygandt, Accounting Principles, 13/e, Solutions Manual (For Instructor Use Only)
ANSWERS TO QUESTIONS
1. (a) Under the time period assumption, an accountant is required to determine the relevance of
each business transaction to specific accounting periods.
(b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal year
that extends from January 1 to December 31 is referred to as a calendar year. Accounting
periods of less than one year are called interim periods.
LO1 BT: C Difficulty: Easy TOT: 4 min. AACSB: None AICPA FC: Measurement
2. The two generally accepted accounting principles that relate to adjusting the accounts are:
(1) The revenue recognition principle, which states that revenue should be recognized in the
accounting period in the performance obligation is satisfied.
(2) The expense recognition principle, which states that efforts (expenses) be matched with
accomplishments (revenues).
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3.
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The law firm should recognize the revenue in April. The revenue recognition principle states that
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revenue should be recognized in the accounting period in the performance obligation is satisfied.
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4.
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Information presented on an accrual basis is more useful than on a cash basis because it reveals
relationships that are likely to be important in predicting future results. To illustrate, under accrual
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accounting, revenues are recognized when the performance obligation is satisfied so they can be
related to the economic environment in which they occur. Trends in revenues are thus more
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meaningful.
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5.
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Expenses of $4,500 should be deducted from the revenues in April. Under the expense
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recognition principle efforts (expenses) should be matched with accomplishments (revenues).
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6. No, adjusting entries are required by the revenue recognition and expense recognition principles.
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7.
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A trial balance may not contain up-to-date information for financial statements because:
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(1) Some events are not journalized daily because it is not efficient to do so.
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(2) The expiration of some costs occurs with the passage of time rather than as a result of daily
transactions.
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(3) Some items may be unrecorded because the transaction data are not yet known.
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8. The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaid
expenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.
LO1, 2, 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement
9. In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.
Copyright © 2018 WILEY Weygandt, Accounting Principles, 13/e, Solutions Manual (For Instructor Use Only) 3-3
Questions Chapter 3 (Continued)
10. No. Depreciation is the process of allocating the cost of an asset to expense over its useful life in
a rational and systematic manner. Depreciation results in the presentation of the book value of
the asset, not its fair value.
11. 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.
12. Equipment ............................................................................................... $18,000

Less: Accumulated Depreciation—Equipment ........................................ 6,000 $12,000
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LO2 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Reporting
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*13. In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.
*14.
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Asset and revenue. An asset would be debited and a revenue would be credited.
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*15.
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An expense is debited and a liability is credited in the adjusting entry.
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*16. Net income was understated $200 because prior to adjustment, revenues are understated by
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$900 and expenses are understated by $700. The difference in this case is $200 ($900 – $700).
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($900 - $700 = $200 understated)
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(Rev. understated – Exp. understated = Net inc. understated)
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*17. The entry is:
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Jan. 9 Salaries and Wages Payable ....................................................... 2,000
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Salaries and Wages Expense ...................................................... 3,000
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Cash ..................................................................................... 5,000
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LO3 BT: AP Difficulty: Easy TOT: 2 min. AACSB: Analytic AICPA FC: Measurement
*18. (a) Accrued revenues.
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(b) Unearned revenues. (e) Prepaid expenses.
(c) Accrued expenses. (f) Accrued revenues or unearned revenues.
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LO1, 2, 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement
*19. (a) Salaries and Wages Payable. (d) Supplies Expense.

(b) Accumulated Depreciation. (e) Service Revenue.
(c) Interest Expense. (f) Service Revenue.
LO2, 3 BT: C Difficulty: Easy TOT: 3 min. AACSB: None AICPA FC: Measurement
20. Disagree. An adjusting entry affects only one balance sheet account and one income statement
account.
LO2, 3 BT: C Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement
21. 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.
*22. For Supplies Expense (prepaid expense): expenses are overstated and assets are understated.
The adjusting entry is:
Assets (Supplies) ..................................................................................... XX
Expenses (Supplies Expense)............................................................ XX
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For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated.
The adjusting entry is:
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Revenues (Rent Revenue) ....................................................................... XX
Liabilities (Unearned Rent Revenue) .................................................. XX
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LO5 BT: AP Difficulty: Moderate TOT: 5 min. AACSB: Analytic AICPA FC: Measurement
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**23. (a) The primary objective of financial reporting is to provide financial information that is useful to
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investors and creditors for making decisions about providing capital.
(b) The fundamental qualitative characteristics are relevance and faithful representation. The
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enhancing qualities are comparabiIity, consistency, verifiability, timeliness, and
understandability.
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*24. Gross is correct. Consistency means using the same accounting principles and accounting
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methods from period to period within a company. Without consistency in the application of
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accounting principles, it is difficult to determine whether a company is better off, worse off, or
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the same from period to period.
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*25. Comparability results when different companies use the same accounting principles.
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Consistency means using the same accounting principles and methods from year to year within
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the same company.
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*26. The constraint is the cost constraint. The cost constraint allows accounting standard setters to
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weigh the cost that companies will incur to provide information against the benefit that financial
statement users will gain from having the information available.
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*27. Accounting relies primarily on two measurement principles. Fair value is sometimes used when
market price information is readily available. However, in many situations reliable market price
information is not available. In these instances, accounting relies on cost as its basis.
*28. The economic entity assumption states that every economic entity can be separately identified
and accounted for. This assumption requires that the activities of the entity be kept separate and
distinct from (1) the activities of its owners (the shareholders) and (2) all other economic entities.
A shareholder of a company charging personal living costs as expenses of the company is an
example of a violation of the economic entity assumption.
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SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
(a) Prepaid Insurance—to recognize insurance expired during the period.
(b) Depreciation Expense—to account for the depreciation that has occurred
on the asset during the period.
(c) Unearned Service Revenue—to record revenue earned for which the
performance obligation is satisfied.
(d) Interest Payable—to recognize interest accrued but unpaid on notes
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payable.
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BRIEF EXERCISE 3-2
Item E
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(a)
Type of Adjustment5 x y (b)
Account Balances before Adjustment
1.
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Prepaid Expenses Assets Overstated
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Expenses Understated
2.
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Accrued Revenues
s e Assets Understated
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3.
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Accrued Expenses Expenses Understated
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Liabilities Understated
4.
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Unearned Revenues
.
Liabilities Overstated
Revenues Understated
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LO1, 2 BT: AN Difficulty: Moderate TOT: 8 min. AACSB: Analytic AICPA FC: Measurement
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BRIEF EXERCISE 3-3
Dec. 31
w Supplies Expense ................................................
Supplies ($6,700 – $2,100) ...........................
4,600
4,600
Supplies Supplies Expense

6,700 12/31 4,600 12/31 4,600
12/31 Bal. 2,100
($6,700 - $2,100 = $4,600)
(Beg. sup. bal. – End. sup. bal. = Supp. exp.)
LO2 BT: AN Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement
BRIEF EXERCISE 3-4
Dec. 31 Depreciation Expense .......................................... 3,750

Accumulated Depreciation—
Equipment ................................................. 3,750
Depreciation Expense Accum. Depreciation—Equipment

12/31 3,750 12/31 3,750
Balance Sheet:
Equipment ........................................................... $30,000
Less: Accumulated Depreciation—
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Equipment ................................................ 3,750 $26,250
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LO2 BT: AN Difficulty: Easy TOT: 5 min. AACSB: Analytic AICPA FC: Measurement, Reporting
BRIEF EXERCISE 3-5
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July 1
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Prepaid Insurance ...........................................
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Cash .........................................................
15,120
15,120
Dec. 31
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Insurance Expense [($15,120 ÷ 4) x 1/2] ........ 1,890
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Prepaid Insurance ................................... 1,890
Prepaid Insurance
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7/1 15,120 12/31 1,890 12/31 1,890
12/31 Bal. 13,230
[($15,120 ÷ 4) x ½ = $1,890]
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[(Tot. amt. of ins. purch. ÷ Life of policy) x ½ yr. = Ins. exp.]
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BRIEF EXERCISE 3-6
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July 1 Cash ................................................................. 15,120
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Unearned Service Revenue .................... 15,120
Dec. 31
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Unearned Service Revenue ............................
Service Revenue ......................................
1,890
1,890
Unearned Service Revenue Service Revenue

12/31 1,890 7/1 15,120 12/31 1,890
12/31 Bal. 13,230
[($15,120 ÷ 4) x ½ = $1,890]
[(Tot. amt. of ins. sold ÷ Life of policy) x ½ yr. = Serv. rev.]
BRIEF EXERCISE 3-7
1. Dec. 31 Interest Expense .......................................... 400

Interest Payable .................................... 400
2. 31 Accounts Receivable ................................... 2,300

Service Revenue ................................... 2,300
3. 31 Salaries and Wages Expense ...................... 900

Salaries and Wages Payable ................ 900
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BRIEF EXERCISE 3-8
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Account Type of Adjustment Related Account
Accounts Receivable
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Prepaid Insurance Prepaid Expenses Insurance Expense
Accum. Depr.—Equipment Prepaid Expenses Depreciation Expense
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Interest Payable Accrued Expenses Interest Expense
Unearned Service Revenue Unearned Revenues Service Revenue
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BRIEF EXERCISE 3-9
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MILLER COMPANY
Income Statement
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For the Year Ended December 31, 2020
Revenues
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Service revenue .................................................... $39,000
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Expenses
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Salaries and wages expense ............................... $16,000
Rent expense ........................................................ 4,000
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Insurance expense ...............................................
Supplies expense .................................................
Depreciation expense ...........................................
2,000
1,500
1,300
Total expenses .............................................. 24,800
Net income .................................................................... $14,200
[$39,000 – ($16,000 + $4,000 + $2,000 + $1,500 + $1,300) = $14,200]
[Serv. rev. – (Sal. & wages exp. + Rent exp. + Ins. exp. + Supp. exp. + Depr. exp.) = Net inc.]
LO4 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Reporting
BRIEF EXERCISE 3-10
MILLER COMPANY
Owner’s Equity Statement
For the Year Ended December 31, 2020
Owner’s capital, January 1 ............................................................. $16,400

Add: Net income ............................................................................. 14,200
30,600
Less: Drawings ............................................................................... 7,000
Owner’s capital, December 31 ........................................................ $23,600
($16,400 + $14,200 - $7,000 = $23,600)
[Beg. owner’s cap. + Net inc. – Owner’s draws. = End. owner’s cap.]
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*BRIEF EXERCISE 3-11
(a) Apr. 30
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Supplies ........................................................
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400
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Supplies Expense ................................. 400
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(b) 30 Service Revenue ........................................... 3,000
Unearned Service Revenue .................. 3,000
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(a) Predictive value.
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(b) Confirmatory value.
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(c) Materiality.
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(d) Complete.
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(e) Free from error.
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(f) Comparability.
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(g) Verifiability.
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(h) Timeliness.
(a) Relevant.
(b) Faithful representation.
(c) Consistency.
(a) 1. Predictive value.

