Chapter 3: Adjusting and Closing Entries

Chapter 3: Adjusting and Closing Entries

Discussion Questions: Key Points

1. Revenue is recognized when it is earned using the accrual basis of accounting and when cash is received using the cash basis of accounting
2. July 19
3. June 28
4. The matching principle requires companies to match expenses with the revenues they helped create. Proper matching is required in order to produce accurate financial information.
5. The time period that revenue is recognized is important because accurate financial statements cannot be produced unless the revenues are recorded in the proper period.
6. A deferral occurs when there has been a prepayment. Deferrals would only be associated with the accrual basis of accounting. A deferral would be recorded when the company is paid in advance for services to be rendered later or when a company pays for expenses in advance that are going to be used up later (e.g., supplies, insurance).
7. Adjusting entries are prepared in order to bring all of the account balances up to date.
8. Assets and expenses are both increased with debits. Assets eventually become expenses over time and use.
9. The determining factor is the benefit period with which the expenditure is associated. If the benefit period is in the future or extending from the present into one or more future accounting periods, an asset is debited. If the expenditure is associated with an item that will be used up in the present accounting period, an expense is debited. It is important to note that dollar amount is not necessarily the determining factor.
10. Expense
11. Asset
12. When a company is paid in advance for services to be delivered later, a deferred revenue journal entry in which cash is debited and unearned revenue is credited will be recorded. The deferred revenue account would need to be adjusted for the amount of the prepayment that has been earned during the period.
13. Accumulated depreciation is a contra-asset account. It is reported on the balance sheet along with the asset account that it modifies.
14. The closing process has two objectives: 1) to transfer the revenue, expense and dividends account balances into retained earnings, and 2) to get those accounts ready for the next accounting period by starting them out at zero. Retained earnings is the only account that is involved but not closed.

Short Exercises

(5-10 min.) S 3-1

1.b

2.c

3.d

4.a

(5-10 min.) S 3-2

1.d

2.c

3.b

4.f

5.a

6.e

7.g

(5-10 min.) S 3-3

Type of Adjusting Entry / Related Income Statement Account
a. / Accrued expense / Interest expense
b. / Deferred revenue / Service revenue
c. / Accrued revenue / Service revenue
d. / Deferred expense / Supplies expense
e. / Deferred expense / Depreciation expense

(5-10 min.) S 3-4

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
June / 30 /

Rent expense ($4,500/6months)

/ 750
Prepaid rent / 750
Record rent expense for June.
Prepaid rent / Rent expense
Bal. / 4,500 / June 30 / 750 / June 30 / 750
Bal. / 3,750

(5-10 min.) S 3-5

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Sept / 30 /

Supplies expense ($1,200 − $500)

/ 700
Office supplies / 700
Record supplies expense for September
Office supplies / Supplies expense
Bal. / 1,200 / Sept. 30 / 700 / Sept. 30 / 700
Bal. / 500

(5-10 min.) S 3-6

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Dec. / 31 /

Interest expense ($200 × 5 months)

/ 1,000
Interest payable / 1,000
Accrue interest expense for
August – December.
Interest payable /

Interest expense

Dec. 31 / 1,000 / Dec. 31 / 1,000

(5-10 min.) S 3-7

Journal
DATE / ACCOUNTS / POST.
REF. / Dr. / Cr.
Dec. / 31 /

Unearned subscription revenue

($2,400/12× 9 months)

/ 1,800
Subscription revenue / 1,800
Record subscription revenue
Earned for April – December.
Unearned subscription revenue /

Subscription revenue

Dec. 31 / 1,800 / Apr 1 / 2,400 / Dec. 31 / 1,800
Bal. / 600

(5-10 min.) S 3-8

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
1. / Dec. / 31 /

Accounts receivable

/ 1,500
Service revenue / 1,500
Accrue service revenue.
2. / Salary expense / 2,300
Salary payable / 2,300
Accrue salary.
3. / Interest expense / 375
Interest payable / 375
Accrue interest.

(5-10 min.) S 3-9

You would record $1,350 of service revenue at the end of September. Under the accrual basis of accounting, revenues are recorded when earned regardless of when cash is received. Therefore, both the $1,200 you have received as well as the $150 that is still owed to you would be recorded as service revenue.

