1、McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 119Chapter 3Adjusting Accounts and Preparing Financial StatementsQUESTIONS1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when
2、cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases t
3、he comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.4. A prepaid expense is an item pa
4、id for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require
5、depreciation.6. The Accumulated Depreciation contra account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in
6、need of replacement.7. Unearned revenue refers to cash received in advance of providing products and services. Another name for unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.8. Accrued revenue is revenue that is earned but is not yet received in cash (and/o
7、r other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed
8、.9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition12010. For Best Buy, all of the accounts under the category of Prop
9、erty and Equipment (except for Land), require adjusting entries. The expense related to the depreciation expense account would be understated on the income statement if Best Buy fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Student
10、s might also correctly identify accounts receivable, goodwill, and tradenames as needing adjustment.11. Circuit City must make adjusting entries to Prepaid expenses and other current assets; Deferred income taxes; Accrued expenses and other current liabilities; Accrued income taxes; and possibly oth
11、er assets and liabilities such as Receivables for bad debts. (It is also possible that Circuit City would need to adjust Goodwill and Other intangible assets.)12. RadioShack would need to debit interest receivable and credit interest revenue.13. The Accrued Wages Expense would be reported as part of
12、 “Accrued Expenses” on Apples balance sheet.QUICK STUDIESQuick Study 3-1 (15 minutes)Cash AccountingRevenues (cash receipts). $52,000 Expenses (cash payments: $37,500 - $6,000 + $3,250) . 34,750Net income $17,250Accrual AccountingRevenues (earned) . $60,000Expenses (incurred) 37,500Net income. $22,5
13、00Quick Study 3-2 (10 minutes)a. AE Accrued expensesb. PE Prepaid expensesc. UR Unearned revenuesd. PE Prepaid expenses (Depreciation)e. AR Accrued revenuesMcGraw-Hill Companies, 2009Solutions Manual, Chapter 3 121Quick Study 3-3 (20 minutes)Accounts Debited and Credited Financial Statementa. Debit
14、Unearned Revenue Balance SheetCredit Revenue Earned Income Statementb. Debit Wages Expense Income StatementCredit Wages Payable Balance Sheetc. Debit Accounts Receivable Balance SheetCredit Revenue Earned Income Statementd. Debit Insurance Expense Income StatementCredit Prepaid Insurance Balance She
15、ete. Debit Depreciation Expense Income StatementCredit Accumulated Depreciation Balance SheetQuick Study 3-4 (15 minutes)a. Insurance Expense . 3,000Prepaid Insurance . 3,000To record 6-month insurance coverage expired.b. Supplies Expense . 4,150Supplies . 4,150To record supplies used during the yea
16、r.($900 + $4,000 ? = $750)Quick Study 3-5 (15 minutes)a. Depreciation ExpenseEquipment 8,400Accumulated DepreciationEquipment. 8,400To record depreciation expense for the year.($45,000 - $3,000) / 5 years = $8,400b. No depreciation adjustments are made for land asit is expected to last indefinitely.
17、McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition122Quick Study 3-6 (10 minutes)Salaries Expense 400Salaries Payable 400To record salaries incurred but not yet paid.One student earns $100 x 4 days, Monday through ThursdayQuick Study 3-7 (15 minutes)a. Unearned Revenue . 22,5
18、00Legal Revenue . 22,500To recognize legal revenue earned (30,000 x 3/4).b. Unearned Subscription Revenue 1,200Subscription Revenue 1,200To recognize subscription revenue earned.100 x ($24 / 12 months) x 6 monthsQuick Study 3-8 (15 minutes)Adjusting entry Debit Credit1. Accrue salaries expense e g2.
