157 28395 EY111 2013 4 2 1 Chap004

Chapter 04 - Completing the Accounting Cycle
Chapter 4
Completing the Accounting Cycle
QUESTIONS
1.
Closing entries affect temporary accounts: revenues, expenses, withdrawals, and

income summary. Specifically, closing entries at the end of an accounting period
prepare the revenues (and gains), expenses (and losses), and withdrawals accounts
for the next period by giving them zero balances. Closing entries also update the
owners capital account for the events of the year just finished. Closing entries do
not affect the asset and liability accounts (permanent accounts).
2.
(i) Closing entries prepare the temporary accountsrevenue and expense (and gain
and loss) accounts and withdrawalsfor the next period by giving them zero
balances. (ii) Closing entries also update the owners capital account for the events
of the period just completed.
3.
The four-step closing entry process is: (i) close the revenue (and gain) accounts to
the Income Summary account, (ii) close the expense (and loss) accounts to the
Income Summary account, (iii) close the Income Summary account to the owners
capital account, and (iv) close the withdrawals account to the owners capital
account.
4.
The Income Summary account is used to summarize the periods revenues and
expenses. As a result, it temporarily has a balance equal to the net income (or net
loss) for the period. (Instructor note: Closing can be accomplished without the
Income Summary account by closing revenue and expense accounts directly to the
owners capital account.)
5.
Yes, an error would have occurred because a post-closing trial balance should only
include permanent accounts, and Depreciation Expense is a temporary account that
should have been closed. If an expense appears on the post-closing trial balance,
the amounts of net income, total assets, and total equity are all in error (overstated).
6.
A work sheet can be used to collect and organize data for preparing (i) adjusting
entries, (ii) closing entries, and (iii) financial statements. A work sheet can also be
used for what if analysis, for help with audit adjustments, and for preparing interim
financial statements.
7.
The adjustments in the Adjustments columns of a work sheet are identified by letters
to link the debits with the credits to ensure that the entries are complete and in
balance (debits = credits) and for reference purposes (audit trail). The letters can
also be used to identify the reasons for the entries and help simplify preparation of
the actual adjusting journal entries.
4-1
8.
A companys operating cycle is the normal time between paying cash for
merchandise inventory or for employee salaries in providing customer services and
the receipt of cash from customers in exchange for those products or services.
9.
Assets on a typical classified balance sheet include current assets and noncurrent
assetswhere noncurrent assets usually include long-term investments, plant assets,
and intangible assets. Liabilities are typically classified as current and noncurrent.
Note that the terms short-term and long-term are sometimes used for current and
noncurrent.
10.
Unearned revenue is reported as a liabilityusually a current liability.
11.
Plant assets (also called property, plant and equipment or long-lived assets) are
tangible long-lived assets used to produce or sell goods or services.
12.A Reversing entries simplify subsequent entries for accrued expenses and accrued
revenues by eliminating the need to record the removal of the accrued liability or
accrued receivable when the accrual is settled.
13.A The following reversing entry could be made as of the first day of the next accounting
period, after the post-closing trial balance is completed and financial statements are
prepared.
Salaries Payable................................................................500
Salaries Expense...................................................
500
14.
The five main categories of noncurrent assets on Research In Motions balance sheet
are: Long-term investments; Property, plant and equipment, net; Intangible assets,
net; Goodwill, and Deferred income tax asset.
15.
Nokias current assets are: Inventories; Accounts receivable; Prepaid expenses and
accrued income; Current portion of long-term loans receivable; Other financial
assets; Investments at fair value through profit and loss, liquid assets; Available-forsale investments, liquid assets; Available-for-sale investments, cash equivalents;
Bank and cash.
16.
Apple has three current liability accounts: Accounts payable; Accrued expenses, and
Deferred revenue.
17.
The closing entry likely recorded on May 31, 2009, to transfer the companys net loss
to its Retained Earnings account would likely have been (in thousands):
Retained Earnings........................................................753,473
Income Summary
753,473
4-2
QUICK STUDIES
Quick Study 4-1 (5 minutes)
1. (f)
Analyzing transactions and events.
2. (i)
Journalizing transactions and events.
3. (b)
Posting the journal entries.
4. (h)
Preparing the unadjusted trial balance.
5. (c)
Journalizing and posting adjusting entries.
6. (d)
Preparing the adjusted trial balance.
7. (g)
Preparing the financial statements.
8. (e)
Journalizing and posting closing entries.
9. (a)
Preparing the post-closing trial balance.

1.
Temporary accounts accumulate data related to one accounting period.
2.
Permanent accounts report on activities related to one or more future

accounting periods, and they carry their ending balances into the next
period.
3.
Temporary accounts include all income statement accounts, the

withdrawals account, and the Income Summary account.
4.
Permanent accounts generally consist of all balance sheet accounts,

and these accounts are not closed.
4-3

Current assets:
Cash
Accounts receivable..................................
Office supplies...........................................
Prepaid insurance......................................
Total current assets...................................
Current liabilities:
Accounts payable......................................
Unearned services revenue......................
Total current liabilities...............................
$ 6,000
15,000
1,800
2,500
$25,300
$10,000
4,000
$14,000
Current ratio = $25,300 / $14,000 = 1.81

1.
2.
D
A
3.
4.
B
F
5.
6.
A
E
d.
e.
f.
IS
BS
BS

a.
b.
c.
IS
BS
BS
4-4
7.
8.
C
E

a.
b.
c.
d.
e.

Computation of K. Wayman, Capital for the Dec. 31, 2011, balance sheet:
K. Wayman, Capital (beginning).......................
$ 65,000
Add net income ($174,000 - $115,000)............. 59,000
124,000
Less withdrawals...............................................(32,000)
K. Wayman, Capital (ending)............................
$ 92,000
4-5

TERREL COMPANY
Work Sheet
Account Title
Prepaid rent...................
Unadjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
800
Services revenue...........
(a)
11,600
240
Adjusted
Trial Balance
Dr.
Cr.
560
(b) 180
(c) 160
5,160
Accounts receivable.......
(b) 180
180
Rent expense.................
(c)
(a) 240
560
11,780
Wages expense............. 5,000
Wages payable..............
Income
Statement
Dr.
Cr.
160
11,780
5,160
180
160
240
Balance Sheet &

Statement of
Owners Equity
Dr.
Cr.
160
240

Dec. 31 Services Revenue.........................................
Income Summary..................................
10,000
10,000
To close the revenue account.
31 Income Summary.........................................
Wages Expense.....................................
Rent Expense.........................................
6,000
5,200
800
To close the expense accounts.
31 Income Summary.........................................
L. Avril, Capital .....................................
4,000
4,000
To close Income Summary.
31 L. Avril, Capital ............................................

L. Avril, Withdrawals ............................
400
400
To close the withdrawals account.

The only account from QS 4-9 that would appear in post-closing trial balance
is L. Avril, Capital.
Quick Study 4-11A (10 minutes)
2011
Jan. 1 Management Fees Earned ............................
Accounts Receivable ...........................
6,700
6,700
To reverse accrued revenue.
16 Cash ...............................................................
Management Fees Earned ...................
15,500
15,500
To record collection of management fees.

a.
The closing process is identical under U.S. GAAP and IFRS.
b.
Under both U.S. GAAP and IFRS, the initial asset value is measured
using historical cost for nearly all assets.
4-7
EXERCISES
Exercise 4-1 (35 minutes)
Closing entries:
(1)
Services Revenue.........................................
Income Summary..................................
74,000
74,000
(2)
Income Summary..........................................
Depreciation Expense...........................
Salaries Expense...................................
Insurance Expense................................
Rent Expense.........................................
52,100
17,000
21,000
4,500
9,600
(3)
Income Summary..........................................
M. Mallon, Capital .................................
21,900
21,900
To close income summary.
(4)
M. Mallon, Capital .........................................