(5-10 min.) S 3-10

Account / Type of Account / Permanent/Temporary / Closed</COLHD>
D<TB>Depreciation expense / Expense / Temporary / Yes</TB</UNTBL</BOX>
Sales revenue / Revenue / Temporary / Yes</TB</UNTBL</BOX>
Building / Asset / Permanent / No
Cash / Asset / Permanent / No
Unearned service revenue / Liability / Permanent / No
Prepaid rent / Asset / Permanent / No
Dividends / Stockholders’ equity / Temporary / Yes</TB</UNTBL</BOX>

(10-15 min.) S 3-11

Req 1

Net income = $700 ($1,200 service revenue - $500 total expenses)

Req 2

Change in Retained earnings = $200 ($700 net income - $500 dividends)

Req 3

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Dec. / 31 /

Service revenue

/ 1,200
Retained earnings / 1,200
Close revenue accounts
Retained earnings / 500
Building rent expense / 200
Salary expense / 300
Close expense accounts
Retained earnings / 500
Dividends / 500
Close dividends

(5-10 min.) S 3-12

Type of Entry (ADJ or CL) / Accounts / Post.
Ref. / Dr. / Cr.
ADJ / Salary expense / 400
Salary payable / 400
CL / Service revenue / 900
Retained earnings / 900
CL / Retained earnings / 1,500
Dividends / 1,500
ADJ / Unearned revenue / 800
Service revenue / 800

(5-10 min.) S 3-13

Simmons Realty, Inc.<P>Apex

Post-Closing Trial Balance
October31, 2010

ACCOUNT / DEBIT / CREDIT
Cash
Accounts receivable
Prepaid insurance
Prepaid rent
Building
Accounts payable
Notes payable
Common Stock
Retained earnings
Total / $1,850
2,450
1,300
975
1,800
______
$8,375 / 300
2,000
5,000
1,075
$8,375

Exercises

(10-15 min.) E 3-14A

Req 1

The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue.

Req 2

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.

Cash

/ 175
Unearned service revenue / 175
Collect revenue in advance.
Accounts receivable / 340
Service revenue / 340
Accrue service revenue.
Cash / 150
Service revenue / 150
Collect cash for services performed

(5-10 min.) E 3-15A

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

Beginning prepaid insurance

/ $ 300 / $ 600 / $ 700 / $ 400
Payments for Prepaid
insurance during the year / 1,200 / $900 / 1,300 / 1,500
Total amount to account for / 1,500 / 1,500 / 2,000 / 1,900
Ending Prepaid insurance / 400 / 500 / 800 / 1,100
Insurance expense / $1,100 / $ 1,000 / $1,200 / $ 800
Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Insuranceexpense

/ 1,100
Prepaid insurance / 1,100
Record insurance expense.

(10-15 min.) E 3-16A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Salary expense

/ 6,000
Salary payable / 6,000
b. / Unearned service revenue / 750
Service revenue / 750
c. / Depreciation expense / 1,800
Accumulated depreciation / 1,800
d. /

Rent expense

/ 450
Prepaid rent / 450
e. / Interest receivable / 875
Interest revenue / 875

(10-15 min.) E 3-17A

Net Income:

Transaction / Overstated/Understated / Amount
a. / Overstated / $2,400
b. / Overstated / $1,800
c. / Overstated / $2,700
d. / Overstated / $700
e. / Understated / $3,500

(15-20 min.) E 3-18A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Unearned rent revenue ($4,800 × 2/6) / 1,600
Rent revenue / 1,600
Record revenue earned.
b. / Interest receivable / 650
Interest revenue / 650
Accrue interest revenue.
c. / Salary expense ($1,700 × 4 days) / 6,800
Salary payable / 6,800
Accrue salary expense.
d. / Supplies expense / 1,500
Supplies ($2,200 − $700) / 1,500
Record supplies expense.
e. / Depreciation Expense ($18,000 / 4 years) / 4,500
Accumulated Depreciation / 4,500
Record depreciation expense.
f. / Insurance expense / 625
Prepaid insurance ($1,500 × 5/12) / 625
Record insurance expense.

(15-20 min.) E 3-19A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Accounts receivable

/ 1,200
Service revenue / 1,200
Accrue revenue.
b. / Unearned service revenue / 500
Service revenue / 500
Record revenue earned.
c. /

Supplies expense ($800 − $150)

/ 650
Supplies / 650
Record supply expense.
d. / Salary expense / 1,100
Salary payable / 1,100
Accrue salary expense.

