5.B.Debit Salary Expense and Credit Salary Payable For

Chapter 3

The Adjusting Process

√ Quick Check

Answers:

1. c / 3. d / 5. b / 7. c / 9. c
2. d / 4. a / 6. b / 8. a / 10. d

Explanations:

5.b.Debit Salary Expense and Credit Salary Payable for

$60 ($300  1/5)

6.b.Income statement reports service revenue of $200

($600  2/6)

√Short Exercises

(5 min.) S 3-1

Req. 1

Service revenue:

(a) / Cash basis / $600
(b) / Accrual basis / $1,100 ($600 + $500)

The accrual basis provides more information because it considers all the revenue you earned, including revenue earned on account. The accrual basis also keeps a record of your receivables from customers. The cash basis ignores both your receivables and the revenue you earned on account.

(5 min.) S 3-2

(a) / Cash Basis / (b) / Accrual Basis
Record expense of $5,000 /

Record asset of $5,000

The accrual basis is more realistic because the computer is an asset. To record the cost of the computer as an expense is unrealistic.

(5 min.) S 3-3

Req. a

Phoenix Magazine should record revenue only after it mails out magazines, not when it collects cash from subscribers.

Req. b

Amount of Revenue / = / 3/12 of the annual subscription amount for 3 months (January, February, March) of the year.

(5 min.) S 3-4

Prepaid Rent / $ 900 ($3,600 × 3/12)
Rent Expense / $2,700 ($3,600 × 9/12)

(5 min.) S 3-5

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
April / 30 /

Rent Expense ($3,000  1/6)

/ 500
Prepaid Rent / 500
To record rent expense.
Prepaid Rent /

Rent Expense

Apr. 1 / 3,000 / Apr. 30 / 500 / Apr. 30 / 500
Bal. / 2,500 / Bal. / 500

(5 min.) S 3-6

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
a. / May / 1 /

Computer Equipment

/ 36,000
Cash / 36,000
Purchased computer equipment.
b. / May / 31 / Depreciation Expense—
Computer Equipment ($36,000 / 36) / 1,000
Accumulated Depreciation—
Computer Equipment / 1,000

(5 min.) S 3-7

Req. 1

Computer Equipment

/ Accumulated Depreciation—

Computer Equipment

/ Depreciation Expense—Computer Equipment
May 1 / 36,000 / May 31 / 1,000 / May 31 / 1,000
Bal. / 36,000 / Bal. / 1,000 / Bal. / 1,000

Req. 2

Computer equipment……………………….. / $36,000
Less Accumulated depreciation………….. / (1,000)
Book value……………………………………. / $35,000

(10 min.) S 3-8

Req. 1

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
Dec. / 31 /

Interest Expense

/ 700
Interest Payable / 700
To accrue interest expense.

Req. 2

Interest Payable /

Interest Expense

Dec. 31 / 700 / Dec. 31 / 700

(5-10 min.) S 3-9

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
Adjusting /

Unearned Subscription Revenue

/ 5,000
entry: / Subscription Revenue / 5,000
To record subscription revenue
that was collected in advance.

(10 min.) S 3-10

Scissors Hair Stylists
Preparation of Adjusted Trial Balance
December 31, 2006
Trial Balance / Adjustments / Adjusted
Trial Balance
Account Title / Debit / Credit / Debit / Credit / Debit / Credit
Cash / 400 / 400
Supplies / 700 / (a) 500 / 200
Equipment / 17,000 / 17,000
Accumulated depreciation / 1,000 / (b) 1,000 / 2,000
Accounts payable / 200 / 200
Interest payable / (c) 100 / 100
Note payable / 3,000 / 3,000
Suzanne Byrd, capital / 6,000 / 6,000
Service revenue / 12,000 / 12,000
Rent expense / 4,000 / 4,000
Supplies expense / (a) 500 / 500
Depreciation expense / (b) 1,000 / 1,000
Interest expense / 100 / (c) 100 / 200
Totals / 22,200 / 22,200 / 1,600 / 1,600 / 23,300 / 23,300

(5 min.) S 3-11

Net income / = / $6,300 ($12,000 – $4,000 – $500 – $1,000 – $200)

(5 min.) S 3-12

Total assets / = / $15,600 ($400 + $200 + $17,000 – $2,000)

√Exercises

(10 min.) E 3-13

Amount of Revenue (Expense) for April

Date /

Revenue (Expense)