M. Mallon, Withdrawals.........................
25,000
25,000
Posted T-accounts:
M. Mallon, Capital
Date PR
Debit
Mar.31
(3)
(4)
25,000
No. 301
Credit
Balance
42,000
21,900
63,900
38,900
Salaries Expense
Date PR Debit
Mar.31
(2)
M. Mallon, Withdrawals
Date PR
Debit
Mar.31
(4)
Services Revenue
Date PR
Debit
Credit
Mar.31
(1)
Insurance Expense
No. 302
Credit
Balance
25,000
25,000
0
74,000
Date PR
Debit
Mar.31
(2)
No. 401
Balance
74,000
0
Rent Expense
Date PR Debit
Mar.31
(2)
Depreciation Expense
Income Summary
Date PR
Date PR
Mar.31
(2)
Debit
No. 603
Credit
Balance
17,000
17,000
0
Debit
(1)
(2)
(3)
4-8
52,100
21,900
No. 622
Credit
Balance
21,000
21,000
0
No. 637
Credit
Balance
4,500
4,500
0
No. 640
Credit
Balance
9,600
9,600
0
No. 901
Credit
Balance
74,000
74,000
21,900
0
No.
Account Title
101 Cash...............................
Adjusted
Trial Balance
Dr.
Cr.
Closing Entry Information

Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
8,200
8,200
106 Accounts receivable......... 24,000
24,000
153 Equipment...................... 41,000
41,000
154 Accumulated depreciationEquipment........
16,500
16,500
193 Franchise........................ 30,000
30,000
201 Accounts payable............
14,000
14,000
209 Salaries payable...............
3,200
3,200
233 Unearned fees.................
2,600
2,600
301 H. Sundance, Capital........
64,500
(4
)
14,400 (3)
16,800
(4)
14,400
611 Depreciation expense

Equipment..................... 11,000
(2)
11,000
622 Salaries expense.............. 31,500
(2)
31,500
640 Rent expense.................. 12,000
(2)
12,000
677 Miscellaneous expense....
(2)
7,700
62,200 (1)
79,000
302 H. Sundance, Withdrawals. 14,400

401 Marketing fees earned......
79,000
(1
)
79,000
7,700
901 Income summary.............

______
______
Totals.............................. 179,800 179,800
4-9
(2
)
(3
)
66,900
16,80
0
______
______
______
172,400
172,400
103,200
103,200

1.
2011
Dec. 31 Services Revenue .......................................

Income Summary .................................
36,000
36,000
31 Income Summary ........................................

Depreciation Expense--Equipment......
Salaries Expense ..................................
Insurance Expense ...............................
Rent Expense ........................................
Supplies Expense .................................
28,100
2,000
21,000
1,500
2,400
1,200
31 Income Summary.........................................
R. Showers, Capital ..............................
7,900
7,900
31 R. Showers, Capital ....................................

R. Showers, Withdrawals .....................
6,000
6,000
2.
SHOWERS COMPANY
Post-Closing Trial Balance
December 31, 2011
Debit
Cash................................................................
Supplies..........................................................
Prepaid insurance..........................................
Equipment.......................................................
Accumulated depreciationEquipment.......
R. Showers, Capital*......................................
Totals...............................................................
*$46,600 + $7,900 - $6,000 = $48,500
4-10
Credit
$18,000
12,000
2,000
23,000
$55,000
$ 6,500
48,500
$55,000

WEBB TRUCKING COMPANY
Income Statement
For Year Ended December 31, 2011
Trucking fees earned................................................
Expenses
Depreciation expenseTrucks........................... $22,500
Salaries expense.................................................. 60,000
Office supplies expense...................................... 7,000
Repairs expenseTrucks.................................... 11,000
Total expenses......................................................
Net income.................................................................
$128,000
100,500
$ 27,500

Statement of Owners Equity
K. Webb, Capital, December 31, 2010......................
$161,000
Plus: Net income.......................................................
27,500
Less: Owner withdrawals.........................................
188,500
(19,000)
K. Webb, Capital, December 31, 2011......................
4-11
$169,500

Balance Sheet
December 31, 2011
Assets
Current assets
Cash................................................................
Accounts receivable.....................................
Office supplies...............................................
Total current assets......................................
Plant assets
Trucks............................................................. $170,000
Accumulated depreciation-Trucks.............. (35,000)
Land................................................................
Total plant assets..........................................
Total assets......................................................
7,000
16,500
2,000
25,500
135,000
75,000
210,000
$235,500
Liabilities
Current liabilities
Accounts payable..........................................
Interest payable.............................................
Total current liabilities..................................
Long-term notes payable................................
Total liabilities..................................................
$ 11,000
3,000
14,000
52,000
66,000
Equity
K. Webb, Capital .............................................
Total liabilities and equity...............................
169,500
$235,500
K. Webb, Capital is computed as:

Beginning balance..................................................................................... $161,000
Plus: Net income ($128,000 - $22,500 - $60,000 - $7,000 - $11,000)....... 27,500
Less: Withdrawals...................................................................................... (19,000)
Ending balance........................................................................................... $169,500
4-12

Current assets:
Cash................................................................................. $ 7,000
Accounts receivable....................................................... 16,500
Office supplies................................................................
2,000
Total current assets........................................................ $25,500
Current liabilities:
Accounts payable........................................................... $11,000
Interest payable...............................................................
3,000
Total current liabilities.................................................... $14,000
Current ratio =
Current assets
Current liabilities
$25,500
$14,000
= 1.82
Interpretation: This companys current ratio of 1.82 exceeds the industry norm of
1.5. This implies the company is in a slightly better liquidity position than its
competitors. Moreover, if we review the makeup of the current ratio, we see that
current assets consist primarily of cash and accounts receivable. The existence of
these more liquid assets is a positive attribute for liquidity purposes.

Current Assets
Current Liabilities
Current Ratio
Case 1
$ 78,000
$31,000
2.52
Case 2
104,000
75,000
1.39
Case 3
44,000
48,000
0.92
Case 4
84,500
80,600
1.05
Case 5
60,000
99,000
0.61
Analysis: Company 1 is in the strongest liquidity position. It has about $2.52 of

current assets for each $1 of current liabilities. The only potential concern is that
Company 1 may be carrying too much in current assets that could be better spent
on more productive assets (note that its remaining competitors current ratios range
from 1.39 to 0.61).
4-13

1.
5.
9.
13.
2.
6.
10.
14.
3.
7.
11.
15.
4.
8.
12.
16.

Instructor note: Entries are shown without an account reference column because no posting is required.
(a)
Insurance ExpenseOffice Equipment..............

Insurance ExpenseStore Equipment...............
Prepaid Insurance..........................................
432
468
900
To record expired insurance.
(b)
Office Supplies Expense.......................................

Office Supplies...............................................
1,650
1,650
To record consumed supplies.
(c)
Depreciation ExpenseOffice Equipment..........

Accumulated DepreciationOffice Equip...
3,300
3,300
To record depreciation of office equip.
(d)
Interest Receivable................................................
Interest Revenue............................................
580
580
To record accrued interest income.
(e)
Office Salaries Expense........................................