(continued) E 3-19A

Accounts receivable / Supplies
Bal. / 1,500 / Bal. / 800 / (c) / 650
(a) / 1,200 / Bal. / 150
Bal. / 2,700
Salary payable / Unearned service revenue
(d) / 1,100 / (b) / 500 / Bal. / 900
Bal. / 1,100 / Bal. / 400
Service revenue / Salary expense
Bal. / 3,900 / Bal. / 1,700
(a) / 1,200 / (d) / 1,100
(b) / 500 / Bal. / 2,800
Bal. / 5,600
Supplies expense
(c) / 650
Bal. / 650

(15-20 min.) E 3-20A

Req. 1

Accounts receivable / Supplies
21,000 / 2,800 / (a) / 1,200
(e) / 1,500 / Bal. / 1,600
Bal / 22,500
Accumulated depreciation, equipment / Accumulated depreciation, building
5,600 / 28,000
(b) / 1,400 / (c) / 2,000
Bal / 7,000 / Bal / 30,000
Salary expense / Supplies expense
14,000 / (a) / 1,200
(d) / 2,900 / Bal / 1,200
Bal / 16,900
Depreciation expense, equipment / Depreciation expense, building
(b) / 1,400 / (c) / 2,000
Bal / 1,400 / Bal / 2,000
Service revenue
97,000
(e) / 1,500
Bal. / 98,500
Salary payable
(d) / 2,900
Bal / 2,900
Henderson Roofing, Inc.
Income Statement
Year Ended December 31, 2010
Revenues
Service revenue / $98,500
Expenses
Salary expense / $16,900
Depreciation expense, building / 2,000
Depreciation expense, equipment / 1,400
Supplies expense / 1,200
Total expenses / 21,500
Net Income / $ 77,000

Req. 2

Operations were successful, as shown by the $77,000 of netincome the business earned during the year. The reason is revenues were greater than expenses.

(10-15 min.) E 3-21A

Req. 1

Sigma Security, Inc.
Statement of Retained Earnings
Year Ended December 31, 2010
Retained earnings, January 1, 2010 / $ 32,000
Less: Net loss / (11,000)
Subtotal / 21,000
Less: Dividends ($800 × 12 months) / (9,600)
Retained earnings, December 31, 2010 / $ 11,400

Req. 2

Retained earnings had a net decrease of $20,600 for the year (End $11,400 – Beg $32,000). This resulted from the current net loss ($11,000) and dividends paid ($9,600).

(10-15 min.) E 3-22A

Supplies
Bal. / 2,800
Purchase of supplies / 8,700 / Supplies expense / 9,800
Bal. / 1,700
Salary payable
Bal. / 2,800
Cash payment / 52,300 / Salary expense / 53,200
Bal. / 3,700
Unearned service revenue
Bal. / 18,000
Service revenue / 108,100 / Cash receipts / 106,400
Bal. / 16,300

(15-20 min.) E 3-23A

Country Cookin Catering, Inc.<P>Apex
Income Statement
Month Ended March 31, 2010

Revenue:
Service revenue
Expenses:
Salary expense
Rent expense
Depreciation expense, equipment
Supplies expense
Total Expenses
Net Income / $3,600
1,200
600
300 / $18,600
5,700
$12,900

Country Cookin Catering, Inc.<P>Apex
Statement of Retained Earnings
Month Ended March 31, 2010

Retained earnings, March 1, 2010
Add: Net income for the Month
Subtotal
Less: Dividends
Retained earnings, March 31, 2010 / $5,800
12,900
18,700
800
$17,900

Country Cookin Catering, Inc.

Balance Sheet

March 31, 2010

Assets / Liabilities
Cash
Accounts receivable
Supplies
Equipment
Less: Accum. depreciation
Total Assets / $22,500
(8,800) / $4,000
8,000
1,300
13,700
$27,000 / Accounts payable
Salary payable
Unearned service revenue
Total Liabilities
Stockholders’ Equity
Common stock
Retained earnings
Total Stockholders’ equity
Total Liabilities & Stockholders’ equity / $2,100
600
1,400
4,100
5,000
17,900
22,900
$27,000

(10-15 min.) E 3-24A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Apr / 30 /

Service revenue

/ 127,000
Interest revenue / 800
Retained earnings / 127,800
Close revenue accounts
Retained earnings / 35,800
Salary expense / 18,500
Depreciation expense / 8,200
Building rent expense / 5,100
Interest expense / 2,300
Supplies expense / 1,700
Close expense accounts
Retained earnings / 18,000
Dividends / 18,000
Close dividends

A to Z Electrical, Inc.’s ending retained earnings is $80,500 ($6,500 + $127,800 - $35,800 - $18,000).