(b) 2. Neutral.
(c) 3. Verifiable.
(d) 4. Timely.
(c) Financial statements should disclose all events and circumstances
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that would matter to users of financial statements.
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SOLUTIONS FOR DO IT! REVIEW EXERCISES
DO IT! 3-1
1. (d) 2. (e) 3. (h) 4. (c)

LO1 BT: K Difficulty: Easy TOT: 2 min. AACSB: None AICPA FC: Measurement
DO IT! 3-2
1. Insurance Expense ....................................................... 400

Prepaid Insurance ................................................. 400
(To record insurance expired)
2.
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Supplies Expense ($2,500 – $1,600) ............................ 900
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Supplies ................................................................. 900
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(To record supplies used)
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($2,500 - $1,600 = $900)
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(Beg. sup. bal. – Supp. on hand = Supp. exp.)
3.
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Depreciation Expense .................................................. 480
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Accumulated Depreciation—Equipment .............. 480
(To record monthly depreciation)
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4. Unearned Service Revenue ($9,000 x 2/5) .................. 3,600
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Service Revenue .................................................... 3,600
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(To record revenue for services provided)
($9,000 x 2/5 = $3,600)
(Unearned serv. rev. amt. x Fraction of serv. performed = Serv. rev.)
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DO IT! 3-3
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1. Salaries and Wages Expense ...................................... 1,300
Salaries and Wages Payable................................. 1,300
2.
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(To record accrued salaries)
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Interest Expense ($20,000 x .06 x 1/12) ....................... 100
Interest Payable ..................................................... 100
(To record accrued interest)
($20,000 x .06 x 1/12 = $100)
(Prin. x Int. rate x one month = Int. exp.)
DO IT! 3-3 (Continued)
3. Accounts Receivable ................................................... 2,400

Service Revenue.................................................... 2,400
(To record revenue for service performed)
DO IT! 3-4
(a) The net income is determined by adding revenues and subtracting

expenses. The net income is computed as follows:
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Revenues
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Service revenue................................................ $11,360
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Rent revenue .................................................... 1,600
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Total revenues .......................................... $12,960
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Expenses
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Salaries and wages expense ........................... 7,400
Rent expense .................................................... 1,200
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Depreciation expense ...................................... 700
Utilities expense ............................................... 410
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Supplies expense .............................................
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160
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Interest expense ............................................... 40
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Total expenses.......................................... 9,910
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Net income ............................................................... $ 3,050
[($11,360 + $1,600) – ($7,400 + $1,200 + $700 + $410 + $160 + $40) = $3,050]
[(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Depr. exp. + Util. exp. + Supp. exp. + Int. exp.) = Net
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inc.]
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(b) Total assets and liabilities are computed as follows:
Assets
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Cash .................................................................. $ 5,360
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Accounts receivable ........................................ 580
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Prepaid rent ...................................................... 1,120
Supplies ............................................................ 920
Equipment ........................................................ $12,000
Less: Accumulated depreciation—
Equipment .............................................. 700 11,300
Total assets............................................... $19,280
DO IT! 3-4 (Continued)
Liabilities
Notes payable ................................................... $ 4,000
Accounts payable............................................. 790
Unearned rent revenue .................................... 400
Salaries and wages payable ............................ 300
Interest payable ................................................ 40
Total liabilities ........................................... $ 5,530
[($5,360 + $580 + $1,120 + $920) + ($12,000 - $700) = $19,280]; [(Cash + Accts. rec. + Prepd. rent. + Supp.) +
(Equip. – Accum. depr.-equip.) = Tot. assets]
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($4,000 + $790 + $400 + $300 + $40 = $5,530); (Notes pay. + Accts. pay. + Unearned rent rev. + Sal. & wages
pay. + Int. pay. = Tot. liabl.)
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(c) Owner’s Capital at June 30, 2020, can be computed in one of two ways.
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Using the basic accounting equation (Assets = Liabilities + Owner’s
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Equity), we find that total assets are $19,280 and total liabilities are
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$5,530; therefore, Owner’s Equity (Owner’s Capital) is $13,750 ($19,280 –
$5,530).
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Another way to compute the Owner’s Capital at June 30, 2020, is as
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follows:
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Owner’s capital, April 1 ........................................... $ –0–
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Add: Investments ..................................................... $11,200
Net income ...................................................... 3,050 14,250
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14,250
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Less: Drawings ........................................................ 500
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Owner’s capital, June 30 ......................................... $13,750
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($19,280 - $5,530 = $13,750); (Tot. assets – Tot. liabl. = Owner’s cap.) OR
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[$0 + ($11,200 + $3,050) - $500 = $13,750]; [(Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draws. = End.
owner’s cap.]
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LO4 BT: AN Difficulty: Moderate TOT: 25 min. AACSB: Analytic AICPA FC: Reporting
SOLUTIONS TO EXERCISES
EXERCISE 3-1
1. True.
2. True.
3. False. Many business transactions affect more than one of these artificial
time periods. For example, the purchase of a building affects expenses
for many years.
4. True.
5.
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False. A time period that lasts less than one year, such as monthly or
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quarterly periods, is called an interim period.
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6. False. All calendar years are fiscal years, but not all fiscal years are
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calendar years. An accounting time period that is one year in length is
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referred to as a fiscal year. A fiscal year that starts on January 1 and
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ends on December 31 is a calendar year.
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EXERCISE 3-2
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(a) Accrual-basis accounting records the transactions that change a
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company’s financial statements in the periods in which the events
occur rather than in the periods in which the company receives or pays
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cash. Information presented on an accrual basis is useful because it
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reveals relationships that are likely to be important in predicting future
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results. Conversely, under cash-basis accounting, revenue is recorded
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only when cash is received, and an expense is recognized only when
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cash is paid. As a result, the cash basis of accounting often leads to
misleading financial statements.
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(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. 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.
EXERCISE 3-2 (Continued)
(c) Dear Senator,
It is my understanding, after having taken a beginning course in account-

ing 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 yet for
the mere reason that they haven’t been paid yet. I realize that the
deficit would dramatically increase if we were to implement an accrual
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system, but in all fairness, we citizens should be given a more accurate
picture of what our government is up to.
Sincerely,
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CONCERNED STUDENT
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LO1 BT: E Difficulty: Moderate TOT: 25 min. AACSB: Reflective Thinking, Communication AICPA FC:
Reporting AICPA PC: Communication
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EXERCISE 3-3
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(a) Cash received from revenue........................................... $108,000
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Cash paid for expenses .................................................. (72,000)
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Cash-basis net income ..........................................
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$ 36,000
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($108,000 - $72,000 = $36,000)
(Cash collected from cust. – Cash pd. for exp. = Cash-basis net inc.)
(b) Revenues [($108,000 – $25,000) + $36,000] ................... $119,000
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Expenses [($72,000 – $30,000) + $42,000] .....................
Accrual-basis net income ......................................
(84,000)
$ 35,000
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[(($108,000 - $25,000 + $36,000) – (($72,000 - $30,000) + $42,000) = $35,000]
.
[((Cash collected in 2020 – Cash related in 2019 svcs.) + Svcs. performed in 2020, not collected) – ((Cash pd. for
exp. in 2020 – Exp. incurred in 2019) + 2020 exp. incurred and not pd.) = Accrual-basis net inc.]
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LO1 BT: AP Difficulty: Easy TOT: 4 min. AACSB: Analytic AICPA FC: Measurement, Reporting
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EXERCISE 3-4
1.
2.
3.
Unearned revenue.
Accrued expense.
Accrued expense.
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4. Accrued revenue.
5. Prepaid expense.
6. Unearned revenue.
7. Accrued revenue.
8. Prepaid expense.
9. Prepaid expense.
10. Prepaid expense.
11. Accrued expense.
EXERCISE 3-5
1. Interest Expense .................................................... 300

Interest Payable
($10,000 x 9% x 4/12) ................................... 300
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($10,000 x 9% x 4/12 = $300)
(Prin. x Int. rate x Mos. loan outstanding = Int. exp.)
2.
I E
Supplies Expense .................................................. 1,550
R z
Supplies ($2,450 – $900) ................................. 1,550
E 5 y
($2,450 - $900 = $1,550)
x
(End. supp. bal. – Supp. on hand = Supp. exp.)
S 06 s.
& 48 rie
3. Depreciation Expense ............................................ 1,000
Accumulated Depreciation—Equipment ....... 1,000
4.
EF 2 e
Insurance Expense ................................................ 1,225
H I 3
Prepaid Insurance
9 d s
C 030 fan
($2,100 x 7/12) .............................................. 1,225
5. Unearned Service Revenue ................................... 8,000
i e
Service Revenue
h
($32,000 x 1/4) .............................................. 8,000
6.
. c
Accounts Receivable ............................................. 4,200
w
Service Revenue.............................................. 4,200
7.
w w
Salaries and Wages Expense ................................
Salaries and Wages Payable
($9,000 x 3/5) ................................................
5,400
5,400
($9,000 x 3/5 = $5,400)
(Wkly. sal. amt. x Fraction of wk. worked = Sal. & wages exp.)
EXERCISE 3-6
(a) (b)
Item Type of Adjustment Accounts before Adjustment
1. Accrued Revenues Assets Understated
2. Prepaid Expenses Assets Overstated

3. Accrued Expenses Expenses Understated

E S
I
4. Unearned Revenues Liabilities Overstated
5. Accrued Expenses
E R 5 y z
S 06 s. x
& 48 rie
6. Prepaid Expenses Assets Overstated
F
E 2 e
LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Measurement
EXERCISE 3-7
H I 9 3 d s
1. Mar. 31
C 030 fan
Depreciation Expense ($400 x 3).......... 1,200
e
h i
Equipment ......................................... 1,200
c
($400 x 3 = $1,200)
.
(Monthly depr. x 3 mos. = Depr. exp.)
w
2. 31 Unearned Rent Revenue .............................. 3,400
w
Rent Revenue ($10,200 x 1/3) ............... 3,400
w
($10,200 x 1/3 = $3,400)
(Unearned rent rev. bal. x Fraction of rev. earned = Rent rev.)
3. 31 Interest Expense ........................................... 500

Interest Payable..................................... 500
4. 31 Supplies Expense ......................................... 2,050

Supplies ($2,800 – $750) ....................... 2,050
($2,800 - $750 = $2,050)

(Beg. supp. bal. – End. supp. bal. – Supp. exp.)
5. 31 Insurance Expense ($300 x 3) ...................... 900

Prepaid Insurance ................................. 900
EXERCISE 3-8
1. Jan. 31 Accounts Receivable ................................... 785

Service Revenue ................................... 785
2. 31
E S
Utilities Expense ........................................... 650
R IUtilities Payable ....................................
z
650
E 5 y
3. 31 Depreciation Expense .................................. 400
S 06 s. x
Equipment ......................................... 400
& 48 rie
F
31 Interest Expense ........................................... 500
2 e
Interest Payable .................................... 500
I E 9 3 d s
H
4. 31 Insurance Expense ($24,000 ÷ 12) ............... 2,000
C 030 fan
Prepaid Insurance ................................. 2,000
($24,000 ÷ 12 = $2,000)
(Prepd. ins. bal. ÷ Term of policy in mos. = Ins. exp.)
5. 31
h i eSupplies Expense ($1,600 – $400) ............... 1,200
c
Supplies ................................................. 1,200
.
($1,600 - $400 = $1,200)
w
(Beg. supp. bal. – End. supp. bal. = Supp. exp.)
1. w w
EXERCISE 3-9
Oct. 31 Supplies Expense ......................................... 2,000

Supplies ($2,500 – $500) ....................... 2,000
2. 31 Insurance Expense ....................................... 120

Prepaid Insurance ................................. 120
3. Oct. 31 Depreciation Expense .................................. 50

Equipment ......................................... 50
4. 31 Unearned Service Revenue .......................... 600

Service Revenue ................................... 600
5. 31 Accounts Receivable .................................... 360