Accrual-Basis Amount of Revenue (Expense)

April / 1 / Neither revenue nor expense / $ 0
5 / Expense / (300)
9 / Revenue / 2,000
14 / Neither revenue nor expense / 0
23 / Revenue / 3,000
30 / Expense ($900 ÷ 3) / (300)
30 / Expense / (900)

(5-10 min.) E 3-14

Time-period concept
Matching principle
Accrual accounting; matching principle
Revenue principle; no revenue to record because no transaction occurred

(5 min.) E 3-15

a. / You earned the revenue after filming the parties.
Your service earned the revenue.
You did not earn this revenue when you received the cash.
b. / A liability was created.
The liability is called Unearned Service Revenue.

(5-10 min.) E 3-16

Missing amounts in italics.
A / B / C / D

Beginning Prepaid Rent

/ $ 800 / $ 600 / $ 400 / $ 500
Payments for Prepaid
Rent during the year / 1,100 / 900 / 1,400 / 800
Total amount to account for / 1,900 / 1,500 / 1,800 / 1,300
Ending Prepaid Rent / 700 / 700 / 300 / 400
Rent Expense / $1,200 / $ 800 / $1,500 / $ 900

Journal entries:

Journal
DATE / DESCRIPTION / POST.
REF. / DEBIT / CREDIT
Situation
A: / Rent Expense / 1,200
Prepaid Rent / 1,200
B: /

Prepaid Rent

/ 900
Cash / 900

(5-10 min.) E 3-17

Journal
DATE / DESCRIPTION / POST.
REF. / DEBIT / CREDIT
a. / Depreciation Expense / 700
Accumulated Depreciation / 700
b. /

Rent Expense

/ 300
Prepaid Rent / 300
c. / Interest Expense / 800
Interest Payable / 800
d. / Salary Expense ($10,000  4/5) / 8,000
Salary Payable / 8,000
e. / Unearned Service Revenue / 500
Service Revenue / 500

(10 min.) E 3-18

Net income:

Overstated by omission of:
Depreciation expense / $ 700

Rent expense

/ 300
Interest expense / 800
Salary expense / 8,000
Total overstatement / $9,800
Understated by omission of:

Service revenue

/ 500
Overall effect—net income overstated by / $9,300

(10-15 min.) E 3-19

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
a. / Unearned Rent Revenue ($4,000  3/12) / 1,000
Rent Revenue / 1,000
b. / Salary Expense ($1,500  2) / 3,000
Salary Payable / 3,000
c. / Supplies Expense / 1,900
Supplies ($3,100 – $1,200) / 1,900
d. / Depreciation Expense ($10,000 / 4) / 2,500
Accumulated Depreciation / 2,500
e. / Insurance Expense / 200
Prepaid Insurance ($1,200 / 2  4/12) / 200

(10-20 min.) E 3-20

Accounts Receivable / Supplies
1,000 / 600 / (c) / 100
(a) / 600 / Bal. / 500
Bal. / 1,600
Salary Payable / Unearned Service Revenue
(d) / 400 / (b) / 200 / 400
Bal. / 400 / Bal. / 200
Service Revenue / Salary Expense
4,700 / 1,200
(a) / 600 / (d) / 400
(b) / 200 / Bal. / 1,600
Bal. / 5,500
Supplies Expense
(c) / 100
Bal. / 100

(10-15 min.) E 3-21

Merry Maids
Preparation of Adjusted Trial Balance
June 30, 2007
Trial Balance / Adjustments / Adjusted
Trial Balance
Account Title / Debit / Credit / Debit / Credit / Debit / Credit
Cash / 800 / 800
Supplies / 2,000 / (a) 1,500 / 500
Prepaid Insurance / 900 / (b) 600 / 300
Equipment / 20,000 / 20,000
Accumulated depreciation / 3,000 / (c) 500 / 3,500
Accounts payable / 2,100 / 2,100
Salary payable / (d) 300 / 300
Unearned service revenue / 600 / (e) 400 / 200
Lou Smith, capital / 8,000 / 8,000
Lou Smith, withdrawals / 4,000 / 4,000
Service revenue / 22,000 / (e) 400 / 22,400
Salary expense / 8,000 / (d) 300 / 8,300
Supplies expense / (a) 1,500 / 1,500
Depreciation expense / (c) 500 / 500
Insurance expense / (b) 600 / 600
Totals / 35,700 / 35,700 / 3,300 / 3,300 / 36,500 / 36,500