Salaries Payable.............................................
To record accrued salaries.
4-14
660
660

Adjusted
Trial Balance
No
.
Account
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet &

Statement of
Owners Equity
Dr.
10
1
Cash...........................................
6,000
6,000
10
6
Accounts receivable..................... 26,200
26,200
15
3
Trucks......................................... 41,000
41,000
Cr.
15
4
Accumulated depreciationTrucks.
18
3
Land........................................... 30,000
20
1
Accounts payable........................
14,000
14,000
20
9
Salaries payable...........................
3,200
3,200
23
3
Unearned fees..............................
2,600
2,600
30
1
J. Propel, Capital...........................
64,500
64,500
30
2
J. Propel, Withdrawals................... 14,400
40
1
Plumbing fees earned...................
61
1
Depreciation expenseTrucks......
16,500
16,500
30,000
14,400
79,000
79,000
5,500
5,500
62
2
Salaries expense.......................... 37,000
37,000
64
0
Rent expense............................... 12,000
12,000
67
7
Miscellaneous expense.................
7,700
______
7,700
______
Totals.......................................... 179,800
179,800
62,200
79,000
4-15
_______
______
117,600 100,800
Net income..................................
16,800
______
_______
16,80
0
Totals..........................................
79,000
79,000
117,600
117,600
4-16

1.
Account Title
Debit
Rent earned....................................................
Salaries expense............................................ 45,300
Insurance expense.........................................
6,400
Dock rental expense...................................... 15,000
Boat supplies expense..................................
3,200
Depreciation expenseBoats...................... 19,500
Totals............................................................... 89,400
Net income...................................................... 12,600
Totals............................................................... 102,000
Credit
102,000
102,000
102,000
2. Closing entries
(1)
(2)
(3)
Rent Earned................................................... 102,000

Income Summary..................................
Income Summary..........................................
Dock Rental Expense............................
Boat Supplies Expense.........................
Depreciation ExpenseBoats.............
89,400
Income Summary..........................................
L. Welch, Capital ...................................
12,600
4-17
102,000
45,300
6,400
15,000
3,200
19,500
12,600
Exercise 4-12 Part 1 (30 minutes)

DALTON DELIVERY COMPANY
Work Sheet
Account Title
Unadjusted
Trial Balance
Dr.
Cr.
Adjustments
Dr.
Cr.
Adjusted
Trial Balance
Dr.
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet
& Statement of
Owners Equity
Dr.
Cr.
Cash...................................... 14,000
14,000
14,000
Accounts receivable................. 33,000
33,000
33,000
1,000
1,000
340,000
340,000
Office supplies......................... 4,000
(c) 3,000
Trucks....................................340,000
Accum. depreciationTrucks....
70,000
(a) 35,000
Land......................................150,000
105,000
150,000
Accounts payable....................
22,000
Interest payable........................
6,000
Long-term notes payable...........

V. Dalton, Capital.......................
150,000
22,000
22,000
8,000
8,000
104,000
104,000
104,00
0
322,000
322,000
322,00
0
(b) 2,000
V. Dalton, Withdrawals.............. 38,000

Delivery fees earned..................
105,000
38,000
256,000
Depreciation expenseTrucks... 45,000
38,000
256,000
(a) 35,000
Salaries expense......................120,000
256,000
80,000
80,000
120,000
120,000
Office supplies expense............ 14,000
(c)
3,000
17,000
17,000
Interest expense....................... 6,000
(b)
2,000
8,000
8,000
Repairs expenseTrucks.......... 16,000
______
_____
_____
Totals.....................................780,000 780,000
40,000
40,000 817,000 817,000 241,000 256,000 576,000 561,00

0
4-18
16,000
______
16,000
______
______ ______
Net income..............................
15,000
Totals.....................................
______
______
15,00
0
256,000 256,000 576,000 576,00

0
4-19
Exercise 4-12 (Concluded)

2.
Closing entries:
Delivery Fees Earned........................................ 256,000
Income Summary.......................................
256,000
Income Summary............................................... 241,000

Depreciation ExpenseTrucks.................
80,000
Salaries Expense........................................
120,000
Office Supplies Expense...........................
17,000
Interest Expense.........................................
8,000
Repairs ExpenseTrucks.........................
16,000
Income Summary...............................................
V. Dalton, Capital........................................
15,000
15,000
V. Dalton, Capital................................................
V. Dalton, Withdrawals ..............................
38,000
38,000
V. Dalton, Capital on the balance sheet:

Beginning balance........................................
$322,000
Add: Net income..........................................
15,000
337,000
Less: Owner withdrawals.............................

Ending balance.............................................
4-20
(38,000)
$299,000
Exercise 4-13A (30 minutes)

1. Adjusting entries:
Oct. 31 Rent Expense................................................
Rent Payable..........................................
3,200
3,200
To record accrued rent expense.
31 Rent Receivable............................................
Rent Earned...........................................
750
750
To record accrued rent income.
2. Subsequent entries without reversing:

Nov. 5 Rent Payable.................................................
Rent Expense................................................
Cash........................................................
3,200
3,200
6,400
To record payment of 2 months rent.
8 Cash...............................................................
Rent Receivable.....................................
Rent Earned...........................................
1,500
750
750
To record collection of 2 months rent.
3. Reversing entries and subsequent entries:

Nov. 1 Rent Payable.................................................
Rent Expense.........................................
3,200
3,200
To reverse accrual of rent expense.
1 Rent Earned...................................................
Rent Receivable.....................................
750
750
To reverse accrual of rent income.
5 Rent Expense................................................
Cash........................................................
6,400
6,400
To record payment of 2 months rent.
8 Cash...............................................................
Rent Earned...........................................
To record collection of 2 months rent.
4-21
1,500
1,500
Exercise 4-14A (10 minutes)

Reversing entries are appropriate for accounting adjustments (a) and (e):
Sept. 1 Service Fees..................................................
Accounts Receivable............................
5,000
5,000
To reverse accrued revenues.
1 Salaries Payable...........................................
2,400
2,400
To reverse accrued salaries.

Income Summary balance after closing revenues and expenses:
Revenues: $35,000 + $3,500............................
Expenses: $19,000 + $4,000 + $2,300.............
Credit balance...................................................
=
=
=
$38,500
- 25,300
$13,200
Cr.
Dr.
Cr.
D. Argosy, Capital balance after all closing entries:

Beginning balance................................
Plus net income....................................
Less withdrawals..................................
Ending balance.....................................
$14,000
13,200
27,200
6,000
$21,200

Dec. 31 Net Sales........................................................1,838,622
Income Summary..................................
1,838,622
31 Income Summary..........................................1,559,533
Cost of Sales..........................................
Advertising Expense.............................
Other Expense, Net...............................
1,044,981
117,308
397,244
4-22

MADISON COMPANY
December 31, 2011
Unadjusted
Trial Balance
Adjustments
Dr. Cr.
Dr.
Cr.
Cash................................................ 7
Accounts receivable.......................... 4
(d) 3
Supplies........................................... 8
(e) 5
Prepaid insurance............................. 6
Equipment....................................... 13
(a) 1
Accumulated depreciationEquip.......
5
Accounts payable.............................
2
(b) 2
Salaries payable................................
(c) 4
Unearned revenue............................
4
T. Madison, Capital............................
14
T. Madison, Withdrawals.................... 2
(c) 4
Revenue..........................................
25
(a) 1
Depreciation expense Equipment.....
(b) 2
Salaries expense............................... 6
(e) 5
Insurance expense............................
(d) 3
Supplies expense.............................
Utilities expense................................ 4
__
__
__
Totals............................................... 50
50
15
15
Adjusted
Trial Balance
Dr. Cr.
7
4
5
1
13
6
2
2
14
2
29
1
8
5
3
4
53
PROBLEM SET A
Problem 4-1A (15 minutes)
1.
6.
11.
16.
2.
7.
12.
17.
3.
8.
13.
18.
4.
9.
14.
19.
5.
10.
15.
20.
4-23
__
53

INSTRUCTOR NOTE: Ledger accounts (as prepared per Part 1) are shown after Part 7 as they would
appear after all entries are posted.
Part 2 Transactions for April