Service Revenue ................................... 360
S
6. 31 Interest Expense ..................................... 95
Interest Payable............................... 95
I E
R
7. 31 Salaries and Wages Expense ................ 1,625
E 5 y z
Salaries and Wages Payable .......... 1,625
x
LO2, 3 BT: AN Difficulty: Easy TOT: 10 min. AACSB: Analytic AICPA FC: Measurement
S 06 s.
& 48 rie
EXERCISE 3-10
LUNDEEN CO.
F
Income Statement
I E 3 2 s e
For the Month Ended July 31, 2020
H 9 d
Revenues
C 030 fan
Service revenue ($5,500 + $650) ............................. $6,150
Expenses
i e
Salaries and wages expense ($2,300 + $400)......... $2,700
Supplies expense ($1,200 – $250)...........................
h
950
c
Utilities expense ...................................................... 600
.
Insurance expense................................................... 500
w
Depreciation expense .............................................. 150
w
Total expenses ................................................. 4,900
Net income ....................................................................... $1,250
w
[($5,500 + $650) – (($2,300 + $400) + ($1,200 - $250) + $600 + $500 + $150) = $1,250]
[Serv. rev. – (Sal. & wages exp. + Supp. exp. + Util. exp. + Ins. exp. + Depr. exp.) = Net inc.]
LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Measurement
EXERCISE 3-11
Answer Computation
(a) Supplies balance = $800 Supplies expense $ 950
Add: Supplies (1/31) 850
Less: Supplies purchased 1,000
Supplies (1/1) $ 800
($950 + $850 - $1,000 = $800)
(Supp. exp. + End. supp. bal. – Supp. purch. = Beg. supp. bal.)
(b) Total premium = $4,800 Total premium = Monthly premium x 12;

$400 x 12 = $4,800
E S
Purchase date = Aug. 1, 2019 Purchase date: On Jan. 31, there are
I
6 months’ coverage remaining ($400 x 6).
R
Thus, the purchase date was 6 months
E 5 y z earlier on Aug. 1, 2019.
x
($400 x 12 = $4,800); $2,400 = ½ of $4,800, therefore 6 mos. have elapsed. Aug. 1 2019 is 6 mos. from Jan. 31,
S 06 s.
2020
(Monthly exp. x 12 = Tot. prem. for 1 yr.); (6 mos. before Jan. 31, 2020 is Aug. 1, 2019)
& 48 rie
(c) Salaries and wages
F 2 e
payable = $1,820 Cash paid $3,800
I E 3 s
Salaries and wages
9 d
payable (1/31/20) 920
H
C 030 fan
4,720
Less: Salaries and wages
expense 2,900
i e
Salaries and wages
h
payable (12/31/19) $1,820
c
($3,800 + $920 - $2,900 = $1,820)
.
(Cash pd. + 1/31/20 Sal. & wages pay. – Sal. & wages exp. = 12/31/19 Sal. & wages pay.)
w
LO1, 2, 3, 4 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Measurement
w
(a) July 10
w
EXERCISE 3-12
Supplies ........................................................ 650

Cash ....................................................... 650
14 Cash .............................................................. 2,200

Service Revenue ................................... 2,200
15 Salaries and Wages Expense ...................... 1,200

Cash ....................................................... 1,200
20 Cash............................................................... 1,000
Unearned Service Revenue .................. 1,000
(b) July 31 Supplies Expense ......................................... 900
Supplies ................................................. 900
31 Accounts Receivable .................................... 500
Service Revenue ................................... 500
31 Salaries and Wages Expense ...................... 1,200
S
Salaries and Wages Payable ................ 1,200
I E
31 Unearned Service Revenue .......................... 1,150
Service Revenue ................................... 1,150
R y z
EXERCISE 3-13
E
S 06 s. 5 x
Date Account Titles
& 48 rie Debit Credit
F
July 31 Interest Expense ($20,000  .06  1/12) ........... 100
E 2 e
Interest Payable ........................................ 100
31
H I 9 3 d s
Supplies Expense ($24,000 – $18,600) ............ 5,400
C 030 fan
Supplies ..................................................... 5,400
e
Rent Expense ($3,600  4)................................
i
31 900
h
Prepaid Rent .............................................. 900
31
. c
Salaries and Wages Expense .......................... 3,100
w
Salaries and Wages Payable .................... 3,100
31
w w
Depreciation Expense ($6,000  12) ................
Accumulated Depreciation—Buildings ...
500
500
31 Unearned Service Revenue ............................. 4,700

Service Revenue ....................................... 4,700
31 Maintenance and Repairs Expense ................. 2,300

Accounts Payable ..................................... 2,300
LO 2, 3 BT: AP Difficulty: Moderate TOT: 12 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
EXERCISE 3-14
Total Total Owner’s

Item Net Income Assets Liabilities Equity
Incorrect balances $70,000 $150,000 $70,000 $80,000
Effects of:
Salaries and Wages (10,000) 10,000 (10,000)
Rent Revenue 4,000 (4,000) 4,000
Depreciation (9,000) (9,000) (9,000)
Correct balances $55,000 $141,000 $76,000 $65,000
E S
(Net inc. = Current amt. – Sal. & wages exp. + Rent rev. – Depr. exp.); (Tot. liabl. = Current amt. + Sal. & wages pay. – Rent
I
rev.)
($70,000 – $10,000 + $4,000 – $9,000); ($70,000 + $10,000 – $4,000)
R z
LO 2, 3 BT: AN Difficulty: Moderate TOT: 10 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
EXERCISE 3-15 E
S 06 s. 5 x y
& 48 rie
F
(a) 2020
E 2 e
June 1 Prepaid Insurance ...................................... 1,800
I 3 s
Cash ..................................................... 1,800
H 9 d
C 030 fan
Aug. 31 Prepaid Rent ............................................... 6,500
Cash ..................................................... 6,500
Sept. 4
h i e Cash ............................................................ 3,600
c
Unearned Service Revenue ................ 3,600
Nov.
w . 30 Prepaid Cleaning........................................
Cash .....................................................
2,000
2,000
w
Dec.w 5 Cash ............................................................
Unearned Service Revenue ................
1,500
1,500
(b) 2020
Dec. 31 Insurance Expense .................................... 1,050
Prepaid Insurance ............................. 1,050
($1,800 × 7/12 months = $1,050)
31 Rent Expense ............................................. 5,200

Prepaid Rent ...................................... 5,200
($6,500 × 4/5 months = $5,200)
31 Unearned Service Revenue ....................... 1,600
E S
Service Revenue ............................... 1,600
I
($3,600 × 4/9 months = $1,600)
31
E R 5 y z
Maintenance and Repairs Expense........... 1,000
x
Prepaid Cleaning ............................... 1,000
31
S 06 s.
Unearned Service Revenue ....................... 1,025
& 48 rie
Service Revenue ............................... 1,025
F
($1,500 – $475 not played = $1,025 played)
I E 3 2 s e
H 9 d
C 030 fan
h i e
. c
w w
w
(c) Insurance Expense
Prepaid Insurance Dec. 31 Adj. 1,050

6/1 1,800
12/31 Adj. 1,050
Rent Expense
Bal. 750
Dec. 31 Adj. 5,200
S
Prepaid Rent
8/31 6,500
I E Service Revenue
R z
12/31 Adj. 5,200
E y
12/31 Adj. 1,600
Bal.
S 06 s.
1,300
5 x
12/31 Adj. 1,025
& 48 rie
Unearned Service Revenue Bal. 2,625
EF 2 e
I 3 s
12/31 Adj. 1,600 9/4 3,600
Maintenance and Repairs Expense
9 d
12/31 Adj. 1,025 12/5 1,500
H
C 030 fan Bal. 2,475
12/31 Adj. 1,000
h i e
c
Prepaid Cleaning
11/30
w . 2,000 12/31 Adj. 1,000
Bal.
w w 1,000
Note: The Cash account has not been included in this solution, as per the
instructions.
LO 2, BT: AP Difficulty: Moderate TOT: 20 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
EXERCISE 3-16
(a) 2020
Dec. 31 Utilities Expense ........................................ 425
Accounts Payable ............................. 425
31 Salaries and Wages Expense .................... 2,000

Salaries and Wages Payable ............ 2,000
($3,500 × 4/7 days = $2,000)
31 Interest Expense ........................................ 200
E S
Interest Payable ................................ 200
I
($48,000 × 5% × 1/12 months = $200)
31
E R 5 y z
Accounts Receivable ................................. 300
x
Service Revenue ............................... 300
31
S 06 s.
Accounts Receivable ................................. 6,000
& 48 rie
Rent Revenue .................................... 6,000
(b) 2021
EF 2 e
Jan. 11
H I 9 3 d s
Accounts Payable ......................................
Cash .....................................................
425
425
4
C 030 fan
Salaries and Wages Payable ..................... 2,000
i e
Salaries and Wages Expense .................... 1,500
h
Cash ..................................................... 3,500
1
. c
Interest Payable.......................................... 200
w
Cash ..................................................... 200
w w
Cash ............................................................
Accounts Receivable ..........................
300
300
2 Cash ............................................................ 6,000

Accounts Receivable .......................... 6,000
LO 3 BT: AP Difficulty: Moderate TOT: 15 min. AACSB: Analytic AICPA FC: Reporting IMA: Reporting
EXERCISE 3-17
Aug. 31 Accounts Receivable..................................... 2,400

Service Revenue .................................... 2,400
31 Supplies Expense .......................................... 1,600
Supplies .................................................. 1,600
31 Insurance Expense ........................................ 1,500
Prepaid Insurance .................................. 1,500
31 Depreciation Expense ................................... 900
S
Equipment .......................................... 900
31
I E
Salaries and Wages Expense ....................... 1,100
R z
Salaries and Wages Payable ................. 1,100
31
E
S 06 s. 5 x y
Unearned Rent Revenue ...............................
Rent Revenue .........................................
1,100
1,100
& 48 rie
EXERCISE 3-18
EF 2 e
H I 9 3 d s RENFRO COMPANY
C 030 fan
Income Statement
For the Year Ended August 31, 2020
i e
Revenues
h
Service revenue ....................................................... $36,400
. c
Rent revenue ............................................................ 12,100
Total revenues .................................................. $48,500
w
Expenses
w
Salaries and wages expense .................................. 18,100
w
Rent expense ........................................................... 15,000
Supplies expense .................................................... 1,600
Insurance expense .................................................. 1,500

Depreciation expense .............................................. 900
Total expenses ................................................. 37,100
Net income ....................................................................... $11,400
[($36,400 + $12,100) – ($18,100 + $15,000 + $1,600 + $1,500 + $900) = $11,400]
[(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Supp. exp. + Ins. exp. + Depr. exp.) = Net inc.]
RENFRO COMPANY
For the Year Ended August 31, 2020
Owner’s capital, September 1, 2019 ............................................... $15,600

Add: Net income ............................................................................ 11,400
Owner’s capital, August 31, 2020 .................................................. $27,000
($15,600 + $11,400 = $27,000)
(Beg. owner’s cap. + Net inc. = End. owner’s cap.)
RENFRO COMPANY
S
Balance Sheet
E
August 31, 2020
R I z
Assets
E y
Cash ................................................................................. $10,400
5 x
Accounts receivable........................................................ 11,200
S 06 s.
Supplies ........................................................................... 700
& 48 rie
Prepaid insurance ........................................................... 2,500
Equipment ........................................................................ $14,000
F
Less: Accum. depreciation—equipment....................... 4,500 9,500
E 2 s e
Total assets ......................................................
I 3
$34,300
H 9 d
C 030 fan
Liabilities and Owner’s Equity
Liabilities
i e
Accounts payable .................................................................... $ 5,800
h
Salaries and wages payable.................................................... 1,100
c
Unearned rent revenue ............................................................ 400
Owner’s equity
w .
Total liabilities .................................................................. 7,300
w
Owner’s capital ........................................................................ 27,000
Total liabilities and owner’s equity .................................
w
$34,300
[($10,400 + $11,200 + $700 + $2,500) + ($14,000 - $4,500) = ($5,800 + $1,100 + $400) + $27,000]
[(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Accts. pay. + Sal. & wages pay. +
Unearned rent rev.) + Owner’s cap.]
EXERCISE 3-19
(a) 1. Cash ................................................................... 8,000

Accounts Receivable ................................ 8,000
2. Unearned Service Revenue .............................. 25,000

Service Revenue........................................ 25,000
3. Cash ................................................................... 38,000