(10 min.) E 3-22

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
2007 / June / 30 /

Supplies Expense

/ 1,500
Supplies / 1,500
30 / Insurance Expense / 600
Prepaid Insurance / 600
30 / Depreciation Expense / 500
Accumulated Depreciation / 500
30 / Salary Expense / 300
Salary Payable / 300
30 / Unearned Service Revenue / 400
Service Revenue / 400

(10 min.) E 3-23

a. / Net / = / $11,500 ($22,400 – $8,300 – $1,500 – $500 – $600)
income
b. / Total / = / $18,100 ($800 + $500 + $300 + $20,000 – $3,500)
assets

Chapter 3 The Adjusting Process

(10-15 min.) E 3-24

Job Link Employment Service
Preparation of Adjusted Trial Balance
January 31, 2008
TRIAL BALANCE / ADJUSTMENTS / ADJUSTED TRIAL BALANCE
ACCOUNT TITLE / DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
Cash / 900 / 900
Accounts receivable / 4,500 / (a) 1,100 / 5,600
Supplies / 1,000 / (b) 300 / 700
Equipment / 32,300 / 32,300
Accumulated depreciation / 14,000 / (c) 600 / 14,600
Salary payable / (d) 900 / 900
L. Teagarden, capital / 24,300 / 24,300
L. Teagarden, withdrawals / 5,100 / 5,100
Service revenue / 9,600 / (a) 1,100 / 10,700
Salary expense / 2,700 / (d) 900 / 3,600
Rent expense / 1,400 / 1,400
Depreciation expense / (c) 600 / 600
Supplies expense / ______ / ______ / (b) 300 / _____ / 300 / ______
Totals / 47,900 / 47,900 / 2,900 / 2,900 / 50,500 / 50,500

Chapter 3 The Adjusting Process

(10-15 min.) E 3-25

/ Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
a. / Jan. / 31 /

Accounts Receivable

($5,600 – $4,500) / 1,100
Service revenue
($10,700 – $9,600) / 1,100
To accrue service revenue.
b. / 31 / Supplies Expense ($300 – $0) / 300
Supplies ($1,000 – $700) / 300
To record supplies expense.
c. / 31 / Depreciation Expense ($600 – $0) / 600
Accumulated Depreciation
($14,600 – $14,000) / 600
To record depreciation expense.
d. / 31 / Salary Expense ($3,600 – $2,700) / 900
Salary Payable ($900 – $0) / 900
To accrue salary expense.

(20 min.) E 3-26

Job Link Employment Service
Income Statement
Month Ended January 31, 2008
Revenues:
Service revenue / $10,700
Expenses:
Salary expense / $3,600
Rent expense / 1,400
Depreciation expense / 600
Supplies expense / 300
Total expenses / 5,900
Net income / $ 4,800
Job Link Employment Service
Statement of Owner’s Equity
Month Ended January 31, 2008
L. Teagarden, capital, January 1, 2008* / $24,300
Add: Net income / 4,800
29,100
Less: Withdrawals / (5,100)
L. Teagarden, capital, January 31, 2008 / $24,000

______

*Alternate date: December 31, 2007

(continued) E 3-26

Job Link Employment Service
Balance Sheet
January 31, 2008
ASSETS / LIABILITIES
Cash / $ 900 / Salary payable / $ 900
Accounts receivable / 5,600
Supplies / 700
Equipment / $32,300 / OWNER’S EQUITY
Less:Accum. / L. Teagarden, capital / 24,000
deprec. / (14,600) / 17,700 / Total liabilities and
Total assets / $24,900 / owner’s equity / $24,900

(15 min.) E 3-27

Req. 1

John Eagle, CPA
Income Statement
Year Ended December 31, 2007
Revenues:
Service revenue ($105,000 + $1,000) / $106,000
Expenses:
Salary expense ($28,000 + $600) / $28,600
Depreciation expense—building / 5,000
Depreciation expense—equipment / 2,000
Supplies expense / 400
Total expenses / 36,000
Net income / $ 70,000

Req. 2

Operations were successful, as shown by the $70,000 of net income the business earned during the year.