19、 Adjust the Unearned Services Revenue account to recognize earned revenuea f3. Record the earning of services revenue for which cash will be received the following periodb fQuick Study 3-9 (10 minutes)The answer is a. ExplanationThe debit balance in Prepaid Insurance was reduced by $400, implying a
20、$400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, implying an $800 debit to Interest Expense.McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 123Quick Study 3-10 (15 minutes)The answer is 2. ExplanationInsurance premium errorUnderstates expenses (and ov
21、erstates assets) by . $1,600Accrued salaries errorUnderstates expenses (and understates liabilities) by 1,000The collective effects from this companys errors follow:Understates expenses by . $2,600Overstates assets by. $1,600Understates liabilities by $1,000Quick Study 3-11 (10 minutes)Profit margin
22、 = $78,750 / $630,000 = 12.5%Interpretation: For each dollar that Miller Company records as revenue, it earns 12.5 cents in net income. Millers 12.5% is markedly lower than competitors average profit margin of 15%it must improve performance.Quick Study 3-12A (5 minutes)The answer is c.McGraw-Hill Co
23、mpanies, 2009Fundamental Accounting Principles, 19th Edition124EXERCISESExercise 3-1 (10 minutes)1. B 4. A2. F 5. D3. C 6. EExercise 3-2 (25 minutes)a. Depreciation ExpenseEquipment . 16,000Accumulated DepreciationEquipment . 16,000To record depreciation expense for the year.b. Insurance Expense 5,3
24、60Prepaid Insurance* 5,360To record insurance coverage that expired ($6,000 - $640).c. Office Supplies Expense. 3,422Office Supplies*. 3,422To record office supplies used ($325 + $3,480 - $383).d. Unearned Fee Revenue. 3,000Fee Revenue 3,000To record earned portion of fee received in advance($15,000
25、 x 1/5).e. Insurance Expense 6,160Prepaid Insurance . 6,160To record insurance coverage that expired.f. Wages Expense . 2,700Wages Payable 2,700To record wages accrued but not yet paid.Notes:Prepaid Insurance* Office Supplies*Bal. Bal. 6,000 Beg. Bal. 325Purch. 3,480? Used ? UsedEnd. Bal. 640 End. B
26、al. 383McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 125Exercise 3-3 (30 minutes)a. Unearned Fee Revenue. 5,000Fee Revenue 5,000To record earned portion of fee received in advance ($15,000 x 1/3).b. Wages Expense . 7,500Wages Payable 7,500To record wages accrued but not yet paid.c. Deprecia
27、tion ExpenseEquipment . 17,251Accumulated DepreciationEquipment . 17,251To record depreciation expense for the year.d. Office Supplies Expense. 5,682Office Supplies* 5,682To record office supplies used ($240 + $6,102 - $660).e. Insurance Expense 2,700Prepaid Insurance 2,700To record insurance covera
28、ge expired ($4,000 - $1,300).f. Interest Receivable 1,400Interest Revenue. 1,400To record interest earned but not yet received.g. Interest Expense 2,000Interest Payable. 2,000To record interest incurred but not yet paid.Notes:Prepaid Insurance Office Supplies*Beg. Bal. 4,000 Beg. Bal. 240Purch. 6,10
29、2? Used ? UsedEnd. Bal. 1,300 End. Bal. 660McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition126Exercise 3-4 (15 minutes)a. Adjusting entry2009Dec. 31 Wages Expense825Wages Payable . 825To record accrued wages for one day.(5 workers x $165)b. Payday entry2010Jan. 4 Wages Expe
30、nse2,475Wages Payable .825Cash 3,300To record accrued and current wages.Wages expense = 5 workers x 3 days x $165Cash = 5 workers x 4 days x $165Exercise 3-5 (15 minutes)a. $ 2,000b. $ 6,607c. $11,987d. $ 1,375Proof: (a) (b) (c) (d)Supplies available prior year-end . $ 350 $1,855 $ 1,576 $1,375Suppl
31、ies purchased in current year 2,450 6,307 11,987 6,907Total supplies available 2,800 8,162 13,563 8,282Supplies available current year-end . (800) (6,607) (2,056) (800)Supplies expense for current year. $2,000 $1,555 $11,507 $7,482McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 127Exercise 3-
32、6 (25 minutes)a.Apr. 30 Legal Fees Expense 4,500Legal Fees Payable . 4,500To record accrued legal fees.May 12 Legal Fees Payable. 4,500Cash 4,500To pay accrued legal fees.b.Apr. 30 Interest Expense . 1,900Interest Payable. 1,900To record accrued interest expense($5,700 x 10/30).May 20 Interest Payab
33、le 1,900Interest Expense . 3,800Cash 5,700To record payment of accrued and current interest expense ($5,700 x 20/30).c.Apr. 30 Salaries Expense 4,800Salaries Payable 4,800To record accrued salaries($12,000 x 2/5 week).May 3 Salaries Payable 4,800Salaries Expense 7,200Cash 12,000To record payment of
34、accrued and current salaries ($12,000 x 3/5 week).McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition128Exercise 3-7 (20 minutes)Balance Sheet Prepaid Insurance Asset using Insurance Expense usingAccrual Basis*Cash BasisAccrual Basis*Cash BasisDec. 31, 2007.$14,450 $0 2007 .$