Unearned Service Revenue ...................... 38,000
Unearned Service Revenue
E S
($38,000 – $17,000)............................................ 21,000
I
Service Revenue ........................................... 21,000
($38,000 - $17,000 = $21,000)
R z
(Gift cert. sold in 2020 – Unused cert. at year-end = Serv. rev.)
4.
E
S 06 s. 5 x y
Accounts Receivable ........................................
Service Revenue
115,000
& 48 rie
($161,000 – $25,000 – $21,000) ............. 115,000
($161,000 - $25,000 - $21,000 = $115,000)
F
(2020 Serv. rev. – 2019 Outstdg. gift cert. redeemed – 2020 Outstdg. Gift cert. redeemed = Accts. rec.)
5.
I E 3 2 s e
Cash ................................................................... 99,000
H 9 d
Accounts Receivable
C 030 fan
($115,000 – $16,000) .............................. 99,000
($115,000 - $16,000 = $99,000)
(2020 Accts. rec. – End. accts. rec. bal. = Cash collect.)
i e
(b) Cash received by the club = $8,000 + $99,000 + $38,000
h
c
= $145,000
.
($8,000 + $99,000 + $38,000 = $145,000)
(2019 Accts. rec. collect. + 2020 Accts. rec. collect. + Cash rec’d. for gift cert. = Tot. cash rec’d.)
w
w w
*EXERCISE 3-20
1. Prepaid Insurance .................................................. 1,000

Insurance Expense
($2,400 x 5/12) .............................................. 1,000
($2,400 x 5/12 = $1,000)
(Tot. ins. prem. amt. x Fraction of yr. not expired = Prepd. ins.)
2. Service Revenue .................................................... 30,000

($40,000 x 3/4) .............................................. 30,000
($40,000 x ¾ = $30,000)
(Tot. amt. rec’d for serv. to be provided x portion not performed = Unearned serv. rev.)
3.
S
Supplies ..................................................................
E
600
I
Supplies Expense ........................................... 600
R z
*EXERCISE 3-21
(a) Jan. 2
E
S 06 s. 5 x y
Insurance Expense ...................................... 1,920
& 48 rie
Cash ...................................................... 1,920
10
EF 2 e
Supplies Expense ........................................ 1,700
I 3 s
Cash ...................................................... 1,700
H 9 d
C 030 fan
15 Cash.............................................................. 6,100
Service Revenue .................................. 6,100
1/15
Cash
6,100 1/2
h i e 1,920
Service Revenue
1/15 6,100
1/10
. c 1,700
w
Insurance Expense Supplies Expense
w
1/2 1,920 1/10 1,700
(b) Jan. 31
31
w
Prepaid Insurance ($160 x 11 months) .......
Insurance Expense ..............................
Supplies .......................................................
1,760
650
1,760
Supplies Expense ................................ 650
*EXERCISE 3-21 (Continued)
31 Service Revenue .......................................... 4,000

Unearned Service Revenue ................. 4,000
Unearned Service
Prepaid Insurance Supplies Revenue
1/31 1,760 1/31 650 1/31 4,000
Insurance Expense Supplies Expense Service Revenue

1/2 1,920 1/31 1,760 1/10 1,700 1/31 650 1/31 4,000 1/15 6,100
S
Bal. 160 Bal. 1,050 Bal. 2,100
I E
(c) Prepaid insurance...................................................................... $1,760
E R 5 y z
Supplies ..................................................................................... 650
x
Unearned service revenue ........................................................ 4,000
S 06 s.
Service revenue ......................................................................... 2,100
Insurance expense .................................................................... 160
& 48 rie
Supplies expense ...................................................................... 1,050
F
I
*EXERCISE 3-22
E 3 2 s e
H 9 d
C 030 fan
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
i e
(c) 3 Monetary unit assumption
h
(d) 4 Time period assumption
c
(e) 5 Historical cost principle
.
(f) 1 Full disclosure principle
w
w w
*EXERCISE 3-23
(a) This is a violation of the historical cost principle. The inventory was
written up to its fair value when it should have remained at cost.
(b) This is a violation of the economic entity assumption. The treatment of
the transaction treats Austin Weber and Weber Co. as one entity when
they are two separate entities. Owner’s Drawings should have been
debited for the purchase of the truck.
*EXERCISE 3-23 (Continued)
(c) This is a violation of the time period assumption. This assumption
states that the economic life of a business can be divided into artificial
time periods (months, quarters, or a year). By adding two more weeks
to the year, Weber Co. would be misleading financial statement
readers. In addition, 2020 results would not be comparable to previous
years’ results. The company should use a 52 week year.
*EXERCISE 3-24
1. Comparability
S
2. Going concern assumption
E
3. Materiality
4.
5.
Full disclosure principle
Time period assumption
R I z
E 5 y
6. Relevance
S 06 s. x
7. Historical cost principle
8. Consistency
& 48 rie
9. Economic entity assumption
F
10. Faithful representation
2 e
11. Monetary unit assumption
12.
I E
Expense recognition principle
9 3 d s
H
*EXERCISE 3-25
C 030 fan
i e
(a) The primary objective of financial reporting is to provide financial
h
information that is useful to investors and creditors for making
c
decisions about providing capital. Since Speyeware’s shares appear to
w .
be actively traded, investors must be capable of using the information
made available by Speyeware to make decisions about the company.
w w
(b) The investors must feel as if the company will show earnings in the
future. They must recognize that information relevant to their
investment choice is indicated by more than Speyeware’s net income.
(c) The change from Canadian dollars to U.S. dollars for reporting purposes
should make Speyeware more comparable with companies traded on
U.S. stock exchanges.
LO6 BT: S Difficulty: Easy TOT: 12 min. AACSB: Reflective Thinking, Communication AICPA FC:
Measurement
*EXERCISE 3-26
(a) Accounting information is the compilation and presentation of

financial information for a company. It provides information in the form
of financial statements and additional disclosures that is useful for
decision making.
The accounting rules and practices that have substantial authoritative
support and are recognized as a general guide for financial reporting
purposes are referred to as generally accepted accounting principles
S
(GAAP). The biotechnology company that employs Mindy will follow
GAAP to report its assets, liabilities, equity, revenues, and expenses
I E
as it prepares financial statements.
R z
(b) Mindy is correct in her understanding that the low success rate for
E 5 y
new biotech products will be a cause of concern for investors. Her
S 06 s. x
suggestion that detailed scientific findings be reported to prospective
investors might offset some of their concerns but it probably won’t
& 48 rie
conform to the qualitative characteristics of accounting information.
F
These characteristics consist of relevance, faithful representation,
I E 3 2 s e
comparability, and consistency, verifiability, timeliness, and
d
understandability. They apply to accounting information rather than
H 9
C 030 fan
the scientific findings that Mindy wants to include.
LO6 BT: S Difficulty: Easy TOT: 6 min. AACSB: Reflective Thinking AICPA FC: Measurement
h i e
. c
w w
w
SOLUTIONS TO PROBLEMS
PROBLEM 3-1A
(a)
J4
Date Account Titles Ref. Debit Credit
2020
May 31 Supplies Expense ................................ 631 900
Supplies ...................................... 126 900
S
31 Utilities Expense .................................. 732 250
Accounts Payable....................... 201 250
I E
R z
31 Insurance Expense .............................. 722 150
E y
Prepaid Insurance
5 x
($3,600 ÷ 24 months) .............. 130 150
S 06 s.
& 48 rie
31 Unearned Service Revenue ................ 209 1,600
Service Revenue
F
($2,000 – $400) ........................ 400 1,600
I E 3 2 s e
d
31 Salaries and Wages Expense ............. 726 1,104
H 9
C 030 fan
[(3/5 x $920) x
2 employees] ........................... 212 1,104
h i e
31 Depreciation Expense ......................... 717 190
c
w .
Equipment ............................... 150 190
w
31 Accounts Receivable .......................... 112 1,700
w
Service Revenue ......................... 400 1,700
(b)
Cash No. 101
Date Explanation Ref. Debit Credit Balance
2020
May 31 Balance  4,500
PROBLEM 3-1A (Continued)
Accounts Receivable No. 112

2020
May 31 Balance  6,000
31 Adjusting J4 1,700 7,700
Supplies No. 126

2020
E S
I
R z
31 Adjusting J4 900 1,000
Prepaid Insurance
E
S 06 s. 5 x y No. 130
& 48 rie
2020
May 31 Balance
EF 2 e
 3,600
I 3 s
H 9 d
C 030 fan
Equipment No. 149
e
2020
h i
c
w .
w
Accumulated Depreciation—Equipment No. 150
w
2020
May 31 Adjusting J4 190 190
Accounts Payable No. 201

2020
Unearned Service Revenue No. 209

2020
S
I E
31 Adjusting J4 1,600 400
E R 5 y z No. 212
Date Explanation
S 06 s. x Ref. Debit Credit Balance
& 48 rie
2020
May 31 Adjusting J4 1,104 1,104
EF 2 e
I 3 s
Owner’s Capital No. 301
H 9 d
C 030 fan
2020
h i e
c
Service Revenue No. 400
Date
2020
Explanation
w . Ref. Debit Credit Balance
w
w
31 Adjusting J4 1,600 11,100
31 Adjusting J4 1,700 12,800
Supplies Expense No. 631

2020
Depreciation Expense No. 717

2020
Insurance Expense No. 722

2020
May 31 Adjusting
E S J4 150 150
Salaries and Wages Expense

R I z
726
Date
2020
Explanation
E
S 06 s. 5 x y Ref. Debit Credit Balance
& 48 rie
31 Adjusting J4 1,104 7,504
EF 2 e
H
Rent Expense
I 9 3 d s No. 729
C 030 fan
2020
i e
May 31 Balance  900
.
Utilities Expense
c h No. 732
w
w
2020
w
(c) KRAUSE CONSULTING

Adjusted Trial Balance
May 31, 2020
Debit Credit
Cash .................................................................... $ 4,500
Accounts Receivable ......................................... 7,700
Supplies .............................................................. Prepaid
1,000 Insurance
Prepaid Insurance .............................................. 3,450
Equipment ........................................................... 11,400
E S
Equipment ....................................................... $ 190
I
Accounts Payable ............................................... 4,750
Unearned Service Revenue ............................... 400
E R 5 y z
Salaries and Wages Payable..............................
Owner’s Capital ..................................................
1,104
x
18,700
S 06 s.
Service Revenue ................................................. 12,800
Supplies Expense ............................................... 900
& 48 rie
Depreciation Expense ........................................ 190
F
Insurance Expense ............................................. 150
E 2 e
Salaries and Wages Expense ............................ 7,504
H I 9 3 d s
Rent Expense ......................................................
Utilities Expense .................................................
900
250
C 030 fan
$37,944 $37,944
[($4,500 + $7,700 + $1,000 + $3,450 + $11,400 + $900 + $190 + $150 + $7,504 + $900 + 250) = ($190 + $4,750
e
+ $400 + $1,104 + $18,700 + $12,800)]
i
[(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Supp. exp. + Depr. exp. + Ins. exp. + Sal. & wages exp. +
h
Rent exp. + Util. exp.) = (Accum. Depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s
c
cap. + Serv. rev.)
.
LO2, 3, 4 BT: AN Difficulty: Easy TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting
w w
w
PROBLEM 3-2A
(a)
J1
Date Account Titles Ref. Debit Credit
May 31 Insurance Expense.............................. 722 200
Prepaid Insurance
($2,400 x 1/12) ......................... 130 200
S
31 Supplies Expense ............................... 631 1,330
Supplies ($2,080 – $750) ............ 126 1,330
I E
R
31 Depreciation Expense
E 5 y z
($3,600 x 1/12) + ($1,500 x 1/12) ...... 619 425
x
S 06 s.
Buildings ................................. 142 300
& 48 rie
Equipment............................... 150 125
EF 2 e
s
31 Interest Expense ................................. 718 200
H I 9 3 d
Interest Payable
C 030 fan
[($40,000 x 6%) x 1/12].............. 230 200
31 Unearned Rent Revenue ..................... 208 2,200
i e
Rent Revenue
h
(2/3 x $3,300) .......................... 429 2,200
31
. c
Salaries and Wages Expense ............. 726 750
w
Salaries and Wages Payable ..... 212 750
(b)
Cash w w No. 101
May 31 Balance  3,400
Supplies No. 126