(10-15 min.) E 3-28

Lake Air Interiors
Statement of Owner’s Equity
Year Ended December 31, 2005
Cynthia Norcross, capital, December 31, 2004 / $ 20,000
Add:Investments by owner
($12,000 + $70,000) / 82,000
Net income / 65,000
167,000
Less:Withdrawals ($4,000 × 12) / (48,000)
Cynthia Norcross, capital, December 31, 2005 / $119,000

(10-20 min.) E 3-29

One mechanism for solving this exercise is to prepare the relevant T-accounts, insert the given information, and solve for the unknown amounts, shown in italics.

Supplies
Beg. bal. / 1,000
Cash payment / 6,000 / Supplies expense / 5,000
End bal. / 2,000
Salary Payable
Beg. bal. / 4,000
Cash payment / 47,000 / Salary expense / 45,500
End. bal. / 2,500
Unearned Service Revenue
Beg. bal. / 16,000
Service revenue / 83,000 / Cash receipts / 80,000
End. bal. / 13,000

√Problems

Group A

(10-15 min.) P 3-30A

DATE:______

TO:New Bookkeeper

FROM:Student Name, Controller

SUBJECT:Why the adjusting entry for salary expense is needed.

At the end of the period, we must make an adjusting entry for accrued salary expense to record all our salary expense of the period. Our salary expense includes both the amounts we pay employees plus the amounts they have earned but we have not yet paid. The unpaid salary expense is our liability to employees. If we fail to make this adjustment, we understate both expenses and liabilities. As a result, we would overstate net income and owners’ equity on our financial statements.

Student responses may vary.

(15-20 min.) P 3-31A

Req. 1

Amount of Revenue (Expense) for January
Date / Revenue (Expense) / Accrual-Basis Amount of Revenue (Expense)
Jan. / 1 / Neither revenue nor expense / $ 0
4 / Revenue / 2,200
5 / Neither revenue nor expense / 0
8 / Expense / (450)
11 / Neither revenue nor expense / 0
19 / Revenue / 700
24 / Neither revenue nor expense / 0
26 / Neither revenue nor expense / 0
29 / Expense / (900)
31 / Expense / $300 ÷ 3 = / (100)
31 / Revenue / 600

Req. 2

Net income………………………………………...... / $2,050

Req. 3

The accrual basis of accounting is preferable because it accounts for revenues and expenses when they occur, not necessarily when received or paid in cash.

(15-25 min.) P 3-32A

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
a. / Dec. / 31 /

Salary Expense ($5,000  1/5)

/ 1,000
Salary Payable / 1,000
To accrue salary expense.
b. / 31 / Insurance Expense / 3,000
Prepaid Insurance / 3,000
To record insurance expense.
c. / 31 /

Supplies Expense

/ 6,400
Supplies ($3,800 + $5,000 – $2,400) / 6,400
To record supplies expense.
d. / 31 / Unearned Service Revenue
($4,000 X 3/4) / 3,000
Service Revenue / 3,000
To record revenue that was collected
in advance.
e. / 31 / Depreciation Expense—Equipment / 5,500
Depreciation Expense—Trucks / 3,000
Accumulated Depreciation—
Equipment / 5,500
Accumulated Depreciation—
Trucks / 3,000
To record depreciation expense.

(45-60 min.) P 3-33A

Reqs. 1 and 2 (T-Accounts)

Cash / Accounts Receivable
Bal. / 7,100 / Bal. / 19,800
Prepaid Rent / Supplies
2,400 / (b) / 2,000 / 1,200 / (c) / 1,000
Bal. / 400 / Bal. / 200
Equipment / Accumulated Depreciation
Bal. / 19,700 / 3,600
(d) / 400
Bal. / 4,000
Accounts Payable / Salary Payable
3,300 / (f) / 500
(e) / 600 / Bal. / 500
Bal. / 3,900
Unearned Service Revenue / Dinah Klein, Capital
(a) / 1,700 / 2,800 / Bal. / 40,000
Bal. / 1,100
Dinah Klein, Withdrawals
Bal. / 9,800

(continued) P 3-33A

Reqs. 1 and 2 (T-Accounts)

Service Revenue / Salary Expense
15,600 / 3,800
(a) / 1,700 / (f) / 500
Bal. / 17,300 / Bal. / 4,300
Rent Expense / Depreciation Expense
(b) / 2,000 / (d) / 400
Bal. / 2,000 / Bal. / 400
Advertising Expense / Supplies Expense
1,500 / (c) / 1,000
(e) / 600 / Bal. / 1,000
Bal. / 2,100

