PRACTICE EXERCISES
PE 3–1A
a.Yesc.Noe.Yes
b.Nod.Yesf.Yes
PE 3–1B
a.No c.Noe.No
b.Nod.Yesf.Yes
PE 3–2A
a.Unearned revenuec.Accrued revenue
b.Prepaid expensed.Accrued expense
PE 3–2B
a.Unearned revenuec.Accrued expense
b.Accrued revenued.Prepaid expense
PE 3–3A
Supplies Expense...... 5,000
Supplies...... 5,000
Supplies used ($2,400 + $3,975 – $1,375).
PE 3–3B
Insurance Expense...... 4,000
Prepaid Insurance...... 4,000
Insurance expired ($7,200 + $4,800 – $8,000).
PE 3–4A
Unearned Fees...... 160,250
Fees Earned...... 160,250
Fees earned ($178,900 – $18,650).
PE 3–4B
Unearned Rent...... 4,375
Rent Revenue...... 4,375
Rent earned [($10,500/12) × 5 months].
PE 3–5A
Accounts Receivable...... 11,600
Fees Earned...... 11,600
Accrued fees.
PE 3–5B
Accounts Receivable...... 21,750
Fees Earned...... 21,750
Accrued fees.
PE 3–6A
Salaries Expense...... 14,400
Salaries Payable...... 14,400
Accrued salaries [($18,000/5 days) × 4 days].
PE 3–6B
Salaries Expense...... 17,250
Salaries Payable...... 17,250
Accrued salaries [($34,500/6 days) × 3 days].
PE 3–7A
Depreciation Expense...... 11,500
Accumulated Depreciation—Equipment...... 11,500
Depreciation on equipment.
PE 3–7B
Depreciation Expense...... 3,800
Accumulated Depreciation—Equipment...... 3,800
Depreciation on equipment.
PE 3–8A
a.Revenues were understated by $33,300.
b.Expenses were understated by $13,200 ($7,200 + $6,000).
c.Net income was understated by $20,100 ($33,300 – $13,200).
PE 3–8B
a.Revenues were understated by $13,900.
b.Expenses were understated by $14,100 ($2,100 + $12,000).
c.Net income was overstated by $200 ($14,100 – $13,900).
PE 3–9A
a.The totals are unequal. The debit total is higher by $270 ($17,520 – $17,250).
b.The totals are equal since the adjusting entry was omitted.
PE 3–9B
a.The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable.
b.The totals are unequal. The credit total is higher by $360 ($1,840 – $1,480).
PE 3–10A
a.
Newman Company
Income Statements
For Years Ended December 31
20122011
AmountPercentAmountPercent
Fees earned...... $405,000 100% $375,000 100%
Operating expenses... 263,500 65 225,000 60
Operating income..... $141,500 35% $150,000 40%
b.An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.
PE 3–10B
a.
Bradford Company
Income Statements
For Years Ended December 31
20122011
AmountPercentAmountPercent
Fees earned...... $825,000 100% $700,000 100%
Operating expenses... 684,750 83 602,000 86
Operating income..... $140,250 17% $ 98,000 14%
b.A favorable trend of decreasing operating expenses and increasing operating income is indicated.
EXERCISES
Ex. 3–1
1.Prepaid expense
2.Accrued revenue
3.Unearned revenue
4.Accrued expense
5.Unearned revenue
6.Prepaid expense
7.Accrued expense
8.Accrued expense
Ex. 3–2
AccountAnswer
Accounts Receivable...... Normally requires adjustment (AR).
Capital Stock...... Does not normally require adjustment.
Cash...... Does not normally require adjustment.
Interest Expense...... Normally requires adjustment (AE).
Interest Receivable...... Normally requires adjustment (AR).
Land...... Does not normally require adjustment.
Office Equipment...... Does not normally require adjustment.
Prepaid Rent...... Normally requires adjustment (PE).
Supplies...... Normally requires adjustment (PE).