Prepaid Insurance No. 130

S
I E
R
Land No. 140
Date Explanation
E 5 y z Ref. Debit Credit Balance
S 06 s. x
& 48 rie
F
Buildings No. 141
E 2 e
May 31 Balance
H I 9 3 d s  60,000
C 030 fan
Accumulated Depreciation—Buildings No. 142
Date Explanation
May 31 Adjusting
h i e Ref.
J1
Debit Credit
300
Balance
300
. c
Equipment
Date
w
Explanation w Ref. Debit Credit
No. 149
Balance
May 31 Balance
w  15,000


Unearned Rent Revenue No. 208

31 Adjusting J1 2,200 1,100
E S
R I z
No. 212
E y
May 31 Adjusting
S 06 s. 5 x
J1 750 750
Interest Payable
& 48 rie No. 230
Date
EF
Explanation
2 e
Ref. Debit Credit Balance
I 3 s
H 9 d
C 030 fan
Mortgage Payable No. 275
i e
h
. c
Date
w w
Owner’s Capital
Explanation Ref. Debit Credit
No. 301
Balance
w
Rent Revenue No. 429

31 Adjusting J1 2,200 12,500
Advertising Expense No. 610


Supplies Expense
E S No. 631
Date Explanation
May 31 Adjusting
R I z
Ref.
J1
Debit
1,330
Credit Balance
1,330
E
S 06 s. 5 x y
& 48 rie
Interest Expense No. 718
May 31 Adjusting
EF 2 e
J1 200 200
H I 9 3 d s
C 030 fan
Insurance Expense No. 722
i e
. c h
w
Salaries and Wages Expense No. 726
w
w
Utilities Expense No. 732

(c) HANK’S HOTEL

May 31, 2020
Debit Credit
Cash .................................................................... $ 3,400
Supplies .............................................................. 750
Land .................................................................... 12,000
S
Buildings ............................................................. 60,000
Accumulated Depreciation—Buildings ............. $ 300
I E
Equipment........................................................... 15,000
R z
Accumulated Depreciation—Equipment .......... 125
E y
Accounts Payable .............................................. 4,700
5 x
Unearned Rent Revenue .................................... 1,100
S 06 s.
Salaries and Wages Payable ............................. 750
& 48 rie
Interest Payable .................................................. 200
Mortgage Payable ............................................... 40,000
F
Owner’s Capital .................................................. 41,380
E 2 s e
Rent Revenue .....................................................
I 3
12,500
d
Advertising Expense .......................................... 600
H 9
C 030 fan
Depreciation Expense ........................................ 425
Supplies Expense............................................... 1,330
Interest Expense................................................. 200
i e
Insurance Expense ............................................. 200
h
c
Utilities Expense................................................. 900
w . $101,055
[($3,400 + $750 + $2,200 + $12,000 + $60,000 + $15,000 + $600 + $425 + $1,330 + $200 + $200 + $4,050 +
$101,055
w
$900) = ($300 + $125 + $4,700 + $1,100 + $750 + $200 + $40,000 + $41,380 + $12,500)]
[(Cash + Supp. + Prepd. ins. + Land + Bldgs. + Equip. + Adv. exp. + Depr. exp. + Supp. exp. + Int. exp. + Ins.
w
exp. + Sal. & wages exp. + Util. exp.) = (Accum. depr.-bldgs. + Accum. depr.-equip. + Accts. pay. + Unearned
rent rev. + Sal. & wages pay. + Int. pay. + Mort. pay. + Owner’s cap. + Rent rev.)]
(d) HANK’S HOTEL

Income Statement
For the Month Ended May 31, 2020
Revenues
Rent revenue .................................................. $12,500
Expenses
Salaries and wages expense ......................... $4,050
Supplies expense ........................................... 1,330
Utilities expense ............................................. 900
Advertising expense ...................................... 600
E S
Depreciation expense .................................... 425
I
Interest expense ............................................. 200
Insurance expense ......................................... 200
E R 5 y z
Total expenses ........................................ 7,705
x
Net income ............................................................. $ 4,795
S 06 s.
[$12,500 – ($4,050 + $1,330 + $900 + $600 + $425 + $200 + $200) = $4,795]
[Rent rev. – (Sal. & wages exp. + Supp. exp. + Util. exp. + Advert. exp. + Depr. exp. + Int. exp. + Ins. exp.) = Net
& 48 rie
inc.]
EF 2 e
HANK’S HOTEL
I 3 s
9 d
For the Month Ended May 31, 2020
H
C 030 fan
Owner’s capital, May 1 ............................................................
Investment by owner ...............................................................
$ 0
41,380
i e
41,380
h
Add: Net income .................................................................... 4,795
c
Owner’s capital, May 31...........................................................
.
$46,175
($0 + $41,380 + $4,795 = $46,175)
w
(Beg. owner’s cap. + Invest. + Net inc. = End. owner’s cap.)
w w
HANK’S HOTEL
Balance Sheet
May 31, 2020
Assets
Cash.................................................................... $ 3,400
Supplies ............................................................. 750
Prepaid insurance.............................................. 2,200
Land .................................................................... 12,000
Buildings ............................................................ $60,000
S
I E
buildings ................................................. 300 59,700
Equipment .......................................................... 15,000
R z
E 5 y
equipment................................................ 125 14,875
S 06 s. x
Total assets......................................... $92,925
& 48 rie
F
Liabilities
2 e
Accounts payable ...................................... $ 4,700
I E 3 s
Unearned rent revenue ..............................
9 d
1,100
H
Salaries and wages payable ...................... 750
C 030 fan
Interest payable .......................................... 200
Mortgage payable....................................... 40,000
e
Total liabilities..................................... 46,750
i
Owner’s equity
. c h
Owner’s capital...........................................
Total liabilities and owner’s equity ......
46,175
$92,925
w
[($3,400 + $750 + $2,200 + $12,000 + ($60,000 - $300) + ($15,000 - $125) = ($4,700 + $1,100 + $750 + $200 +
$40,000) + $46,175]
w
[(Cash + Supp. + Prepd. ins. + Land + (Bldgs. – Accum. depr.-bldgs.) + (Equip. – Accum. depr.-equip) = (Accts.
pay. + Unearned rent rev. + Sal. & wages pay. + Int. pay. + Mort. pay.) + Owner’s cap.]
w
PROBLEM 3-3A
(a) Sept. 30 Accounts Receivable .............................. 1,100

Service Revenue ................................ 1,100
30 Rent Expense .......................................... 1,700

Prepaid Rent ...................................... 1,700
30 Supplies Expense ................................... 850

Supplies ............................................. 850
30 Depreciation Expense ............................. 700
S
Accum. Depreciation—Equipment ..... 700
30
I E
Interest Expense ..................................... 100
R z
Interest Payable ................................. 100
30
E
S 06 s. 5 x y
Unearned Rent Revenue .........................
Rent Revenue.....................................
1,450
1,450
& 48 rie
F
30 Salaries and Wages Expense ................. 725
2 e
Salaries and Wages Payable ............. 725
I E 9 3 d s
H
C 030 fan
(b) ALENA CO.
Income Statement
For the Quarter Ended September 30, 2020
Revenues
h i e
c
Service revenue .................................................. $17,100
.
Rent revenue ...................................................... 2,860
w
Total revenues ............................................ $19,960
w
Expenses
Salaries and wages expense ............................. 8,725
w
Rent expense ......................................................
Utilities expense .................................................
Supplies expense ...............................................
3,600
1,510
850
Depreciation expense ........................................ 700
Interest expense ................................................. 100
Total expenses ............................................ 15,485
Net income ................................................................. $ 4,475
[($17,100 + $2,860) – ($8,725 + $3,600 + $1,510 + $850 + $700 + $100) = $4,475]
[(Serv. rev. + Rent rev.) – (Sal. & wages exp. + Rent exp. + Util. exp. + Supp. exp. + Depr. exp. + Int. exp.) = Net inc.]
ALENA CO.
For the Quarter Ended September 30, 2020
Owner’s capital, July 1, 2020 ............................... $ 0

Investment by owner ............................................ $22,000
Add: Net income ................................................. 4,475 26,475
26,475
Less: Drawings .................................................... 1,600
Owner’s capital, September 30, 2020 .................. $24,875
S
($0 + ($22,000 + $4,475) - $1,600 = $24,875)
E
(Beg. owner’s cap. + (Invest. + Net inc.) – Owner’s draws. = End. owner’s cap.)
R I z
ALENA CO.
y
Balance Sheet
E
S 06 s. 5 x
September 30, 2020
Assets
& 48 rie
Cash....................................................................... $ 8,700
F
Accounts receivable ............................................. 11,500
E 2 e
Supplies ................................................................ 650
I 3 s
Prepaid rent........................................................... 500
H 9 d
Equipment ............................................................. $18,000
C 030 fan
Less: Accum. depreciation—equipment ............ 700 17,300
Total assets............................................ $38,650
h i e Liabilities and Owner’s Equity
c
Liabilities
.
Notes payable ................................................ $10,000
w
Accounts payable ......................................... 2,500
w
Salaries and wages payable ......................... 725
Unearned rent revenue ................................. 450
w
Interest payable ............................................. 100
Total liabilities........................................ 13,775
Owner’s equity
Owner’s capital.............................................. 24,875
Total liabilities and owner’s equity ...... $38,650
[($8,700 + $11,500 + $650 + $500) + ($18,000 - $700) = ($10,000 + $2,500 + $725 + $450 + $100) + $24,875]
[(Cash + Accts. rec. + Supp. + Prepd. rent) + (Equip. – Accum. depr.-equip) = (Notes pay. + Accts. pay. + Sal. &
wages pay. + Unearned rent rev. + Int. pay.) + Owner’s cap.]
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $100 ($10,000 x 1%). Since total interest expense is $100, the note
has been outstanding one month.
($10,000 x 12% x Fraction of a yr. = $100); (Fraction of a yr. = 1/12 or one month)
(Prin. x Int. rate x Fraction of a yr. = Int. exp.)
LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting
E S
R I z
E
S 06 s. 5 x y
& 48 rie
EF 2 e
H I 9 3 d s
C 030 fan
h i e
. c
w w
w
PROBLEM 3-4A
1. Dec. 31 Insurance Expense ....................................... 4,840

Prepaid Insurance ................................. 4,840
($7,920 ÷ 3) = $2,640
[($4,400 ÷ 2) = 2,200
$4,840
[($7,920 ÷ 3) + ($4,400 ÷ 2) = $4,840]
[(Policy B4564 ÷ Policy term) + (Policy A2958 ÷ Policy term) = Ins. exp.]
S
2. Dec. 31 Unearned Rent Revenue .............................. 75,500
E
Rent Revenue ........................................ 75,500
I
[Nov. 5 x $5,000 x 2 = $50,000
R z
[Dec. 3 x $8,500 x 1 = 25,500
E y
$75,500
5 x
[(5 x $5,000 x 2) + (3 x $8,500 x 1) = $75,500]
S 06 s.
[(No. of Nov. leases x Monthly rent x No. of mos.) + (No. of Dec. leases x Monthly rent x No. of mos.) = Rent rev.]
& 48 rie
3. Dec. 31 Interest Expense ........................................... 1,200
F
Interest Payable
2 e
($120,000 x 6% x 2/12)....................... 1,200
I E 3 s
($120,000 x 6% x 2/12 = $1,200)
9 d
(Prin. x Int. rate x Fraction of yr. = Int. exp.)
H
C 030 fan
4. Dec. 31 Salaries and Wages Expense ...................... 2,000
Salaries and Wages Payable ................ 2,000
5 x $700 x 2/5 = $1,400
i e
[3 x $500 x 2/5 = 600
h
$2,000
c
[(5 x $700 x 2/5) + (3 x $500 x 2/5) = $2,000]
.
[No. of emp. x Wkly sal. x Days worked) + (No. of emp. x Wkly. sal. x Days worked) = Sal. & wages exp.]
w
w w
PROBLEM 3-5A
(a), (c) & (e)
Cash No. 101

Nov. 1 Balance  2,400
8 J1 1,700 700
10 J1 3,620 4,320
12 J1 3,100 7,420
S
20 J1 2,700 4,720
E
22 J1 400 4,320
I
25 J1 1,700 2,620
R z
29 J1 600 3,220
Accounts Receivable E
S 06 s. 5 x y No. 112
Date Explanation
& 48 rie Ref. Debit Credit Balance
F
10
I E 3 2 s e J1 3,620 630
d
27 J1 2,200 2,830
H 9
Supplies
C 030 fan No. 126
Date Explanation
h i e Ref.