(10-15 min.) E 3-25A

Kurlz Salon, Inc.<P>Apex
Statement of Retained Earnings
Year Ended December 31, 2010

Retained earnings, January 1, 2010
Add: Net income for the Month
Subtotal
Less: Dividends
Retained earnings, December 31, 2010 / $188,000
139,000
327,000
76,000
$251,000

(10-15 min.) E 3-26A

Cunningham Photography, Inc.
Post-Closing Trial Balance

December 31, 2010

ACCOUNT / DEBIT / CREDIT
Cash
Accounts receivable
Supplies
Equipment
Accumulated depreciation, equipment
Accounts payable
Salary payable
Unearned service revenue
Common stock
Retained earnings
Total / $9,450
33,100
1,900
68,000
.
$112,450 / $19,700
11,450
2,500
5,600
30,000
43,200
$112,450

(10-15 min.) E 3-27A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Dec. / 31 /

Service revenues

/ 73,000
Retained earnings / 73,000
Close revenue accounts
Retained earnings / 52,300
Salary expense / 31,000
Rent expense / 18,600
Depreciation expense, equipment / 1,600
Depreciation expense, furniture / 400
Supplies expense / 700
Close expense accounts
Retained earnings / 14,000
Dividends / 14,000
Close dividends

(10-15 min.) E 3-28B

Req 1

The accounts used include the assets Cash and Accounts Receivable, the liability Unearned Service Revenue, and the revenue Service Revenue.

Req 2

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.

Cash

/ 120
Unearned service revenue / 120
Collect revenue in advance.
Accounts receivable / 425
Service revenue / 425
Accrue service revenue.
Cash / 110
Service revenue / 110
Collect cash for services performed

(5-10 min.) E 3-29B

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

Beginning prepaid insurance

/ $ 800 / 1,100 / $ 1,600 / $ 300
Payments for Prepaid
insurance during the year / 1,500 / $600 / 1,600 / 2,400
Total amount to account for / 2,300 / 1,700 / 3,200 / 2,700
Ending Prepaid insurance / 700 / 1,200 / 600 / 1,300
Insurance expense / $ 1,600 / $ 500 / $ 2,600 / $ 1,400
Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Insurance expense

/ 1,600
Prepaid insurance / 1,600
Record insurance expense.

(10-15 min.) E 3-30B

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Salary expense

/ 7,500
Salary payable / 7,500
b. / Unearned service revenue / 1,250
Service revenue / 1,250
c. / Depreciation expense / 1,900
Accumulated depreciation / 1,900
d. /

Rent expense

/ 550
Prepaid rent / 550
e. / Interest receivable / 980
Interest revenue / 980

(10-15 min.) E 3-31B

Net Income:

Transaction / Overstated/Understated / Amount
a. / Overstated / $2,500
b. / Overstated / $1,000
c. / Overstated / $3,100
d. / Overstated / $800
e. / Understated / $4,500

(15-20 min.) E 3-32B

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Unearned rent revenue ($3,000 × 2/6) / 1,000
Rent revenue / 1,000
Record revenue earned.
b. / Interest receivable / 520
Interest revenue / 520
Accrue interest revenue.
c. / Salary expense ($2,900 × 2 days) / 5,800
Salary payable / 5,800
Accrue salary expense.
d. / Supplies expense / 1,200
Supplies ($1,400 − $200) / 1,200
Record supplies expense.
e. / Depreciation Expense ($8,000 / 10 years) / 800
Accumulated Depreciation / 800
Record depreciation expense.
f. / Insurance expense / 650
Prepaid insurance ($1,560 × 5/12) / 650
Record insurance expense.

(15-20 min.) E 3-33B

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. /

Accounts receivable

/ 2,200
Service revenue / 2,200
Accrue revenue.
b. / Unearned service sevenue / 300
Service revenue / 300
Record revenue earned.
c. /

Supplies expense ($1,100 − $150)

/ 950
Supplies / 950
Record supply expense.
d. / Salary expense / 700
Salary payable / 700
Accrue salary expense.