April 1 Cash...............................................................101
Computer Equipment...................................167
Stafford, Capital.....................................301
20,000
40,000
60,000
Owner invested in the business.
2 Rent Expense................................................640
Cash........................................................101
1,700
1,700
Paid one months rent.
3 Office Supplies...............................................124
Cash........................................................101
1,100
1,100
Acquired office supplies.
10 Prepaid Insurance..........................................128
Cash........................................................101
3,600
3,600
Paid 12-months premium in advance.
14 Salaries Expense...........................................622
Cash........................................................101
1,800
1,800
Paid two weeks salaries.
24 Cash...............................................................101
Commissions Earned............................405
7,900
7,900
Collected commissions from airlines.
28 Salaries Expense..........................................622
Cash........................................................101
1,800
1,800
Paid two weeks salaries.
29 Repairs Expense...........................................684
Cash........................................................101
250
250
Repaired the computer.
30 Telephone Expense......................................688
Cash........................................................101
650
650
Paid the telephone bill.
30 J. Stafford, Withdrawals...............................302
Cash........................................................101
Owner withdrew cash for personal use.
4-24
1,500
1,500
Problem 4-2A (Continued)

Part 3
SEE-IT-NOW TRAVEL
Unadjusted Trial Balance
April 30, 2011
No.
101
106
124
128
167
168
209
301
302
405
612
622
637
640
650
684
688
Account Title
Debit
Cash............................................................. $15,500
0
Office supplies............................................
1,100
3,600
Computer equipment.................................
40,000
Accumulated depreciation.....................
Computer equipment................................
Salaries payable.........................................
J. Stafford, Capital......................................
J. Stafford, Withdrawals............................
1,500
Commissions earned.................................
Depreciation expense
Computer equipment................................
0
Salaries expense........................................
3,600
Insurance expense.....................................
0
Rent expense..............................................
1,700
Office supplies expense............................
0
Repairs expense.........................................
250
Telephone expense....................................
650
Totals........................................................... $67,900
4-25
Credit
0
0
60,000
7,900
$67,900

Part 4
Adjusting entries:
(a) Apr
30 Insurance Expense............................................... 637
200
Prepaid Insurance.......................................... 128
200
To record expired insurance (2/3 x $300 per month).

(b)
30 Office Supplies Expense....................................... 650

Office Supplies............................................... 124
400
400
To record cost of supplies used ($1,100 - $700).

(c)
30 Depreciation ExpComputer Equipment........... 612

Accumulated Depreciation
Computer Equipment .................................... 168
600
600
To record depreciation.
(d)
30 Salaries Expense................................................... 622

Salaries Payable............................................. 209
320
320

(e)
30 Accounts Receivable............................................ 106

Commissions Earned.................................... 405
1,650
1,650
To record accrued commissions.
Part 5
SEE-IT-NOW TRAVEL
Income Statement
For Month Ended April 30, 2011
Commissions earned..................................................
Expenses
Depreciation expenseComputer equipment........
$ 600
Salaries expense........................................................
3,920
Insurance expense....................................................
200
Rent expense..............................................................
1,700
Office supplies expense............................................
400
Repairs expense........................................................
250
Telephone expense....................................................
650
Total expenses...........................................................
Net income....................................................................
4-26
$9,550
7,720
$1,830

Part 5continued
SEE-IT-NOW TRAVEL
For Month Ended April 30, 2011
J. Stafford, Capital, April 1, 2011....................
Plus: Investment by owner............................
60,000
Net income............................................
1,830
61,830
Less: Owner withdrawals...............................

J. Stafford, Capital, April 30, 2011..................
(1,500)
$60,330
SEE-IT-NOW TRAVEL
Balance Sheet
April 30, 2011
Assets
Cash..................................................................................
Accounts receivable........................................................
Office supplies.................................................................
Prepaid insurance...........................................................
Computer equipment...................................................... $40,000
Accumulated depreciationComputer equipment.......
(600)
Total assets......................................................................
$15,500
1,650
700
3,400
39,400
$60,650
Liabilities
Salaries payable..............................................................
Equity
J. Stafford, Capital...........................................................
Total liabilities and equity...............................................
60,330
$60,650
4-27
320

Part 6
Closing entries:
April 30 Commissions Earned...................................405
Income Summary..................................901
9,550
9,550
30 Income Summary..........................................901
Depreciation ExpComputer Equip.....612
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688
7,720
600
3,920
200
1,700
400
250
650
30 Income Summary..........................................901
J. Stafford, Capital.................................301
1,830
1,830
To close the Income Summary account.
30 J. Stafford, Capital........................................301
J. Stafford, Withdrawals.......................302
1,500
1,500
Part 7
SEE-IT-NOW TRAVEL
April 30, 2011
Debit
Cash.......................................................... $15,500
Accounts receivable................................
1,650
Office supplies.........................................
700
Prepaid insurance....................................
3,400
Computer equipment............................... 40,000
Accumulated depreciation
Computer equipment.............................
Salaries payable.......................................
J. Stafford, Capital...................................
Totals......................................................... $61,250
4-28
Credit
600
320
60,330
$61,250

Part 7continued
Ledger as of April 30:
Cash
Date
April 1
2
3
10
14
24
28
29
30
30
Date
April 30
Date
April 3
30
Date
April 10
30
Date
April 1
Date
April 30
Date
April 30
Explanation
PR
Debit
20,000
7,900
Explanation
Adjusting
Explanation
Accounts Receivable
PR
Debit
1,650
Office Supplies
PR
Explanation
Debit
1,100
Debit
3,600
Acct. No. 128

Credit Balance
3,600
200
3,400
Adjusting
Explanation
Computer Equipment
PR
Acct. No. 106

Credit Balance
1,650
Acct. No. 124
Credit Balance
1,100
400
700
Adjusting
Prepaid Insurance
PR
Acct. No. 101

Credit Balance
20,000
1,700 18,300
1,100 17,200
3,600 13,600
1,800
11,800
19,700
1,800 17,900
250 17,650
650 17,000
1,500 15,500
Debit
40,000
Acct. No. 167

Credit Balance
40,000
Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit Balance
Adjusting
600
600
Explanation
Adjusting
Salaries Payable
PR
4-29
Debit
Acct. No. 209

Credit Balance
320
320

Date
April 1
30
30
Date
April 30
30
Date
April 24
30
30
Date
April 30
30
Date
April 14
28
30
30
Date
April 30
30
Explanation
J. Stafford, Capital
PR
Closing
Closing
Explanation
Debit
1,500
J. Stafford, Withdrawals
PR
Debit
1,500
Closing
9,550
Depreciation ExpenseComputer Equipment

Explanation
PR
Debit
Adjusting
600
Closing
Acct. No. 612

Credit Balance
600
600
0
Adjusting
Closing
Explanation
Salaries Expense
PR
Adjusting
Closing
Explanation
Adjusting
Closing
Insurance Expense
PR
Debit
Debit
1,800
1,800
320
Acct. No. 622

Credit Balance
1,800
3,600
3,920
3,920
0
Debit
200
Acct. No. 637

Credit Balance
200
200
0
Rent Expense
Date
Explanation
April 2
April 30
Closing
Date
April 30
30
Acct. No. 302

Credit Balance
1,500
1,500
0
Acct. No. 405
Credit Balance
7,900
7,900
1,650
9,550
0
Explanation
Commissions Earned
PR
Acct. No. 301

Credit Balance
60,000 60,000
1,830 61,830
60,330
PR
Acct. No. 640
Debit
Credit Balance
1,700
1,700
Office Supplies Expense

Explanation
PR
Debit
Adjusting
400
Closing
4-30
1,700
0
Acct. No. 650

Credit Balance
400
400
0
Problem 4-2A (Concluded)

Date
April 29
30
Date
April 30
30
Date
April 30
30
30
Explanation
Repairs Expense
PR
Debit
250
Acct. No. 684