Unearned Fees...... Normally requires adjustment (UR).
Wages Expense...... Normally requires adjustment (AE).
Ex. 3–3
Supplies Expense...... 2,165
Supplies...... 2,165
Supplies used ($3,915 – $1,750).
Ex. 3–4
$3,650 ($900 + $2,750)
Ex. 3–5
a.Insurance expense (or expenses) will be understated. Net income will be overstated.
b.Prepaid insurance (or assets) will be overstated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–6
a.Insurance Expense...... 11,200
Prepaid Insurance...... 11,200
Insurance expired.
b.Insurance Expense...... 11,200
Prepaid Insurance...... 11,200
Insurance expired ($14,800 – $3,600).
Ex. 3–7
a.Insurance Expense...... 14,800
Prepaid Insurance...... 14,800
Insurance expired ($4,800 + $15,000 – $5,000).
b.Insurance Expense...... 14,800
Prepaid Insurance...... 14,800
Insurance expired.
Ex. 3–8
Unearned Fees...... 36,000
Fees Earned...... 36,000
Fees earned ($45,000 – $9,000).
Ex. 3–9
a.Rent revenue (or revenues) will be understated. Net income will be under-stated.
b.Unearned rent (liabilities) will be overstated. Stockholders’ equity (retained earnings) at the end of the period will be understated.
Ex. 3–10
a.Accounts Receivable...... 12,300
Fees Earned...... 12,300
Accrued fees.
b.No. If the cash basis of accounting is used, revenues are recognized only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary.
Ex. 3–11
a.Unearned Fees...... 78,500
Fees Earned...... 78,500
Unearned fees earned during year.
b.Accounts Receivable...... 23,600
Fees Earned...... 23,600
Accrued fees earned.
Ex. 3–12
a.Fees earned (or revenues) will be understated. Net income will be understated.
b.Accounts (fees) receivable (or assets) will be understated. Stockholders’ equity (retained earnings) will be understated.
Ex. 3–13
a.Salary Expense...... 3,750
Salaries Payable...... 3,750
Accrued salaries [($9,375/5 days) × 2 days].
b.Salary Expense...... 7,500
Salaries Payable...... 7,500
Accrued salaries [($9,375/5 days) × 4 days].
Ex. 3–14
$37,500 ($41,250 – $3,750)
Ex. 3–15
a.Salary expense (or expenses) will be understated. Net income will be overstated.
b.Salaries payable (or liabilities) will be understated. Stockholders’ equity (retained earnings) will be overstated.
Ex. 3–16
a.Salary expense (or expenses) will be overstated. Net income will be under-stated.
b.The balance sheet will be correct. This is because salaries payable has been satisfied, and the net income errors have offset each other. Thus, stockholders’ equity (retained earnings) is correct.
Ex. 3–17
a.Taxes Expense...... 6,750
Prepaid Taxes...... 6,750
Prepaid taxes expired [($9,000/12) × 9 months].
Taxes Expense...... 34,500
Taxes Payable...... 34,500
Accrued taxes.
b.$41,250 ($6,750 + $34,500)
Ex. 3–18
Depreciation Expense...... 2,900
Accumulated Depreciation—Equipment...... 2,900
Depreciation on equipment.
Ex. 3–19
a.$325,000 ($750,000 – $425,000)
b.No. Depreciation is an allocation of the cost of the equipment to the periods benefiting from its use. It does not necessarily relate to value or loss of value.
Ex. 3–20
a.$7,535 million ($15,082 – $7,547)
b.No. Depreciation is an allocation method, not a valuation method. That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year.