(45-60 min.) P 3-33A

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTCASH
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 7,100
ACCOUNTACCOUNTS RECEIVABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 19,800
ACCOUNTPREPAID RENT
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 2,400
30 / (b) / 2,000 / 400
ACCOUNTSUPPLIES
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 1,200
30 / (c) / 1,000 / 200

(continued) P 3-33A

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTEQUIPMENT
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 19,700
ACCOUNTACCUMULATED DEPRECIATION
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(d) / 400 / 3,600
4,000
ACCOUNTACCOUNTS PAYABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(e) / 600 / 3,300
3,900
ACCOUNTSALARY PAYABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / (f) / 500 / 500

(continued) P 3-33A

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTUNEARNED SERVICE REVENUE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(a) / 1,700 / 2,800
1,100
ACCOUNTDINAH KLEIN, CAPITAL
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 40,000
ACCOUNTDINAH KLEIN, WITHDRAWALS
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / Balance / 9,800
ACCOUNTSERVICE REVENUE / ACCOUNT NO.
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(a) / 1,700 / 15,600
17,300

(continued) P 3-33A

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTSALARY EXPENSE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(f) / 500 / 3,800
4,300
ACCOUNTRENT EXPENSE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / (b) / 2,000 / 2,000
ACCOUNTDEPRECIATION EXPENSE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / (d) / 400 / 400
ACCOUNTADVERTISING EXPENSE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30
30 / Balance
(e) / 600 / 1,500
2,100
ACCOUNTSUPPLIES EXPENSE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Nov. / 30 / (c) / 1,000 / 1,000

(continued) P 3-33A

Req. 2

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT

Adjusting Entries at November 30, 2007

a. / Unearned Service Revenue
($2,800 − $1,100) / 1,700
Service Revenue / 1,700
b. / Rent Expense / 2,000
Prepaid Rent ($2,400 − $400) / 2,000
c. /

Supplies Expense

/ 1,000
Supplies / 1,000
d. / Depreciation Expense / 400
Accumulated Depreciation / 400
e. / Advertising Expense / 600
Accounts Payable / 600
f. / Salary Expense / 500
Salary Payable / 500

(continued) P 3-33A

Req. 3

DynaClean Air Purification Systems
Adjusted Trial Balance
November 30, 2007
ACCOUNT / DEBIT / CREDIT
Cash / $ 7,100
Accounts receivable / 19,800
Prepaid rent / 400
Supplies / 200
Furniture / 19,700
Accumulated depreciation / $ 4,000
Accounts payable / 3,900
Salary payable / 500
Unearned service revenue / 1,100
Dinah Klein, capital / 40,000
Dinah Klein, withdrawals / 9,800
Service revenue / 17,300
Salary expense / 4,300
Rent expense / 2,000
Depreciation expense / 400
Advertising expense / 2,100
Supplies expense / 1,000
Total / $66,800 / $66,800

Req. 4

The company will use the adjusted trial balance to prepare its financial statements.

(15-20 min.) P 3-34A

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
Dec. / 31 /

Accounts Receivable

($11,200 – $5,200) / 6,000
Service Revenue
($74,000 – $68,000) / 6,000
To accrue service revenue.
31 / Supplies Expense ($900 – $0) / 900
Supplies ($1,200 – $300) / 900
To record supplies expense.
31 / Insurance Expense ($300 – $0) / 300
Prepaid Insurance ($2,600 – $2,300) / 300
To record insurance expense.
31 / Depreciation Expense ($1,600 – $0) / 1,600
Accumulated Depreciation
($9,800 – $8,200) / 1,600
To record depreciation expense.
31 / Salary Expense ($27,600 – $26,600) / 1,000
Salary Payable ($1,000 – $0) / 1,000
To accrue salary expense.