Credit Balance
250
250
0
Debit
650
Acct. No. 688

Credit Balance
650
650
0
Closing
Explanation
Telephone Expense
PR
Closing
Explanation
Closing
Closing
Closing
Income Summary
PR
Debit
7,720
1,830
4-31
Acct. No. 901

Credit Balance
9,550
9,550
1,830
0

Part 1
KOBE REPAIRS
Income Statement
Repair fees earned.....................................
Expenses
Depreciation expenseEquipment........
Wages expense.........................................
Insurance expense...................................
Rent expense............................................
Office supplies expense..........................
Utilities expense.......................................
Total expenses.........................................
Net income..................................................
$77,750
$ 4,000
36,500
700
9,600
2,600
1,700
55,100
$22,650
KOBE REPAIRS
Statement of Owner's Equity
S. Kobe, Capital, Jan. 1, 2011....................
$40,000
Add net income .........................................
22,650
62,650
Less withdrawals........................................
(15,000)
S. Kobe, Capital, Dec. 31, 2011..................
$47,650
4-32

Part 1 (concluded)
KOBE REPAIRS
Balance Sheet
December 31, 2011
Assets
Current assets
Cash.................................................................
Office supplies................................................
Prepaid insurance..........................................
Total current assets........................................
Plant assets
Equipment.......................................................
Accumulated depreciationEquipment......
Total assets.......................................................
$13,000
1,200
1,950
$16,150
48,000
(4,000)
44,000
$60,150
Liabilities
Current liabilities
Accounts payable...........................................
Wages payable................................................
Total current liabilities...................................
Equity
S. Kobe, Capital ...............................................
Total liabilities and equity................................
4-33
$12,000
500
12,500
47,650
$60,150

Parts 2 and 3
KOBE REPAIRS
No.
Account Title
Adjusted
Trial Balance
Dr.
Cr.

Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
101 Cash...................................
13,000
13,000
124 Office supplies......................
1,200
1,200
128 Prepaid insurance .................
1,950
1,950
167 Equipment...........................
48,000
48,000
4,000
4,000
201 Accounts payable.................
12,000
12,000
210 Wages payable.....................
500
500
168
Equipment.........................
301 S. Kobe, Capital...................

302 S. Kobe, Withdrawals...........
40,000 (4) 15,000

15,000
401 Repair fees earned..............
(3)
22,650
(4)
15,000
77,750 (1) 77,750
Equipment........................
4,000
(2)
4,000
623 Wages expense...................
36,500
(2)
36,500
637 Insurance expense...............
700
(2)
700
640 Rent expense......................
9,600
(2)
9,600
650 Office Supplies expense.......
2,600
(2)
2,600
690 Utilities expense..................
1,700
(2)
1,700
612
47,650
901 Income summary................
______
Totals................................. 134,250
(2) 55,100
______ (3) 22,65
0
134,250
170,50
0
(1)
77,750
______ ______ ______
170,500
64,150
Closing entries (all dated December 31, 2011):

(1)
Repair Fees Earned......................................

Income Summary..................................
4-34
77,750
77,750
64,15
0

(2)
(3)
(4)
Income Summary..........................................
Depreciation Expense, Equipment......
Wages Expense.....................................
Rent Expense.........................................
Office Supplies Expense......................
Utilities Expense....................................
55,100
Income Summary..........................................
S. Kobe, Capital.....................................
22,650
S. Kobe, Capital.............................................
S. Kobe, Withdrawals............................
15,000
4,000
36,500
700
9,600
2,600
1,700
22,650
15,000
Part 4
(a) If none of the $700 insurance expense had expired, the income statement
would not report any insurance expense and net income would be
increased by $700.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $500 less and net income would
be $500 more.
Financial Statement Changes:
The income statement would reflect the following:
Net income would be increased by $700 + $500 = $1,200.
The balance sheet would reflect the following:
Prepaid insurance and total assets would be increased by $700.
There would not be any wages payable.
Total current liabilities would be $500 less.
Owner's equity would be increased by $1,200.
Total liabilities and owner's equity would be increased by $700.
4-35

Part 1
SHARP CONSTRUCTION
Income Statement
Revenues
Professional fees earned................................... $96,000
Rent earned......................................................... 13,000
Dividends earned...............................................
1,900
Interest earned....................................................
1,000
Total revenues....................................................
Expenses
Depreciation expenseBuilding...................... 10,000
Depreciation expenseEquipment..................
5,000
Wages expense................................................... 31,000
Interest expense.................................................
4,100
Insurance expense.............................................
9,000
Rent expense...................................................... 12,400
Supplies expense...............................................
6,400
Postage expense................................................
3,200
Property taxes expense.....................................
4,000
Repairs expense.................................................
7,900
Telephone expense............................................
2,200
Utilities expense.................................................
3,600
Total expenses....................................................
Net income............................................................
SHARP CONSTRUCTION
J. Sharp, Capital, December 31, 2010.................
Add: Investments by owner............................... $50,000
Net income.................................................. 13,100
Less: Withdrawals by owner...............................
J. Sharp, Capital, December 31, 2011.................
4-36
$111,900
98,800
$ 13,100
$32,700
63,100
95,800
(12,000)
$83,800

SHARP CONSTRUCTION
Balance Sheet
December 31, 2011
Assets
Current assets
Cash.....................................................................
Short-term investments.....................................
Supplies..............................................................
Prepaid insurance..............................................
Total current assets...........................................
Plant assets
Equipment...........................................................
Accumulated depreciationEquipment..........
Building...............................................................
Accumulated depreciationBuilding..............
Land.....................................................................
Total plant assets...............................................
Total assets...........................................................
$ 4,000
22,000
7,100
6,000
$ 39,100
39,000
(20,000)
130,000
(55,000)
19,000
75,000
45,000
139,000
$178,100
Liabilities
Current liabilities
Accounts payable............................................... $ 15,500
Interest payable..................................................
1,500
Rent payable.......................................................
2,500
Wages payable....................................................
1,500
Property taxes payable......................................
800
Unearned professional fees..............................
6,500
Current portion of long-term note payable...
6,600
Total current liabilities.......................................
$ 34,900
Long-term liabilities
Long-term notes payable*.................................
59,400
Total liabilities.......................................................
94,300
Equity
J. Sharp, Capital ..................................................
83,800
Total liabilities and equity....................................
$178,100
* $66,000-$6,600
4-37

Part 2
(1)
(2)
(3)
(4)
Professional Fees Earned............................

Rent Earned...................................................
Dividends Earned.........................................
Interest Earned..............................................
Income Summary..................................
To close the revenue accounts.
96,000
13,000
1,900
1,000
Income Summary..........................................
Depreciation Expense, Building..........
Wages Expense.....................................
Interest Expense....................................
Rent Expense.........................................
Supplies Expense..................................
Postage Expense...................................
Property Taxes Expense.......................
Repairs Expense...................................
Telephone Expense...............................
98,800
Income Summary..........................................
J. Sharp, Capital....................................
To close the income summary account.
13,100
J. Sharp, Capital ...........................................

J. Sharp, Withdrawals...........................
12,000
111,900
10,000
5,000
31,000
4,100
9,000
12,400
6,400
3,200
4,000
7,900
2,200
3,600
13,100
Part 3
a. Return on assets = $13,100/[($200,000 + $178,100)/2] = 6.93%
b. Debt ratio = $94,300/$178,100 = 0.53
c. Profit margin = $13,100/$111,900 =11.7%
d. Current ratio = $39,100/$34,900 = 1.12
4-38
12,000
Problem 4-5A (90 minutes) Part 1

ADAMS CONSTRUCTION CO.
Work Sheet
For Year Ended June 30, 2011
No.
101
126
128
167
168
201
203
208
210
213
251
301
302
401
612
Account Title
Unadjusted
Trial Balance
Dr.
Cr.
Cash......................................
17,500
Supplies.................................
8,900
Prepaid insurance....................
6,200
Equipment..............................
131,000
Equipment.............................
Accounts payable....................
Rent payable...........................
Wages payable........................
Property taxes payable..............
Long-term notes payable...........
S. Adams, Capital.....................
S. Adams, Withdrawals..............
30,000
Construction fees earned...........
Equipment.............................
623
Wages expense.......................
45,860
633
Interest expense.......................
2,640
637
Insurance expense...................
640
652
Rent expense..........................
13,200
Supplies expense.....................
683
Property taxes expense.............