Debit Credit Balance
c
Nov. 1 Balance 1,800
.
17 J1 700 2,500
w
30 Adjusting J1 1,100 1,400
Equipment
Date Explanation w w Ref. Debit Credit
No. 153
Balance
15 J1 2,000 14,000


S
E
15 J1 2,000 4,600
I
17 J1 700 5,300
R z
20 J1 2,700 2,600
Unearned Service Revenue E

S 06 s. 5 x y No. 209
Date
& 48 rie
Explanation Ref. Debit Credit Balance
F
29
I E 3 2 s e J1 600 1,800
d
H 9
C 030 fan
e
Salaries and Wages Payable No. 212
Date Explanation
h i Ref. Debit Credit Balance
c
Nov. 1 Balance  700
.
8 J1 700 0
w
30 Adjusting J1 350 350
w w
Owner’s Capital No. 301
Service Revenue No. 407

Nov. 12 J1 3,100 3,100
27 J1 2,200 5,300
30 Adjusting J1 1,220 6,520

S
Nov. 30 Adjusting J1 200 200
I E
R z
Supplies Expense No. 631
E 5 y
Nov. 30 Adjusting
S 06 s. x J1 1,100 1,100
& 48 rie
F
Salaries and Wages Expense No. 726
Date
I E
Explanation
3 2 s e Ref. Debit Credit Balance
H 9 d
Nov. 8 J1 1,000 1,000
C 030 fan
25 J1 1,700 2,700
h i e
c
Rent Expense No. 729
Date
Nov. 22
Explanation
w . Ref.
J1
Debit
400
Credit Balance
400
w w
(b) General Journal

J1
Date Account Titles and Explanation Ref. Debit Credit
Nov. 8 Salaries and Wages Payable .............. 212 700
Salaries and Wages Expense ............ 726 1,000
Cash ............................................. 101 1,700
10 Cash..................................................... 101 3,620

Accounts Receivable .................. 112 3,620
12
E S
Cash..................................................... 101 3,100
I
Service Revenue ......................... 407 3,100
15
E R 5 y z
Equipment ........................................... 153 2,000
S 06 s. x
Accounts Payable ....................... 201 2,000
& 48 rie
17 Supplies .............................................. 126 700
Accounts Payable ....................... 201 700
EF 2 e
I 3 s
20 Accounts Payable ............................... 201 2,700
9 d
Cash ............................................. 101 2,700
H
C 030 fan
22 Rent Expense ......................................
Cash .............................................
729
101
400
400
25
h i e
Salaries and Wages Expense ............ 726 1,700
. c
Cash ............................................. 101 1,700
27
w w Accounts Receivable ..........................

Service Revenue .........................
112
407
2,200
2,200
w
29 Cash.....................................................
Unearned Service Revenue ........
101
209
600
600
(d) & (f) HAMM EQUIPMENT REPAIR

Trial Balances
November 30, 2020
Before After
Adjustment Adjustment
Dr. Cr. Dr. Cr.
Cash ........................................... $ 3,220 $ 3,220
Accounts Receivable ................ 2,830 2,830
Supplies ..................................... 2,500 1,400
S
Equipment .................................. 14,000 14,000
E
I
Equipment ............................... $ 2,000 $ 2,200
R z
Accounts Payable ...................... 2,600 2,600
E y
Unearned Service Revenue ...... 1,800 580
Salaries and Wages Payable.....
S 06 s.
Owner’s Capital .........................
5 x
–0–
13,950
350
13,950
& 48 rie
Service Revenue ........................ 5,300 6,520
Depreciation Expense ............... -0- 200
F 2 e
Supplies Expense ...................... -0- 1,100
E 3 s
Salaries and Wages Expense ... 2,700 3,050
I 9 d
Rent Expense .............................
H
400 400
C 030 fan
$25,650 $25,650 $26,200 $26,200
[Before adj.: ($3,220 + $2,830 + $2,500 + $14,000 + $2,700 + $400) = ($2,000 + $2,600 + $1,800 + $0 + $13,950
+ $5,300)]; [(Cash + Accts. rec. + Supp. + Equip. + Sal. & wages exp. + Rent exp.) = (Accum. depr.-equip. +
e
Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s cap. + Serv. rev.)]
i
[After adj.: ($3,220 + $2,830 + $1,400 + $14,000 + $200 + $1,100 + $3,050 + $400) = ($2,200 + $2,600 + $580 +
h
$350 + $13,950 + $6,520)]; [(Cash + Accts. rec. + Supp. + Equip. + Depr. exp. + Supp. exp. + Sal. & wages exp.
+ Rent exp.) = (Accum. depr.-equip. + Accts. pay. + Unearned serv. rev. + Sal. & wages pay. + Owner’s cap. +
. c
Serv. rev.)]
w
(e) 1. Nov. 30 Supplies Expense ........................ 631 1,100
w
Supplies ($2,500 – $1,400) .... 126 1,100
2. 30
w Salaries and Wages Expense .....
Salaries and Wages
Payable................................
726
212
350
350
3. 30 Depreciation Expense ................. 615 200

Equipment .......................... 154 200
PROBLEM 3-5A (Continued) .......................................
4. 30 Unearned Service Revenue ......... 209 1,220

Service Revenue .................... 407 1,220
(g) HAMM EQUIPMENT REPAIR

Income Statement
For the Month Ended November 30, 2020
Revenues
Service revenue............................................... $6,520
Expenses
S
Salaries and wages expense .......................... $3,050
I E
Supplies expense ............................................ 1,100
Rent expense ................................................... 400
R z
Depreciation expense ..................................... 200
E 5 y
Total expenses......................................... 4,750
S 06 s. x
Net Income .............................................................. $1,770
[$6,520 – ($3,050 + $1,100 + $400 + $200) = $1,770]
& 48 rie
[Serv. rev. – (Sal. & wages exp. + Supp. exp. + Rent exp. + Depr. exp.) = Net inc.]
EF 2 e
HAMM EQUIPMENT REPAIR
I 3 s
H 9 d
C 030 fan
Owner’s capital, November 1 .................................................. $13,950
Plus: Net income.................................................................... 1,770
i e
Owner’s capital, November 30 ................................................ $15,720
h
($13,950 + $1,770 = $15,720)
c
(Beg. owner’s cap. + Net inc. = End. owner’s cap.)
w .
w w
HAMM EQUIPMENT REPAIR

Balance Sheet
November 30, 2020
Assets
Cash ....................................................................... $ 3,220
Supplies ................................................................. 1,400
Equipment ............................................................. $14,000
S
equipment .................................................. 2,200 11,800
E
Total assets ................................................... $19,250
R I z
E y
Liabilities
S 06 s. 5 x
Accounts payable.............................................................
Unearned service revenue ...............................................
$ 2,600
580
& 48 rie
Salaries and wages payable ............................................ 350
Total liabilities ........................................................... 3,530
F
Owner’s equity
E 2 s e
Owner’s capital .................................................................
I 3
15,720
d
Total liabilities and owner’s equity .................................
9
$19,250
H
C 030 fan
[($3,220 + $2,830 + $1,400) + ($14,000 - $2,200) = ($2,600 + $580 + $350) + $15,720]
[(Cash + Accts. rec. + Supp.) + (Equip. – Accum. depr.-equip) = (Accts. pay. + Unearned serv. rev. + Sal. &
wages pay.) + Owner’s cap.]
LO2, 3, 4 BT: AN Difficulty: Moderate TOT: 70 min. AACSB: Analytic AICPA FC: Measurement, Reporting
h i e
. c
w w
w
*PROBLEM 3-6A
(a) 1. June 30 Supplies ................................................ 1,300

Supplies Expense ......................... 1,300
2. 30 Interest Expense
($20,000 x 6% x 5/12) ........................ 500
Interest Payable ............................ 500
($20,000 x 6% x 5/12 = $500)
S
(Prin. x Int. rate x Fraction of a yr. = Int. exp.)
I E
3. 30 Prepaid Insurance
R
[($2,700 ÷ 12) x 9] .............................. 2,025
E 5 y z
Insurance Expense ....................... 2,025
x
[($2,700 ÷ 12) x 9 = $2,025]
S 06 s.
[(Amt. of ins. prem. ÷ Life of ins. policy in mos.) x No. of mos. unexpired = Prepd. ins. bal.]
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4. 30 Service Revenue ................................... 1,300
Unearned Service Revenue............ 1,300
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5. 30 Accounts Receivable ........................... 2,000
9 d
Service Revenue ........................... 2,000
6. H
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30 Depreciation Expense
($2,250 ÷ 2) ........................................ 1,125
h i e Accumulated Depreciation—
Equipment ................................. 1,125
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($2,250 x ½ = $1,125)
(Ann. depr. x ½ yr. = Depr. exp.)
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*PROBLEM 3-6A (Continued)
(b) GABRIEL’S GRAPHICS COMPANY

June 30, 2020
Debit Credit
Cash .................................................................... $ 8,600
Accounts Receivable ($14,000 + $2,000)........... 16,000
Supplies .............................................................. 1,300
Equipment ........................................................... 45,000
Accumulated Depreciation—Equipment ........... $ 1,125
E S
Notes Payable ..................................................... 20,000
I
Accounts Payable ............................................... 9,000
Interest Payable .................................................. 500
E R 5 y z
Unearned Service Revenue ...............................
Owner’s Capital ..................................................
1,300
x
22,000
S 06 s.
Sales Revenue .................................................... 52,100
Service Revenue ($6,000 – $1,300 + $2,000) ..... 6,700
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Supplies Expense ($3,700 – $1,300) .................. 2,400
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Advertising Expense .......................................... 1,900
H I 9 3 d s
Rent Expense ......................................................
Utilities Expense .................................................
1,500
1,700
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Depreciation Expense ........................................ 1,125
Insurance Expense ($2,700 – $2,025) ................ 675
i e
Interest Expense ................................................. 500
h
$112,725 $112,725
c
[($8,600 + $16,000 + $1,300 + $2,025 + $45,000 + $30,000 + $2,400 + $1,900 + $1,500 + $1,700 + $1,125 +
.
$675 + $500) = ($1,125 + $20,000 + $9,000 + $500 + $1,300 + $22,000 + $52,100 + $6,700)]
[(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Sal. & wages exp. + Supp. exp. + Advert. exp. + Rent exp. +
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Util. exp. + Depr. exp. + Ins. exp. + Int. exp.) = (Accum. depr.-equip. + Notes pay. + Accts. pay. + Int. pay. +
Unearned serv. rev. + Owner’s cap. + Sales rev. + Serv. rev.)]
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(c) GABRIEL’S GRAPHICS COMPANY