Ex. 3–21
Income: $3,434 million ($1,714 + $1,720)
Ex. 3–22
a.$579 million
b.53.7% ($579 ÷ $1,079)
Ex. 3–23
Error (a)Error (b)
Over-Under-Over-Under-
statedstatedstatedstated
1.Revenue for the year would be...... $0$18,000$0$0
2.Expenses for the year would be...... 0003,000
3.Net income for the year would be...... 018,0003,0000
4.Assets at May 31 would be...... 0000
5.Liabilities at May 31 would be...... 18,000003,000
6.Stockholders’ equity at May 31 would be018,0003,0000
Ex. 3–24
$255,000 ($240,000 + $18,000 – $3,000)
Ex. 3–25
a.Depreciation Expense...... 14,500
Accumulated Depreciation—Equipment...... 14,500
Depreciation on equipment.
b.(1)Depreciation expense would be understated. Net income would be overstated.
(2)Accumulated depreciation would be understated, and total assets would be overstated. Stockholders’ equity (retained earnings) would be overstated.
Ex. 3–26
1.Accounts Receivable...... 2
Fees Earned...... 2
Accrued fees earned.
2.Supplies Expense...... 1
Supplies...... 1
Supplies used.
3.Insurance Expense...... 4
Prepaid Insurance...... 4
Insurance expired.
4.Depreciation Expense...... 1
Accumulated Depreciation—Equipment...... 1
Equipment depreciation.
5.Wages Expense...... 1
Wages Payable...... 1
Accrued wages.
Ex. 3–27
1.The accountant debited Accounts Receivable for $3,750 but did not credit Laundry Revenue. This adjusting entry represents accrued laundry revenue.
2.The accountant debited rather than credited Laundry Supplies for $1,750.
3.The accountant credited the prepaid insurance account for $3,800 but debited the insurance expense account for only $800.
4.The accountant credited Laundry Equipment for the depreciation expense of $6,000, instead of crediting the accumulated depreciation account.
5.The accountant did not debit Wages Expense for $1,200.
The corrected adjusted trial balance is shown below.
E-Z Laundry
Adjusted Trial Balance
July 31, 2012
DebitCredit
BalancesBalances
Cash...... 7,500
Accounts Receivable...... 22,000
Laundry Supplies...... 2,000
Prepaid Insurance...... 1,400
Laundry Equipment...... 190,000
Accumulated Depreciation—Laundry Equipment. 54,000
Accounts Payable...... 9,600
Wages Payable...... 1,200
Capital Stock...... 40,000
Retained Earnings...... 70,300
Dividends...... 28,775
Laundry Revenue...... 185,850
Wages Expense...... 50,400
Rent Expense...... 25,575
Utilities Expense...... 18,500
Depreciation Expense...... 6,000
Insurance Expense...... 3,800
Laundry Supplies Expense...... 1,750
Miscellaneous Expense...... 3,250
360,950 360,950
Ex. 3–28
a.$$396 million decrease ($1,487 – $1,883)
21.0% ($396 ÷ $1,883) decrease
b.2009: 7.8% ($1,487÷ $19,176)
2008: 10.1% ($1,883÷ $18,627)
c.The net income decreased during 2009 by $396 million, or 21.0%, from 2008, an unfavorable trend. The percent of net income to net sales also decreased.
Ex. 3–29
a.Dell Inc.
AmountPercent
Net sales...... $ 61,101 100.0%
Cost of goods sold...... (50,144) 82.1
Operating expenses...... (7,767) 12.7
Operating income (loss)...... $ 3,190 5.2%
b.Hewlett-Packard Company (HP)
AmountPercent
Net sales...... $118,364 100.0%
Cost of goods sold...... (89,592) 75.7
Operating expenses...... (17,970) 15.2
Operating income (loss)...... $ 10,802 9.1%
c.Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of goods sold of 75.7% is significantly less (6.4%) than Dell’s cost of goods sold of 82.1%. This is partially offset by HP’s higher operating expenses of 15.2% as compared to Dell’s operating expenses of 12.7%. The net result is that HP generates an operating income of 9.1% of sales, while Dell generates operating income of 5.2% of sales. Dell must improve its operations if it is to remain competitive with HP.