4,600
684
690
Repairs expense......................
2,810
Utilities expense.......................
4,000
Adjustments
Dr.
Cr.
(a) 5,700
(b) 3,900
Adjusted
Trial Balance
Dr.
Cr.
17,500
3,200
2,300
131,000
(c) 8,500
(d)
550
(h)
240
(f)
200
(e) 1,600
(g)
900
25,250
5,800
Income
Statement
Dr.
Cr.
17,500
3,200
2,300
131,000
33,750
6,350
240
200
1,600
900
24,000
77,660
24,000
77,660
33,750
6,350
240
200
1,600
900
24,000
77,660
30,000
134,000
______
30,000
134,000
134,000
(c
)
(e
)
(h
)
(b
)
(f)
(a
)
(g
)
8,500
8,500
8,500
1,600
47,460
47,460
240
2,880
2,880
3,900
3,900
3,900
200
5,700
13,400
5,700
13,400
5,700
900
5,500
5,500
(d
550
_____
4-39
Balance Sheet &

Statement of
Owners Equity
Dr.
Cr.
2,810
4,550
______
2,810
4,550
______
______ ______
Totals.....................................
266,710
Net Income..............................
Totals.....................................
266,710
21,590
21,590
4-40
278,700
278,700
94,700
39,300
134,000
134,000
______
134,000
184,000 144,700
______ 39,300
184,000 184,000

Part 2
Adjusting entries (all dated June 30, 2011):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Supplies Expense.........................................
Supplies.................................................
To record consumption of supplies.
5,700
Insurance Expense.......................................
Prepaid Insurance.................................
To record expiration of insurance.
3,900
Depreciation Expense, Equipment..............

Accumulated Depreciation, Equipment
8,500
5,700
3,900
8,500
Utilities Expense...........................................
Accounts Payable.................................
To record accrued utilities costs.
550
Wages Expense.............................................
Wages Payable......................................
To record accrued wages.
1,600
Rent Expense................................................
Rent Payable..........................................
To record remainder of annual rent.
200
Property Taxes Expense..............................

Property Taxes Payable........................
To record additional property taxes.
900
Interest Expense (1% x $24,000).................

Interest Payable.....................................
To record the months interest expense.
240
4-41
550
1,600
200
900
240

Closing entries (all dated June 30, 2011):
(1)
(2)
(3)
(4)
Construction Fees Earned........................... 134,000

Income Summary..................................
Income Summary..........................................
Wages Expense.....................................
Rent Expense.........................................
Repairs Expense...................................
94,700
Income Summary..........................................
S. Adams, Capital..................................
39,300
S. Adams, Capital..........................................
S. Adams, Withdrawals.........................
30,000
4-42
134,000
8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
39,300
30,000

Part 3
Income Statement
Construction fees earned.................................
Expenses
Depreciation expenseEquipment...............
Wages expense................................................
Interest expense..............................................
Insurance expense..........................................
Rent expense....................................................
Supplies expense............................................
Property taxes expense..................................
Repairs expense..............................................
Utilities expense...............................................
Total expenses.................................................
Net income.........................................................
$134,000
$ 8,500
47,460
2,880
3,900
13,400
5,700
5,500
2,810
4,550
94,700
$ 39,300

S. Adams, Capital, June 30, 2010.....................
$ 52,660
Add: Investment by owner............................... $25,000

Net income................................................
Less: Withdrawals by owner............................
S. Adams, Capital, June 30, 2011.....................
4-43
39,300
64,300
116,960
(30,000)
$ 86,960

Balance Sheet
June 30, 2011
Assets
Current assets
Cash.......................................................................
$ 17,500
Supplies.................................................................
3,200
Prepaid insurance.................................................
2,300
Total current assets..............................................
$ 23,000
Plant assets
Equipment.............................................................
131,000
Accumulated depreciationEquipment.............
(33,750)
Total assets.............................................................
97,250
$120,250
Liabilities
Current liabilities
Accounts payable.................................................
$ 6,350
Interest payable.....................................................
240
Rent payable..........................................................
200
Wages payable......................................................
1,600
Property taxes payable........................................
900
Current portion of long-term note payable........
5,000
Total current liabilities..........................................
$ 14,290
Noncurrent liabilities
Long-term note payable (less current portion)..
19,000
Total liabilities.........................................................
33,290
Equity
S. Adams, Capital....................................................
86,960
Total liabilities and equity......................................
$120,250
4-44

Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Supplies account should be $3,200, but the entry
reduces Supplies by $3,200. Because its unadjusted balance was
$8,900, the adjusted balance will be $5,700 ($8,900 - $3,200), which is
$2,500 greater than the correct $3,200 balance. In addition, the
Supplies Expense account balance will be only $3,200 instead of
$5,700.
The adjusted trial balance columns in the work sheet will be equal, but
the error will cause the work sheets net income to be overstated by
$2,500 because of the understatement of the expense. In addition, the
balance sheet columns will include the overstated balance for the
Supplies account.
This error is not likely to be detected as a result of completing the
work sheet. If it is not, the income statement will overstate net income
by $2,500, and the balance sheet will overstate the cost of the supplies
available and the owner's equity by $2,500.
(b) This error inserts a credit in the adjusted trial balance when a debit
should have been inserted. As a result, the trial balance will not
balance (the credit column will be greater than the debit column by
$35,000), and the error will be tracked down and corrected before
going on with the next step in the work sheet.
Because the error will be detected and corrected before preparing the
financial statements, the statements will not be affected.
4-45
Problem 4-6AA (40 minutes)

Part 1
BULLSEYE RANGES
December 31, 2011
Unadjusted
Trial Balance
Cash................................
Adjustments
13,000
13,000
Accounts receivable...........
Supplies............................
Adjusted
Trial Balance
(e)
9,100
5,500
Equipment........................ 130,000
Equipment.......................
Interest payable..................
9,100
(b)
2,800
2,700
130,000
25,000
Salaries payable.................
(f)
12,500
37,500
(c)
1,250
1,250
(a)
900
900
Unearned member fees.......
14,000 (d)
Notes payable....................
50,000
50,000
T. Allen, Capital...................
58,250
58,250
T. Allen, Withdrawals...........
8,400
5,600
20,000
Member fees earned...........
20,000
53,000
Equipment.......................
(d)
(e)
8,400
9,100
70,500
(f)
12,500
12,500
Salaries expense................
28,000
(a)
900
28,900
Interest expense.................
3,750
(c)
1,250
5,000
Supplies expense............... ______
______ (b)
2,800
_____
2,800
______
Totals................................ 200,250
200,250
34,950
34,950
224,000
224,000
4-46
Problem 4-6AA (Continued)

Part 2 (all adjusting entries dated December 31, 2011)
(a)
(b)
(c)
(d)
(e)
(f)
Salaries Expense..........................................
Salaries Payable....................................
900
Supplies.................................................
To record cost of consumed supplies.
2,800
Interest Expense...........................................
To record accrued interest expense.
1,250
Unearned Member Fees...............................