Income Statement
For the Six Months Ended June 30, 2020
Revenues
Sales revenue ................................................ $52,100
Service revenue............................................. 6,700
Total revenues ....................................... $58,800
Expenses
Salaries and wages expense ........................ 30,000
S
Supplies expense .......................................... 2,400
I E
Advertising expense ..................................... 1,900
Utilities expense ............................................ 1,700
R z
Rent expense ................................................. 1,500
E 5 y
Depreciation expense ................................... 1,125
S 06 s. x
Insurance expense ........................................ 675
Interest expense ............................................ 500
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Total expenses....................................... 39,800
F
Net income ............................................................ $19,000
2 e
[($52,100 + $6,700) – ($30,000 + $2,400 + $1,900 + $1,700 + $1,500 + $1,125 + $675 + $500) = $19,000]
I E 3 s
[(Sales rev. + Serv. rev.) – (Sal. & wages exp. + Supp. exp. + Advert. exp. + Util. exp. + Rent exp. + Depr. exp. +
d
Ins. exp. + Int. exp.) = Net inc.]
H 9
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GABRIEL’S GRAPHICS COMPANY
i e
For the Six Months Ended June 30, 2020
. c h
Owner’s capital, January 1 ......................................................
Investment by owner ...............................................................
$ 0
22,000
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22,000
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Add: Net income ..................................................................... 19,000
Owner’s capital, June 30 .........................................................
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$41,000
($0 + $22,000 + $19,000 = $41,000)
GABRIEL’S GRAPHICS COMPANY

Balance Sheet
June 30, 2020
Assets
Cash ....................................................................... $ 8,600
Supplies ................................................................. 1,300
Prepaid insurance ................................................. 2,025
Equipment ............................................................. $45,000
E S
equipment .................................................. 1,125 43,875
I
Total assets ............................................ $71,800
E R 5 y z
x
Liabilities
S 06 s.
Notes payable ................................................ $20,000
Accounts payable.......................................... 9,000
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Unearned service revenue ............................ 1,300
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Interest payable ............................................. 500
E 2 e
Total liabilities ........................................ 30,800
I 3 s
Owner’s equity
H 9 d
Owner’s capital .............................................. 41,000
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Total liabilities and owner’s equity......... $71,800
[($8,600 + $16,000 + $1,300 + $2,025) + ($45,000 - $1,125) = ($20,000 + $9,000 + $1,300 + $500) + $41,000]
[(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Notes pay. + Accts. pay. +
i e
Unearned serv. rev. + Int. pay.) + Owner’s cap.]
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LO2, 3, 4, 5 BT: AN Difficulty: Moderate TOT: 50 min. AACSB: Analytic AICPA FC: Measurement, Reporting
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CC3 CONTINUING COOKIE CHRONICLE
(a)
GENERAL JOURNAL J2
Date Account Titles and Explanation Debit Credit
Nov. 30 Supplies Expense............................................. 35

Supplies........................................................ 35
S
30 Depreciation Expense ...................................... 20
Accumulated Depreciation—Equipment
I E
[($300 + $900) ÷ 60 months] .................... 20
R
[($300 + $900) ÷ 60 = $20]
z
(Cost of equip. ÷ Useful life in mos. = Monthly depr. exp.)
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S 06 s. 5 x y
30 Interest Expense...............................................
Interest Payable
5
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($2,000 x .06 x 1/12 x .5) ............................ 5
($2,000 x .06 x 1/12 x .5 = $5)
F
(Prin. x Int. rate x half of a mo. = Monthly int. exp.)
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30 Accounts Receivable ....................................... 300
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Service Revenue .......................................... 300
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30 Utilities Expense............................................... 45
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Accounts Payable ........................................ 45
. c h
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CC3 (Continued)
(a) (Continued)
Cash
Nov. 30 Balance  245
Accounts Receivable
Nov. 30
E S J2 300 300
R I z
E 5 y
Supplies
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F
30 J2 35 90
I E 3 2 s e
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Prepaid Insurance
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
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Nov. 30 Balance 1,320
. c h Equipment
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Nov. 30 Balance
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Accumulated Depreciation—Equipment
Nov. 30 J2 20 20
CC3 (Continued)
(a) (Continued)
Accounts Payable
Nov. 30 J2 45 45
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Interest Payable
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Nov. 30
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J2 5 5
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S 06 s. 5 x y
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Nov. 30 Balance
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 30
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Notes Payable
Nov. 30 Balance
h i e  2,000
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Owner’s Capital
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Service Revenue

30 J2 300 425
CC3 (Continued)
(a) (Continued)
Utilities Expense
Nov. 30 J2 45 45
Advertising Expense
Nov. 30 Balance
E S  65 65
R I z
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Supplies Expense
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Nov. 30 J2 35 35
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I 3 s
Depreciation Expense
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Nov. 30
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Interest Expense
.
Nov. 30
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CC3 (Continued)
(b)
COOKIE CREATIONS
November 30, 2019
Account Debit Credit

Cash ............................................................................... $ 245
Accounts Receivable .................................................... 300
Supplies ......................................................................... 90
Prepaid Insurance ......................................................... 1,320
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Equipment ..................................................................... 1,200
I E
Accumulated Depreciation—Equipment ..................... $ 20
Accounts Payable ......................................................... 45
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Interest Payable ............................................................ 5
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Unearned Service Revenue .......................................... 30
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Notes Payable ............................................................... 2,000
Owner’s Capital ............................................................. 800
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Service Revenue ........................................................... 425
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Utilities Expense ........................................................... 45
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Advertising Expense ..................................................... 65
I E 3 s
Supplies Expense .........................................................
9 d
35
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Depreciation Expense ................................................... 20
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Interest Expense ........................................................... 5
Totals ................................................................ $3,325 $3,325
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[($245 + $300 + $90 + $1,320 + $1,200 + $45 + $65 + $35 + $20 + $5) = ($20 + $45 + $5 + $30 + $2,000 + $800
i
+ $425)]
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[(Cash + Accts. rec. + Supp. + Prepd. ins. + Equip. + Util. exp. + Advert. exp. + Supp. exp. + Depr. exp. + Int.
exp.) = (Accum. depr.-equip. + Accts. pay. + Int. pay. + Unearned serv. rev. + Notes pay. + Owner’s cap. + Serv.
. c
rev.)]
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CC3 (Continued)
(c)
Revenues
Service revenue ............................................................ $425
Expenses
Advertising expense ..................................................... $65
Utilities expense ........................................................... 45
Supplies expense ......................................................... 35
Depreciation expense ................................................... 20
Interest expense ........................................................... 5 170
Net income ........................................................................... $255
[$425 – ($65 + $45 + $35 + $20 + $5) = $255]
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[Serv. rev. – (Advert. exp. + Util. exp. + Supp. exp. + Depr. exp. + Int. exp.) = Net inc.]
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Yes, Cookie Creations has been profitable in November. It has a profit of
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$255 which is more than one half of the revenue earned in November.
S 06 s. x
[Note: Owner’s Equity Statement is not required—shown for information
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purposes only.]
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COOKIE CREATIONS
I 3 s
H 9 d
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Owner’s Capital, November 1, 2019 .................................... $ 0
e
Add: Investment .................................................................. 800
i
Net income .................................................................. 255
h
Owner’s Capital, November 30, 2019 .................................. $1,055
. c
($0 + $800 + $255 = $1,055)
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CC3 (Continued)
(c) (Continued)
[Note: Balance Sheet is not required—shown for information purposes

only.]
COOKIE CREATIONS
Balance Sheet
November 30, 2019
S
Assets
I E
Cash ................................................................................ $ 245
R z
Accounts receivable ...................................................... 300
E 5 y
Supplies .......................................................................... 90
S 06 s. x
Prepaid insurance .......................................................... 1,320
Equipment....................................................................... $1,200
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Less: Accumulated depreciation—equipment ............ 20 1,180
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Total assets ................................................................ $3,135
I E 3 2 s e Liabilities and Owner’s Equity
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Liabilities
Notes payable ............................................................ $2,000
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Accounts payable ...................................................... 45
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Unearned service revenue ........................................ 30
c
Interest payable ......................................................... 5
.
Total liabilities ....................................................... 2,080
w
Owner’s equity
Owner’s capital ..........................................................
w
1,055
Total liabilities and owner’s equity ...................... $3,135
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[($245 + $300 + $90 + $1,320) + ($1,200 - $20) = ($2,000 + $45 + $30 + $5) + $1,055]
[(Cash + Accts. rec. + Supp. + Prepd. ins.) + (Equip. – Accum. depr.-equip.) = (Notes pay. + Accts. pay. +
Uneaned serv. rev. + Int. pay.) + Owner’s cap.]
LO2, 3, 4 BT: AP Difficulty: Moderate TOT: 60 min. AACSB: Analytic AICPA FC: Measurement, Reporting
EC3 ETHICS CASE
(a) The stakeholders in this situation are:
 Zoe Baas, controller.

 The president of Russell Company.
 Russell Company stockholders.
(b) 1. It is unethical for the president to place pressure on Zoe to misstate

net income by requesting her to prepare incorrect adjusting entries.
2.
E S
It is customary for adjusting entries to be dated as of the balance
I
sheet date although the entries are prepared at a later date. Zoe did
R z
nothing unethical by dating the adjusting entries December 31.
E
S 06 s. 5 x y
(c) Zoe can accrue revenues and defer expenses through the preparation
of adjusting entries and be ethical so long as the entries reflect
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economic reality. Intentionally misrepresenting the company’s financial
F
condition and its results of operations is unethical (it is also illegal).
E 2 e
LO1, 2, 3, 4 BT: E Difficulty: Moderate TOT: 12 min. AACSB: Ethics AICPA FC: Measurement AICPA PC:
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Professional Demeanor, Communication
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CT 3-1 FINANCIAL REPORTING PROBLEM
(a) Items that may result in adjusting entries for prepayments are:
1. Other current assets (per balance sheet).
2. Property, plant and equipment, net (per balance sheet).
3. Acquired intangible assets, net (per balance sheet)—amortization is

similar to depreciation (explained later in Chapter 10).
E S
I
(b) Accrual adjusting entries were probably made for accounts payable
and accrued expenses.
E R 5 y z
x
(c) Apple’s net income increased since 2013. Its net income increased by
S 06 s.
$2,473 million from 2013 to 2014, and by $13,884 million from 2014 to
& 48 rie
2015. Apple’s net income increased by 44.2% from 2013 to 2015.
F
I E 3 2 s e
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CT 3-2 COMPARATIVE ANALYSIS PROBLEM
(Amounts shown in millions)

PepsiCo Coca-Cola
(a) Net increase (decrease) in property, $(927) $(2,062)
plant, and equipment (net) from 2014 to
2015.
(b) Increase (decrease) in selling, general, $(1,241) $(791)

and administrative expenses
from 2014 to 2015.
S
(c) Increase (decrease) in long-term debt $5,392 $9,344
I E
(obligations) from 2014 to 2015.
R z
(d) Increase (decrease) in net income from $(1,057) $242
E 5 y
2014 to 2015.
(e) Increase (decrease) in cash