(20-30 min.) P 3-35A

Req. 1

Festive Occasions Party Planners
Income Statement
Year Ended December 31, 2008
Revenues:
Service revenue / $63,700
Expenses:
Salary expense / $9,000
Depreciation expense / 5,300
Utilities expense / 3,700
Insurance expense / 3,100
Supplies expense / 1,600
Total expenses / 22,700
Net income / $41,000
Festive Occasions Party Planners
Statement of Owner’s Equity
Year Ended December 31, 2008
D. Brooks, capital, December 31, 2007 / $ 10,000
Add: Net income / 41,000
51,000
Less: Withdrawals / (38,000)
D. Brooks, capital, December 31, 2008 / $ 13,000

(continued) P 3-35A

Req. 1

Festive Occasions Party Planners
Balance Sheet
December 31, 2008
ASSETS / LIABILITIES
Cash / $12,300 / Accounts payable / $ 3,600
Accounts receivable / 10,400 / Unearned service
Supplies / 900 / revenue / 4,500
Equipment / $25,600 / Salary payable / 900
Less: Accum. / Note payable / 15,000
deprec. / (12,200) / 13,400 / Total liabilities / 24,000
OWNER’S EQUITY
D. Brooks, capital / 13,000
Total liabilities and
Total assets / $37,000 / owner’s equity / $37,000

Req. 2

a.Results of operations:Income statement

Results of operations were successful, as shown by the company’s net income of $41,000 for the year.

b.Financial position:Balance sheet

Financial position looks okay, as shown by the fact that Festive Occasions’ total assets ($37,000) exceed total liabilities ($24,000). The company should have no trouble paying its bills.

Chapter 3 The Adjusting Process

(40-50 min.) P 3-36A

Req. 1

Hummer Limo Service
Preparation of Adjusted Trial Balance
October 31, 2007
TRIAL BALANCE / ADJUSTMENTS / ADJUSTED TRIAL BALANCE
ACCOUNT TITLE / DEBIT / CREDIT / DEBIT / CREDIT / DEBIT / CREDIT
Cash / 6,300 / 6,300
Accounts receivable / 1,000 / (a) 2,000 / 3,000
Prepaid rent / 3,000 / (b) 600 / 2,400
Supplies / 600 / (c) 400 / 200
Automobiles / 72,000 / 72,000
Accumulated depreciation / 3,000 / (d) 1,000 / 4,000
Accounts payable / 2,800 / 2,800
Salary payable / (e) 200 / 200
Ben Hummer, capital / 73,000 / 73,000
Ben Hummer, withdrawals / 3,600 / 3,600
Service revenue / 9,400 / (a) 2,000 / 11,400
Salary expense / 1,400 / (e) 200 / 1,600
Rent expense / (b) 600 / 600
Fuel expense / 300 / 300
Depreciation expense / (d) 1,000 / 1,000
Supplies expense / (c) 400 / 400
88,200 / 88,200 / 4,200 / 4,200 / 91,400 / 91,400

______

(b)$3,000  5 = $600

(c)$600 – $200 = $400

(d)$72,000  6 = $12,000  12 = $1,000

(e)$1,000  5 = $200

Chapter 3 The Adjusting Process

(continued) P 3-36A

Req. 2

Hummer Limo Service
Income Statement
Month Ended October 31, 2007
Revenues:
Service revenue / $11,400
Expenses:
Salary expense / $1,600
Depreciation expense / 1,000
Rent expense / 600
Supplies expense / 400
Fuel expense / 300
Total expenses / 3,900
Net income / $ 7,500
Hummer Limo Service
Statement of Owner’s Equity
Month Ended October 31, 2007
Ben Hummer, capital, September 30, 2007 / $73,000
Add: Net income / 7,500
80,500
Less: Withdrawals / (3,600)
Ben Hummer, capital, October 31, 2007 / $76,900

(continued) P 3-36A

Req. 2

Hummer Limo Service
Balance Sheet
October 31, 2007
ASSETS / LIABILITIES
Cash / $ 6,300 / Accounts payable / $ 2,800
Accounts receivable / 3,000 / Salary payable / 200
Prepaid rent / 2,400 / Total liabilities / 3,000
Supplies / 200
Automobile / $72,000 / OWNER’S EQUITY
Less: Accum. / Ben Hummer, capital / 76,900
deprec. / (4,000) / 68,000 / Total liabilities and /
Total assets / $79,900 / owner’s equity / $79,900

√Problems

Group B

(15 min.) P 3-37B

DATE:______

TO:Assistant Manager

FROM:(Student Name)

SUBJECT:Difference between the cash basis and the accrual basis of accounting

The cash basis of accounting treats all cash receipts as revenues and all cash payments as expenses. The accrual basis records revenues as they’re earned and expenses as they’re incurred, not when cash is received or paid. There is a difference in the timing of the recording of revenues and expenses under the cash basis and the accrual basis. Under the accrual basis, revenues are recorded based on the revenue principle and expenses are recorded by the matching principle.