Member Fees Earned............................
To record earned fees.
8,400
Accounts Receivable....................................
Membership Fees Earned.....................
To record accrued revenues.
9,100
Depreciation Expense, Equipment..............

Accumulated Depreciation, Equipment
12,500
900
2,800
1,250
8,400
9,100
12,500
Part 3 (all reversing entries dated January 1, 2012)

(a)
(c)
(e)
Salaries Payable...........................................
To reverse accrued salaries.
900
Interest Payable............................................
To reverse accrued interest expense.
1,250
Member Fees Earned....................................

9,100
4-47
900
1,250
9,100
Problem 4-6AA (Concluded)

Part 4
2012
Jan. 4
Salaries Expense.........................................
Cash........................................................
To record payroll.
1,600
Interest Expense..........................................
Cash........................................................
To record interest payment.
1,500
31 Cash ($9,100 + $8,000).................................

Member Fees Earned............................
17,100
15
To record collection of membership fees.
4-48
1,600
1,500
17,100
PROBLEM SET B
Problem 4-1B (15 minutes)
1.
6.
11.
16.
2.
7.
12.
17.
3.
8.
13.
18.
4.
9.
14.
19.
5.
10.
15.
20.
4-49

INSTRUCTOR NOTE: Ledger accounts (as prepared per Part 1) are shown after Part 7 as
they would appear after all entries are posted.
Part 2
Transactions for July:
July 1 Cash..................................................................101
Buildings..........................................................173
L. Fogle, Capital.......................................301
20,000
120,000
140,000
Owner invested in the business.
2 Rent Expense...................................................640
Cash..........................................................101
1,800
1,800
Paid one months rent.
5 Office Supplies................................................124
Cash..........................................................101
2,300
2,300
Acquired office supplies.
10
Prepaid Insurance...........................................128
Cash..........................................................101
5,400
5,400
Paid 12-months premium in advance.
14
Salaries Expense.............................................622
Cash..........................................................101
900
900
Paid two weeks salary.
24
Cash..................................................................101
Storage Fees Earned...............................401
8,800
8,800
Collected fees from customers.
28
Salaries Expense.............................................622
Cash..........................................................101
900
900
Paid two weeks salary.
29
Repairs Expense.............................................684
Cash..........................................................101
850
850
Repaired the roof.
30
Telephone Expense.........................................688
Cash..........................................................101
300
300
Paid the telephone bill.
31
L. Fogle, Withdrawals.....................................302
Cash..........................................................101
Owner withdrew cash..
4-50
1,600
1,600
Problem 4-2B (Continued)

Part 3
KEEPSAFE CO.
Unadjusted Trial Balance
July 31, 2011
No.
Account Title
Debit
Credit
101 Cash....................................................................... $ 14,750

106 Accounts receivable............................................
124 Office supplies......................................................
2,300
128 Prepaid insurance................................................
5,400
173 Buildings............................................................... 120,000

174 Accum. depreciationBuildings..........................
209 Salaries payable...................................................
301 L. Fogle, Capital....................................................
140,000
302 L. Fogle, Withdrawals..........................................
1,600
401 Storage fees earned.............................................
8,800
606 Depreciation expenseBuildings........................
622 Salaries expense..................................................
1,800
637 Insurance expense...............................................
640 Rent expense........................................................
1,800
650 Office supplies expense......................................
684 Repairs expense...................................................
850
688 Telephone expense..............................................
300
Totals.....................................................................$148,800
4-51
$148,800

Part 4
Adjusting entries:
July 31 Insurance Expense.......................................637
Prepaid Insurance.................................128
300
300
To record expired insurance (2/3 x $450

per month).
31 Office Supplies Expense..............................650

Office Supplies......................................124
750
750
To record the cost of consumed

supplies ($2,300 - $1,550).
31 Depreciation ExpenseBuildings..............606
Accum. DepreciationBuildings.........174
1,200
1,200
31 Salaries Expense..........................................622
Salaries Payable....................................209
180
180
31 Accounts Receivable....................................106
Storage Fees Earned.............................401
950
950
To record accrued storage fees.
Part 5
KEEPSAFE CO.
Income Statement
For Month Ended July 31, 2011
Storage fees earned.....................................
Expenses
Depreciation expenseBuildings.............. $1,200
Salaries expense.........................................
1,980
Insurance expense.....................................
300
Rent expense...............................................
1,800
Office supplies expense.............................
750
Repairs expense.........................................
850
Telephone expense.....................................
300
Total expenses............................................
Net income.....................................................
4-52
$9,750
7,180
$ 2,570

Part 5
KEEPSAFE CO.
For Month Ended July 31, 2011
L. Fogle, Capital, July 1, 2011....................
Add: Investments by owner...................
140,000
Net income.........................................
2,570
142,570
Less: Owner withdrawals..........................

L. Fogle, Capital, July 31, 2011..................
KEEPSAFE CO.
Balance Sheet
July 31, 2011
Assets
Cash.............................................................
Office supplies............................................
Buildings..................................................... $120,000
Accumulated depreciation--Buildings.....
(1,200)
Total assets.................................................
(1,600)
$140,970
$ 14,750
950
1,550
5,100
118,800
$141,150
Liabilities
Equity
L. Fogle, Capital..........................................
Total liabilities and equity..........................
140,970
$141,150
4-53
180

Part 6
Closing entries
July 31
Storage Fees Earned.................................401

Income Summary..................................901
9,750
9,750
31
Income Summary.......................................901
Depreciation ExpBuildings...............606
Salaries Expense...................................622
Insurance Expense................................637
Rent Expense.........................................640
Office Supplies Expense......................650
Repairs Expense...................................684
Telephone Expense...............................688
7,180
1,200
1,980
300
1,800
750
850
300
31
Income Summary........................................901
L. Fogle, Capital.....................................301
2,570
2,570
To close the Income Summary.
31
L. Fogle, Capital..........................................301
L. Fogle, Withdrawals............................302
1,600
1,600
To close the Withdrawals account..
Part 7
KEEPSAFE CO.
July 31, 2011
Debit
Cash............................................................. $ 14,750
950
Office supplies............................................
1,550
5,100
Credit
Buildings..................................................... 120,000
Accumulated depreciationBuildings......
1,200
180
L. Fogle, Capital..........................................
140,970
4-54
Totals........................................................... $142,350
4-55
$142,350
Date
July 1
2
5
10
14
24
28
29
30
31
Date
July 31
Date
July 5
31
Date
July 10
31
Explanation
Ledger as of July 31:

Cash
PR
Debit
20,000
8,800
Accounts Receivable
Explanation
PR
Debit
Adjusting
950
Explanation
Office Supplies
PR
Explanation
Debit
2,300
Debit
5,400
Acct. No. 128

Credit Balance
5,400
300
5,100
Adjusting
Buildings
Date
July 1
Date
July 31
Date
July 31
Explanation
PR
Acct. No. 106

Credit Balance
950
Acct. No. 124
Credit Balance
2,300
750
1,550
Adjusting
Prepaid Insurance
PR
Acct. No. 101

Credit Balance
20,000
1,800 18,200
2,300 15,900
5,400 10,500
900
9,600
18,400
900 17,500
850 16,650
300 16,350
1,600 14,750
Debit
120,000
Acct. No. 173

Credit Balance
120,000
Accumulated DepreciationBuildings
Acct. No. 174
Explanation
PR
Debit Credit Balance
Adjusting
1,200
1,200
Explanation
Adjusting
Salaries Payable
PR
4-56
Debit
Acct. No. 209

Credit Balance
180
180

Date
July 1
31
31
Date
July 31
31
Explanation
L. Fogle, Capital
PR
Closing
Closing
Acct. No. 301