35、850 $15,300 Dec. 31, 2008.9,350 0 2008 .5,100 0 Dec. 31, 2009.4,250 0 2009 . 5,100 0 Dec. 31, 2010.0 0 2010 . 4,250 0 Total.$15,300 $15,300 Explanations:*Accrual asset balance equals months left in the policy x $425 per month (monthly cost is computed as $15,300 / 36 months).Months Left Balance12/31
36、/2007 . 34 $14,45012/31/2008 . 22 9,350 12/31/2009 . 10 4,250 12/31/2010 . 0 0*Accrual insurance expense equals months covered in the year x $425 per month.Months Covered Expense2007.2 $ 8502008.12 5,1002009.12 5,1002010.10 4,250$15,300McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 129Exerci
37、se 3-8 (25 minutes)Dec. 31 Accounts Receivable 1,980Fees Earned. 1,980To record earned but unbilled fees (30% x $6,600).31 Unearned Fees 4,620Fees Earned. 4,620To record earned fees collected in advance (70% x $6,600).31 Depreciation ExpenseComputers 1,650Accumulated Depreciation-Computers. 1,650To
38、record depreciation on computers.31 Depreciation ExpenseOffice Furniture. 1,925Accumulated DepreciationOffice Furniture 1,925To record depreciation on office furniture.31 Salaries Expense 2,695Salaries Payable 2,695To record accrued salaries.31 Insurance Expense 1,430Prepaid Insurance . 1,430To reco
39、rd expired prepaid insurance.31 Rent Expense 700Rent Payable . 700To record accrued rent expense.31 Office Supplies Expense. 528Office Supplies 528To record use of office supplies.31 Advertising Expense 500Advertising Payable. 500To record accrued advertising expense.31 Utilities Expense 77Utilities
40、 Payable. 77To record incurred and unpaid utility costs.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition130Exercise 3-9 (10 minutes)a. $ 6,039 / $ 52,970 = 11.4%b. $100,890 / $ 471,430 = 21.4%c. $106,880 / $ 301,920 = 35.4%d. $ 67,140 / $1,721,520 = 3.9%e. $ 84,780 / $ 513,
41、800 = 16.5%Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 35.4 cents in net income for every one dollar of net sales earned.Exercise 3-10A (30 minutes)a.Dec. 1 Supplies Expense. 2,000Cash . 2,000Purchased supplies.b.Dec. 2 I
42、nsurance Expense. 1,540Cash . 1,540Paid insurance premiums.c.Dec. 15 Cash. 13,000Remodeling Fees Earned . 13,000Received fees for work to be done.d.Dec. 28 Cash. 3,700Remodeling Fees Earned . 3,700Received fees for work to be done.e.Dec. 31 Supplies. 1,840Supplies Expense . 1,840Adjust expenses for
43、unused supplies.f.Dec. 31 Prepaid Insurance. 1,200Insurance Expense . 1,200Adjust expenses for unexpired coverage ($1,540 - $340).g.Dec. 31 Remodeling Fees Earned 11,130Unearned Remodeling Fees. 11,130Adjusted revenues for unfinished projects($13,000 + 3,700 - $5,570).McGraw-Hill Companies, 2009Solu
44、tions Manual, Chapter 3 131Exercise 3-11A (25 minutes)a. Initial credit recorded in the Unearned Fees accountJuly 1 Cash 2,800Unearned Fees 2,800Received fees for work to be done for Solana.6 Cash 8,100Unearned Fees 8,100Received fees for work to be done for Haru.12 Unearned Fees . 2,800Fees Earned
45、2,800Completed work for Solana.18 Cash 7,300Unearned Fees 7,300Received fees for work to be done for Jordan.27 Unearned Fees . 8,100Fees Earned 8,100Completed work for customer Haru.31 No adjusting entries required.b. Initial credit recorded in the Fees Earned accountJuly 1 Cash 2,800Fees Earned 2,8
46、00Received fees for work to be done for Solana.6 Cash 8,100Fees Earned 8,100Received fees for work to be done for Haru.12 No entry required.18 Cash 7,300Fees Earned 7,300Received fees for work to be done for Jordan.27 No entry required.31 Fees Earned 7,300Unearned Fees 7,300Adjusted to reflect unear
47、ned fees for unfinished job for Jordan.McGraw-Hill Companies, 2009Fundamental Accounting Principles, 19th Edition132Exercise 3-11A concludedc. Under the first method (and using entries from a)Unearned Fees = $2,800 + $8,100 - $2,800 + $7,300 - $8,100 = $7,300Fees Earned = $2,800 + $8,100 = $10,900Un
48、der the second method (and using entries from b)Unearned Fees = $7,300Fees Earned = $2,800 + $8,100 + $7,300 - $7,300 = $10,900Note: Both procedures yield identical results in the financial statements.McGraw-Hill Companies, 2009Solutions Manual, Chapter 3 133PROBLEM SET AProblem 3-1A (10 minutes)1.
49、I 5. G 9. H2. D 6. C 10. E3. F 7. I 11. H4. B 8. A 12. BProblem 3-2A (35 minutes) Part 1Adjustment (a)Dec. 31 Office Supplies Expense 12,325Office Supplies. 12,325To record cost of supplies used($2,900 + $11,977 - $2,552).Adjustment (b)31 Insurance Expense . 12,280Prepaid Insurance 12,280To record annual insurance coverage cost.Policy Cost per MonthMonths Active in 2009 2009 CostA $485 ($11,640/24 mo.) 12 $ 5,820B 290 ($10,440/36 mo.) 9 2,610C 770 ($ 9,240 /12 mo.) 5 3,850Total $12,280Adjustment (c)31