(continued) E 3-33B

Accounts receivable / Supplies
Bal. / 1,900 / Bal. / 1,100 / (c) / 950
(a) / 2,200 / Bal. / 150
Bal. / 4,100
Salary payable / Unearned service revenue
(d) / 700 / (b) / 300 / Bal. / 1,300
Bal. / 700 / Bal. / 1,000
Service revenue / Salary expense
Bal. / 5,300 / Bal. / 3,100
(a) / 2,200 / (d) / 700
(b) / 300 / Bal. / 3,800
Bal. / 7,800
Supplies expense
(c) / 950
Bal. / 950

(15-20 min.) E 3-34B

Req. 1

Accounts receivable / Supplies
19,200 / 2,200 / (a) / 1,600
(e) / 2,250 / Bal. / 600
Bal / 21,450
Accumulated depreciation, equipment / Accumulated depreciation, building
4,200 / 46,000
(b) / 1,400 / (c) / 1,000
Bal / 5,600 / Bal / 47,000
Depreciation expense, equipment / Depreciation expense, building
(b) / 1,400 / (c) / 1,000
Bal / 1,400 / Bal / 1,000
Salary expense / Supplies expense
13,500 / (a) / 1,600
(d) / 2,500 / Bal / 1,600
Bal / 16,000
Salary payable
(d) / 2,500
Bal / 2,500
Service revenue
6,400
(e) / 2,250
Bal. / 8,650
Metal Main, Inc.
Income Statement
Year Ended August 31, 2010
Revenues
Service revenue / $8,650
Expenses
Salary expense / $16,000
Supplies expense / 1,600
Depreciation expense, equipment / 1,400
Depreciation expense, building / 1,000
Total expenses / 20,000
Net Loss / $ (11,350)

Req. 2

Operations were not successful from the standpoint that the business incurred a net loss of $11,350 during the year. The reason is expenses were greater than revenues.

(10-15 min.) E 3-35B

Req. 1

Zeta Safety, Inc.
Statement of Retained Earnings
Year Ended December 31, 2010
Retained earnings, January 1, 2010 / $ 34,000
Less: Net loss / (5,000)
Subtotal / 29,000
Less: Dividends ($550 × 12 months) / (6,600)
Retained earnings, December 31, 2010 / $ 22,400

Req. 2

Retained earnings had a net decrease of $11,600 for the year (End $22,400 – Beg $34,000). This resulted from the current net loss ($5,000) and dividends paid ($6,600).

(10-15 min.) E 3-36B

Supplies
Bal. / 1,700
Purchase of supplies / 9,000 / Supplies expense / 9,500
Bal. / 1,200
Salary payable
Bal. / 4,000
Cash payment / 55,500 / Salary expense / 56,000
Bal. / 4,500
Unearned service revenue
Bal. / 17,000
Service revenue / 59,900 / Cash receipts / 58,000
Bal. / 15,100

(15-20 min.) E 3-37B

Spruce Up Catering, Inc.<P>Apex
Income Statement
Month Ended January 31, 2010

Revenue:
Service revenue
Expenses:
Salary expense
Rent expense
Depreciation expense, equipment
Supplies expense
Total Expenses
Net Income / $3,800
1,700
1,500
900 / $20,100
7,900
$12,200

Spruce Up Catering, Inc.<P>Apex
Statement of Retained Earnings
Month Ended January 31, 2010

Retained earnings, January 1, 2010
Add: Net income for the Month
Subtotal
Less: Dividends
Retained earnings, January31, 2010 / $11,100
12,200
23,300
1,100
$22,200

Spruce Up Catering, Inc.

Balance Sheet

January 31, 2010

Assets / Liabilities
Cash
Accounts receivable
Supplies
Equipment
Less: Accum. depreciation
Total Assets / $26,600
(6,800) / $6,500
6,000
400
19,800
$32,700 / Accounts payable
Salary payable
Unearned service revenue
Total Liabilities
Stockholders’ Equity
Common stock
Retained earnings
Total Stockholders’ equity
Total Liabilities & Stockholders’ equity / $2,300
1,100
1,900
5,300
5,200
22,200
27,400
$32,700

(10-15 min.) E 3-38B

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Sep / 30 /

Service revenue

/ 49,000
Interest revenue / 300
Retained earnings / 49,300
Close revenue accounts
Retained earnings / 37,200
Salary expense / 21,900
Building rent expense / 5,600
Depreciation expense / 5,000
Interest expense / 2,400
Supplies expense / 2,300
Close expense accounts
Retained earnings / 14,000
Dividends / 14,000
Close dividends

JubaElectrical, Inc.’s ending retained earnings is $6,000 ($7,900 + $49,300 - $37,200 -$14,000).