S 06 s. x (($ 2,962 $(1,649)
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and cash equivalents from 2014 to 2015.
LO N/A BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting
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CT 3-3 COMPARATIVE ANALYSIS PROBLEM
1. (Amounts in millions)
Amazon Wal-Mart
(a) Increase (decrease) in interest $249 $87
expense, from 2014 to 2015.
(b) Increase (decrease) in net income $837 $(2,019)

from 2014 to 2015.
(c)
E S
Increase (decrease) in cash from ($5,078 $(1,175)
I
operations from 2014 to 2015.
2.
E R 5 y z
Cash flow from operations is the difference between cash receipts
S 06 s. x
from revenues and cash payments for expenses (see chapter 1).
Depreciation expense is a major reason why cash flow from operations
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and net income are different for these two companies. Depreciation
expense reduces a company’s net income, but does not affect cash
F 2 e
flow from operations since it’s a noncash expense. Other reasons
E
I 3 s
would include changes in accounts receivable, inventory, and
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accounts payable.
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LO N/A BT: AP Difficulty: Easy TOT: 15 min. AACSB: Analytic AICPA FC: Reporting
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CT 3-4 REAL–WORLD FOCUS
Answers will vary depending on the company and article chosen by

the student.
LO N/A BT: S Difficulty: Easy TOT: 15 min. AACSB: Technology, Communication AICPA FC: Reporting
AICPA PC: Communication
E S
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S 06 s. 5 x y
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CT 3-5 DECISION MAKING ACROSS THE ORGANIZATION
(a) HAPPY CAMPER PARK

Income Statement
For the Quarter Ended March 31, 2020
Revenues
Rent revenue ($90,000 – $15,000) ................ $75,000
Expenses
Salaries and wages expense
[$29,800 + ($300 x 2)] ................................. $30,400
S
Advertising expense ($5,200 + $110) ........... 5,310
E
Supplies expense ($6,200 – $1,700) ............. 4,500
I
Maintenance and repairs expense
R z
($4,000 + $260) ............................................ 4,260
E 5 y
Insurance expense ($7,200 x 3/12) ............... 1,800
S 06 s. x
Utilities expense ($900 + $180) ..................... 1,080
Depreciation expense ................................... 800
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Interest expense ($12,000 x 10% x 3/12) ......... 300
F
Total expenses....................................... 48,450
2 e
Net income ............................................................ $26,550
I E 3 s
[($90,000 - $15,000) – ($29,800 + ($300 x 2)) – ($5,200 + $110) – ($6,200 - $1,700) – ($4,000 + $260) – ($7,200
9 d
x 3/12) – ($900 + $180) - $800 – ($12,000 x 10% x 3/12) = $26,550]
H
[Rent rev. – Sal. & wages exp. – Advert. exp. – Supp. exp. - Maint. & repairs exp. – Ins. exp. – Util. exp. – Depr.
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exp. – Int. exp. = Net inc.]
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(b) The generally accepted accounting principles pertaining to the income
i
statement that were not recognized by Erica were the revenue recognition
h
principle and the expense recognition principle. The revenue recognition
. c
principle states that revenue is recognized when the performance
w
obligation is satisfied. The $15,000 for summer rentals has not been
performed and, therefore, should not be reported in income for the
w
quarter ended March 31. The expense recognition principle dictates
w
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 $7,750 ($48,450 – $40,700). The
overstatement of revenues ($15,000) plus the understatement of
expenses ($7,750) equals the difference in reported income of $22,750
($49,300 – $26,550).
LO N/A BT: AN Difficulty: Moderate TOT: 20 min. AACSB: Analytic, Communication AICPA FC: Reporting
AICPA PC: Communication
CT 3-6 COMMUNICATION ACTIVITY
Dear Ms. Kahn:
Upon reviewing the accounts of your company at the end of the year,
I discovered that adjusting entries were not made.
Adjusting entries are made at the end of the accounting period to ensure
that the revenue recognition and expense recognition principles required
under generally accepted accounting principles are followed. The use of
adjusting entries makes it possible to report on the balance sheet the
appropriate assets, liabilities, and owner’s equity at the statement date and
S
to report on the income statement the proper net income (or loss) for the
E
I
year.
R y z
Adjusting entries are needed because the trial balance may not contain an
E 5 x
up-to-date and complete record of transactions and events for the
S 06 s.
following reasons:
1.
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Some events are not journalized daily because it is not efficient to
F
do so. Examples are the use of supplies and the earning of wages
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by employees.
H I 9 3 d s
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2. The expiration of some costs is not journalized during the account-
ing period because these costs expire with the passage of time
rather than as a result of recurring daily transactions. Examples of
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such costs are building and equipment depreciation, rent, and
h
insurance.
3.
. c
Some expenses, such as the cost of utility service and property
w
taxes, may be unrecorded because the bills for the costs have not
w
been received.
1.
w
There are four types of adjusting entries:
Prepaid expenses—expenses paid in cash and recorded as assets

before they are used or consumed.
2. Unearned revenues—revenues received in cash and recorded as

liabilities before they are earned.
CT 3-6 (Continued)
3. Accrued revenues—revenues earned but not yet received in cash

or recorded.
4. Accrued expenses—expenses incurred but not yet paid in cash or

recorded.
I will be happy to answer any questions you may have on adjusting entries.
Signature
S
LO1, 2, 3 BT: S Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Measurement,
E
Reporting AICPA PC: Communication
R I z
E
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CT 3-7 ALL ABOUT YOU
We address the issue of contingent liabilities in greater detail in Chapter

11. Our primary interest in this exercise is to engage students in a
discussion regarding the general nature of the financial statement
elements (assets, liabilities, equity, revenues and expenses).
(a) By taking out the bank loan your friend has incurred a liability. You do
not have a liability unless your friend defaults, or unless it becomes
clear that he will default. The loan application may, however, require you
S
to disclose any guarantees that you have signed, since they represent
potential liabilities.
I E
R
(b) Accounting standards have specific requirements regarding account-
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ing for situations where there is uncertainty regarding whether a liability
E 5 x
has been incurred. Those standards require an evaluation of the pro-
S 06 s.
bability of an amount being owed. Without going into detail regarding
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those standards, the basic idea is that if it is probable that you will
owe money, then you should accrue a liability. If it is not probable, but
F
it is possible that you will owe money, then you should disclose facts
I E 3 2 s e
regarding the situation. The most important point is that this event has
d
the potential to materially impact your finances, and therefore you have
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a responsibility to disclose it to the bank in some form.
(c) Losing your job would not create a financial liability, although it would
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most certainly reduce your revenues. You are obviously concerned that
h
you might lose your job, but you don’t have specific information that
c
would suggest that it will happen. Therefore, you probably don’t have
w .
an obligation to disclose this information to the bank. However, unless
you are relatively certain that you would be able to find suitable
w
employment relatively quickly, you might want to wait until your job
w
situation has stabilized before pursuing a loan of this size.
LO N/A BT: E Difficulty: Moderate TOT: 15 min. AACSB: Communication AICPA FC: Reporting AICPA PC:
Communication
CT 3-8 CONSIDERING PEOPLE, PLANET, AND PROFIT
The balance sheet should provide a fair representation of what a company

owns and what it owes. If significant obligations of the company are not
reported on the balance sheet, the company’s net worth (its equity) will be
overstated. While it is true that it is not possible to estimate the exact
amount of future environmental cleanup costs, it is becoming clear that
companies will be held accountable.
Therefore, it doesn’t seem reasonable to not accrue for environmental
S
costs. Recognition of these liabilities provides a more accurate picture of
E
the company’s financial position. It also has the potential to improve the
R I
environment. As companies are forced to report these amounts on their
z
financial statements they will start to look for more effective and efficient
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means to reduce toxic waste, and therefore reduce their costs.
S 06 s. x
LO N/A BT: E Difficulty: Moderate TOT: 10 min. AACSB: Communication AICPA FC: Reporting AICPA PC:
Communication
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CT 3-9 FASB CODIFICATION ACTIVITY
(a) Revenues are inflows or other enhancements of assets of an entity or

settlements of its liabilities (or a combination of both) from delivering
or producing goods, rendering services, or other activities that
constitute the entity’s ongoing major or central operations.
(b) Compensation is reciprocal transfers of cash or other assets in exchange

for services performed.
LO N/A BT: K Difficulty: Easy TOT: 12 min. AACSB: Communication AICPA FC: Reporting AICPA PC:
S
Communication
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IFRS 3-1 INTERNATIONAL FINANCIAL REPORTING PROBLEM
(a) Note 1.25 indicates that revenue is recognized in the following ways:
Direct sales to customers are recognized at the time of purchase by
retail customers; wholesale sales recognize revenue when title to the
goods passes to third party customers, generally upon shipment; and
revenue is presented net of all forms of discount.
(b) Note 1.25 states that the estimated rate of returns is based on
statistics of historical returns.
E S
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(c) Louis Vuitton could have adjustments for prepayments such as:
Depreciation expense, Amortization of intangible assets, and Deferred
R z
tax assets.
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S 06 s. 5 x y
(d) Louis Vuitton could have adjustments for accruals such as:
Finance costs (interest expense), Tax liabilities, and Trade and other
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payables.
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LO7 BT: AN Difficulty: Moderate TOT: 15 min. AACSB: Analytic, Diversity AICPA FC: Reporting
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Sollution Accounting Chapter # 03 Keiso

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CHAPTER 3

Adjusting the Accounts

ASSIGNMENT CLASSIFICATION TABLE

*1. Explain the accrual basis of 1, 2, 3, 4, 5, 1, 2, 8 1 1, 2, 3, 4, 10,

x 8, 14, 15, 16,

Problem Difficulty Time

1A Prepare adjusting entries, post to ledger accounts, Easy 40–50

2A Prepare adjusting entries, post, and prepare adjusted Easy 50–60

3A Prepare adjusting entries and financial statements. Moderate 40–50

4A Prepare adjusting entries. Moderate 30–40

12. Equipment ............................................................................................... $18,000

*18. (a) Accrued revenues.

w . (d) Accrued expenses or prepaid expenses.

*19. (a) Salaries and Wages Payable. (d) Supplies Expense.

(a) Prepaid Insurance—to recognize insurance expired during the period.

(d) Interest Payable—to recognize interest accrued but unpaid on notes

Supplies Supplies Expense

Dec. 31 Depreciation Expense .......................................... 3,750

Depreciation Expense Accum. Depreciation—Equipment

BRIEF EXERCISE 3-5

BRIEF EXERCISE 3-6

Unearned Service Revenue Service Revenue

1. Dec. 31 Interest Expense .......................................... 400

2. 31 Accounts Receivable ................................... 2,300

3. 31 Salaries and Wages Expense ...................... 900

E 5 y z Accrued Revenues Service Revenue

Owner’s capital, January 1 ............................................................. $16,400

(a) Predictive value.

*BRIEF EXERCISE 3-13

(a) 1. Predictive value.

*BRIEF EXERCISE 3-15

(c) Financial statements should disclose all events and circumstances

1. (d) 2. (e) 3. (h) 4. (c)

1. Insurance Expense ....................................................... 400

3. Accounts Receivable ................................................... 2,400

(a) The net income is determined by adding revenues and subtracting

(c) Dear Senator,

It is my understanding, after having taken a beginning course in account-

I am shocked at such a practice! There must be billions of dollars of

(b) Revenues [($108,000 – $25,000) + $36,000] ................... $119,000

1. Interest Expense .................................................... 300

5. Unearned Service Revenue ................................... 8,000

2. Prepaid Expenses Assets Overstated

3. Accrued Expenses Expenses Understated

3. 31 Interest Expense ........................................... 500

4. 31 Supplies Expense ......................................... 2,050

($2,800 - $750 = $2,050)

5. 31 Insurance Expense ($300 x 3) ...................... 900

1. Jan. 31 Accounts Receivable ................................... 785

R IUtilities Payable ....................................

h i eSupplies Expense ($1,600 – $400) ............... 1,200

Oct. 31 Supplies Expense ......................................... 2,000

2. 31 Insurance Expense ....................................... 120

3. Oct. 31 Depreciation Expense .................................. 50

4. 31 Unearned Service Revenue .......................... 600

5. 31 Accounts Receivable .................................... 360

(b) Total premium = $4,800 Total premium = Monthly premium x 12;

E 5 y z earlier on Aug. 1, 2019.

Supplies ........................................................ 650