Student responses may vary.

(15-20 min.) P 3-38B

Req. 1

Amount of Revenue (Expense) for October
Date / Revenue (Expense) / Accrual-Basis Amount of Revenue (Expense)
Oct. / 2 / Neither revenue nor expense / $ 0
4 / Expense / (200)
5 / Revenue / 8,000
9 / Neither revenue nor expense / 0
12 / Revenue / 7,400
14 / Neither revenue nor expense / 0
28 / Neither revenue nor expense / 0
29 / Expense / (1,100)
30 / Neither revenue nor expense / 0
31 / Expense / $900 ÷ 3 = (300)
31 / Revenue / 700

Req. 2

Net income…………………………………………… $14,500

Req. 3

The accrual basis of accounting is preferable because it accounts for revenues and expenses when they occur, not necessarily when they are received or paid in cash.

(15-25 min.) P 3-39B

Journal
DATE / ACCOUNTS AND EXPLANATIONS / POST.
REF. / DEBIT / CREDIT
a. / Dec. / 31 /

Insurance Expense ($5,000 × 6/12)

/ 2,500
Prepaid Insurance / 2,500
To record insurance expense.
b. / 31 / Salary Expense ($2,000 × 3/5) / 1,200
Salary Payable / 1,200
To accrue salary expense.
c. / 31 /

Interest Expense

/ 300
Interest Payable / 300
To accrue interest expense.
d. / 31 / Supplies Expense
($1,000 + $6,100 − $2,100) / 5,000
Supplies / 5,000
To record supplies expense.
e. / 31 / Unearned Service Revenue
($12,000 × 0.60) / 7,200
Service Revenue / 7,200
To record revenue that was collected
in advance.
f. / 31 / Depreciation Expense—
Canoe Equipment / 3,800
Depreciation Expense—Trucks / 1,300
Accumulated Depreciation—
Canoe Equipment / 3,800
Accumulated Depreciation—Trucks / 1,300
To record depreciation expense.

(45-60 min.) P 3-40B

Reqs. 1 and 2 (T-Accounts)

Cash / Accounts Receivable
Bal. / 12,200 / Bal. / 14,100
Prepaid Insurance / Supplies
3,100 / (a) / 2,500 / 800 / (b) / 600
Bal. / 600 / Bal. / 200
Building / Accumulated Depreciation
412,000 / 311,000
Bal. / 412,000 / (c) / 900
Bal. / 311,900
Accounts Payable / Salary Payable
Bal. / 1,900 / (d) / 100
Bal.
Unearned Service Revenue / Paul Revere, Capital
(e) / 1,200 / 2,300 / Bal. / 115,000
Bal. / 1,100
Paul Revere, Withdrawals
Bal. / 2,900

(continued) P 3-40B

Reqs. 1 and 2 (T-Accounts)

Service Revenue / Salary Expense
17,800 / 2,100
(e) / 1,200 / (d) / 100
Bal. / 19,000 / Bal. / 2,200
Insurance Expense / Depreciation Expense
(a) / 2,500 / (c) / 900
Bal. / 2,500 / Bal. / 900
Advertising Expense / Supplies Expense
Bal. / 800 / (b) / 600
Bal. / 600

(45-60 min.) P 3-40B

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTCASH
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 12,200
ACCOUNTACCOUNTS RECEIVABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 14,100
ACCOUNTPREPAID INSURANCE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 3,100
31 / (a) / 2,500 / 600
ACCOUNTSUPPLIES
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 800
31 / (b) / 600 / 200

(continued) P 3-40B

Reqs. 1 and 2 (4-Column Accounts)

ACCOUNTBUILDING
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 412,000
ACCOUNTACCUMULATED DEPRECIATION
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 311,000
31 / (c) / 900 / 311,900
ACCOUNTACCOUNTS PAYABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / Balance / 1,900
ACCOUNTSALARY PAYABLE
DATE / ITEM / JRNL.
REF. / DEBIT / CREDIT / BALANCE
DEBIT / CREDIT
Dec. / 31 / (d) / 100 / 100

(continued) P 3-40B