(10-15 min.) E 3-39B

Resch Restore, Inc.<P>Apex
Statement of Retained Earnings
Year Ended January31, 2010

Retained earnings, February 1, 2009
Add: Net income for the Month
Subtotal
Less: Dividends
Retained earnings, January31, 2010 / $77,000
189,000
266,000
82,000
$184,000

(10-15 min.) E 3-40B

Fonzarelli Photo, Inc.
Post-Closing Trial Balance

March 31, 2010

ACCOUNT / DEBIT / CREDIT
Cash
Accounts receivable
Supplies
Equipment
Accumulated depreciation, equipment
Accounts payable
Salary payable
Unearned service revenue
Common stock
Retained earnings
Total / $10,250
25,000
600
17,000
.
$52,850 / $5,000
8,800
5,200
2,200
20,000
11,650
$52,850

(10-15 min.) E 3-41B

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
Aug / 31 /

Service revenues

/ 77,000
Retained earnings / 77,000
Close revenue accounts
Retained earnings / 37,800
Salary expense / 27,000
Rent expense / 6,000
Depreciation expense, equipment / 1,500
Depreciation expense, furniture / 1,300
Supplies expense / 2,000
Close expense accounts
Retained earnings / 14,000
Dividends / 14,000
Close dividends

Problems

(15-20 min.) P 3-42A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Dec. / 31 /

Insurance expense

($2,400 × 8/12 months) / 1,600
Prepaid insurance / 1,600
Record insurance expense.
b. / 31 / Salary expense ($6,500 × 2/5) / 2,600
Salary payable / 2,600
Accrue salary expense.
c. / 31 /

Interest receivable

/ 350
Interest revenue / 350
Accrue interest expense.
d. / 31 / Supplies expense
($1,800 + $3,700 − $2,200) / 3,300
Supplies / 3,300
Record supply expense.
e. / 31 / Unearned service revenue / 5,100
Service revenue / 5,100
Record revenue earned.
f. / 31 / Depreciation expense, vehicles / 2,850
Accumulated depreciation, vehicles / 2,850
Depreciation expense, equipment / 1,200
Accumulated depreciation,equipment / 1,200
Record depreciation expense.

(15-20 min.) P 3-43A

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
June / 30 / Supplies expense($1,100 - $0) / 1,100
Supplies ($1,400 − $300) / 1,100
Record supplies used.
30 /

Rent expense ($4,200 - $3,500)

/ 700

Prepaid rent ($2,800 - $2,100)

/ 700

Record Prepaid rent expired

30 / Depreciation expense, equipment ($1,500 - $1,250) / 250
Accumulated depreciation,
equipment ($7,750 − $7,500) / 250
Record depreciation.
30 / Salary expense ($24,650 - $23,400) / 1,250
Salary payable ($1,250 − $0) / 1,250
Accrue salary expense.
30 / Interest expense ($400 - $250) / 150
Interest payable ($150 - $0) / 150
Accrue interest expense
30 / Unearned service revenue ($2,600 - $900) / 1,700
Service revenue ($49,100 - $47,400) / 1,700

(25-30 min.) P 3-44A

Req 1 & 2

Journal
DATE / ACCOUNTS / POST
REF. / Dr. / Cr.
a. / Nov / 30 / Insurance expense / 2,400
Prepaid insurance ($2,700 - $300) / 2,400
Record Prepaid rent expired
b. / 30 /

Supplies expense

/ 250

Supplies

/ 250

Record supplies used.

c. / 30 / Depreciation expense, equipment / 1,200
Accumulated depreciation,
equipment / 1,200
Record depreciation.
d. / 30 / Utilities expense / 300
Accounts payable / 300
Accrue utilities expense
e. / 30 / Salary expense / 450
Salary payable / 450
Accrue salary expense.
f. / 31 / Unearned service revenue ($2,200 - $800) / 1,400
Service revenue / 1,400
Record unearned revenue earned

Req 1 & 2

Cash / Supplies
Bal / 22,800 / Bal / 900 / 250 / b.
Bal / 22,800
Bal / 650
Equipment
Accounts receivable / Bal / 83,800
Bal / 39,400
Bal / 83,800
Bal / 39,400
Accumulated depreciation, equipment
64,300 / Bal
Prepaid insurance / 1,200 / c.
Bal / 2,700 / 2,400 / a. / 65,500 / Bal
Bal / 300
Accounts payable / Common stock
1,900 / Bal / 50,000 / Bal
300 / d.
2,200 / Bal / 50,000 / Bal
Salary payable / Retained earnings
450 / e. / 29,300 / Bal
450 / Bal / 29,300 / Bal
Unearned service revenue / Dividends
f. / 1,400 / 2,200 / Bal / Bal / 3,600
800 / Bal / Bal / 3,600
Service revenue
8,400 / Bal
1,400 / f.
9,800 / Bal
Salary expense
Bal / 2,900
e. / 450
Bal / 3,350
Insurance expense
a. / 2,400
Bal / 2,400
Depreciation expense, equipment
c. / 1,200
Bal / 1,200
Utilities expense
d. / 300
Bal / 300
Supplies expense
b. / 250
Bal / 250

Req 3

Alpha Advertising, Inc.
Adjusted Trial Balance
November 30, 2010
ACCOUNT TITLE / Dr. / Cr.
Cash / $22,800
Accounts receivable / 39,400
Prepaid insurance / 300
Supplies / 650
Equipment / 83,800
Accumulated depreciation, equipment / $65,500
Accounts payable / 2,200
Salary payable / 450
Unearned service revenue / 800
Common stock / 50,000
Retained earnings / 29,300
Dividends / 3,600
Service revenue / 9,800
Salary expense / 3,350
Insurance expense / 2,400
Depreciation expense, equipment / 1,200
Utilities expense / 300
Supplies expense / 250 / ______
Total / $158,050 / $158,050

Req 4

The adjusted trial balance will be used to prepare Alpha Advertising’s financial statements.

(20-25 min.) P 3-45A

Req 1

Revenues and Expenses for January
Date / Impact on Revenues or Expenses / $ Affect on Revenues or Expenses
Jan 1 / No effect
3 / Increase revenues / $1,800
6 / No effect
8 / Increase expenses / $600
12 / No effect
18 / Increase revenues / $4,700
23 / No effect
26 / No effect
30 / Increase expenses / $2,400
31 / Increase expenses / $250
31 / Increase revenues / $400

Req 2

Revenues ($1,800 + $4,700 + $400) / $6,900
Expenses ($600 + $2,400 + $250) / $3,250
Net Income ($6,900 - $3,250) / $3,650

Req 3

The accrual basis of accounting results in a more accurate measurement of income because it reports revenues when they are earned and expenses when they are incurred regardless of when cash is received or paid.

(20-25 min.) P 3-46A

Req 1

Lighthouse Realty, Inc.
Income Statement
Year Ended December 31, 2010
Revenue:
Service revenue / $97,000
Interest revenue / 650
Total Revenues / $97,650
Expenses:
Salary expense / $51,000
Rent expense / 18,000
Depreciation Expense, Equipment / 4,200
Utilities expense / 2,700
Interest Expense / 1,300
Supplies Expense / 700
Total expenses / 77,900
Net Income / $19,750
Lighthouse Realty, Inc.
Statement of retained earnings
Year Ended December 31, 2010
Retained earnings, January 1 / $8,200
Add: Net income / 19,750
Subtotal / 27,950
Less: Dividends / 14,000
Retained earnings, December 31 / $13,950
Lighthouse Realty, Inc.
Balance Sheet
December 31, 2010
ASSETS / LIABILITIES
Cash / $ 6,300 / Accounts payable / $ 5,400
Accounts receivable / 11,600 / Unearned service revenue / 2,100
Prepaid rent / 1,200 / Interest payable / 750
Supplies / 900 / Salary payable / 1,800
Equipment / 48,000 / Notes payable / 12,000
Less Accum. Depr., equipmment / (12,000) / 36,000 / Total liabilities / 22,050
STOCKHOLDERS’ EQUITY
Common stock / 20,000
Retained earnings / 13,950
Total Stockholders’ equity / 33,950
Total liabilities and
Total assets / $56,000 / stockholder’s equity / $56,000

Req. 2