Debit Credit Balance
140,000 140,000
2,570 142,570
1,600
140,970
L. Fogle, Withdrawals
Explanation
PR
Debit
1,600
Closing
Date
July 24
31
31
Adjusting
Closing
9,750
Acct.No. 401
Credit Balance
8,800
8,800
950
9,750
0
Date
July 31
31
Depreciation ExpenseBuildings
Explanation
PR
Debit
Adjusting
1,200
Closing
Acct. No. 606

Credit Balance
1,200
1,200
0
Date
July 14
28
31
31
Date
July 31
31
Date
July 2
31
Explanation
Explanation
Storage Fees Earned

PR
Debit
Acct. No. 302

Credit Balance
1,600
1,600
0
Salaries Expense
PR
Adjusting
Closing
Explanation
Adjusting
Closing
Explanation
Insurance Expense
PR
Rent Expense
PR
Closing
4-57
Debit
900
900
180
Acct. No. 622

Credit Balance
900
1,800
1,980
1,980
0
Debit
300
Acct. No. 637

Credit Balance
300
300
0
Debit
1,800
Acct. No. 640

Credit Balance
1,800
1,800
0
Problem 4-2B (Concluded)

Date
July 31
31
Date
July 29
31
Date
July 30
31
Date
July 31
31
31
Office Supplies Expense

Explanation
PR
Debit
Adjusting
750
Closing
Explanation
Repairs Expense
PR
Debit
850
Acct. No. 684

Credit Balance
850
850
0
Debit
300
Acct. No. 688

Credit Balance
300
300
0
Closing
Explanation
Telephone Expense
PR
Closing
Explanation
Closing
Closing
Closing
Income Summary
PR
Debit
7,180
2,570
4-58
Acct. No. 650

Credit Balance
750
750
0
Acct. No. 901

Credit Balance
9,750
9,750
2,570
0

Part 1
HEEL-TO-TOE SHOES
Income Statement
Repair fees earned.....................................
Expenses
Depreciation expenseEquipment........
Wages expense.........................................
Insurance expense...................................
Rent expense............................................
Store supplies expense...........................
Utilities expense.......................................
Total expenses..........................................
Net income..................................................
$62,000
$ 3,000
28,400
1,100
2,400
1,300
1,860
38,060
$23,940
HEEL-TO-TOE SHOES
P. Holt, Capital, December 31, 2010..........
$31,650
Add: Net income.........................................
23,940
55,590
Less: Owner withdrawals..........................
(16,000)
P. Holt, Capital, December 31, 2011..........
$39,590
4-59

Part 1 (concluded)
HEEL-TO-TOE SHOES
Balance Sheet
December 31, 2011
Assets
Current assets
Cash........................................................... $13,450
Store supplies...........................................
4,140
Prepaid insurance....................................
2,200
Total current assets.................................
Plant assets
Equipment................................................. 33,000
Accumulated depreciation, equipment. .
(9,000)
Total assets.................................................
$19,790
24,000
$43,790
Liabilities
Current liabilities
Accounts payable.....................................
Wages payable..........................................
Total current liabilities.............................
Equity
P. Holt, Capital ...........................................
Total liabilities and equity..........................
4-60
$ 1,000
3,200
4,200
39,590
$43,790

Parts 2 and 3
No
.
Account Title
HEEL-TO-TOE SHOES
Adjusted
Trial Balance
Dr.
Cr.
Dr.
Cr.
Post-Closing
Trial Balance
Dr.
Cr.
10
1
Cash............................. 13,450
13,450
12
5
Store supplies................ 4,140
4,140
12
8
Prepaid insurance........... 2,200
2,200
16
7
Equipment..................... 33,000
33,000
16
8
Accumulated depreciationEquipment...........
9,000
9,000
20
1
Accounts payable...........
1,000
1,000
21
0
Wages payable...............
3,200
3,200
30
1
P. Holt, Capital.................
31,650
30
2
P. Holt, Withdrawals......... 16,000
40
1
Repair fees earned..........
61
2
3,000
Equipment...................
(2)
62
3
Wages expense.............. 28,400
(2) 28,400
63
7
Insurance expense.......... 1,100
(2)
1,100
64
0
Rent expense................. 2,400
(2)
2,400
(4) 16,000
(3) 23,940
(4) 16,000
62,000
4-61
(1) 62,000
3,000
39,59
0
65
1
Store supplies expense... 1,300
(2)
1,300
69
0
Utilities expense.............. 1,860
(2)
1,860
90
1
Income summary...........
(2) 38,060
(1) 62,000
______
______
______
(3) 23,940
Totals............................106,850
106,850
140,000
_____
_____
140,000 52,790
52,79
0
4-62

Part 3
(1)
Repair Fees Earned......................................

Income Summary..................................
62,000
Income Summary..........................................
Wages Expense.....................................
Rent Expense.........................................
Store Supplies Expense.......................
38,060
Income Summary..........................................
P. Holt, Capital.......................................
23,940
P. Holt, Capital...............................................
P. Holt, Withdrawals..............................
16,000
(2)
(3)
(4)
62,000
3,000
28,400
1,100
2,400
1,300
1,860
23,940
16,000
Part 4
(a) If none of the $1,100 insurance expense had expired, the income
statement would not report any insurance expense and net income would
be increased by $1,100.
(b) If there were no earned and unpaid wages (meaning Wages Payable
equals zero), wages expense would be $3,200 less and net income would
be $3,200 higher.
Financial Statement Changes:
The income statement would reflect the following:
Net income would be increased by $1,100 + $3,200 = $4,300.
The balance sheet would reflect the following:
Prepaid insurance and total assets would be increased by $1,100.
There would not be any wages payable.
Total liabilities would be decreased by $3,200.
Owner's equity would be increased by $4,300.
Total liabilities and owner's equity would be increased by $1,100.
4-63

Part 1
GIOVANNI CO.
Income Statement
Revenues
Professional fees earned................................... $47,000
Rent earned.........................................................
3,600
Dividends earned...............................................
500
Interest earned....................................................
1,120
Total revenues....................................................
Expenses
Depreciation expenseBuilding......................
2,000
Depreciation expenseEquipment..................
1,000
Wages expense................................................... 17,500
1,200
Insurance expense.............................................
1,425
Rent expense......................................................
1,800
900
Postage expense................................................
310
3,825
Repairs expense.................................................
579
Telephone expense............................................
421
1,820
Total expenses....................................................
Net income............................................................
GIOVANNI CO.
J. Giovanni, Capital, December 31, 2010...........
Net income.................................................. 19,440
J. Giovanni, Capital, December 31, 2011............
4-64
$52,220
32,780
$19,440
$ 61,800
49,440
111,240
(6,000)
$105,240

GIOVANNI CO.
Balance Sheet
December 31, 2011
Assets
Current assets
Cash.....................................................................
$ 6,400
Short-term investments.....................................
10,200
Supplies..............................................................
3,600
Prepaid insurance..............................................
800
Total current assets...........................................
$ 21,000
Plant assets
Equipment........................................................... $18,000
Accumulated depreciationEquipment.......... (3,000) 15,000
Building............................................................... 90,000
Accumulated depreciationBuilding.............. (9,000) 81,000
Land.....................................................................
28,500
Total plant assets...............................................
124,500
Total assets...........................................................
$145,500
Liabilities
Current liabilities
Accounts payable...............................................
Interest payable..................................................
Rent payable.......................................................
Wages payable....................................................
Property taxes payable......................................
Unearned professional fees..............................
Current portion of long-term note payable......
Total current liabilities.......................................
Long-term notes payable*.................................
Total liabilities.......................................................
Equity
J. Giovanni, Capital..............................................
Total liabilities and equity....................................
* $32,000-$6,400
4-65
$ 2,500
1,400
200
1,180
2,330
650
6,400
$ 14,660
25,600
40,260
105,240
$145,500

Part 2
(1)
(2)
(3)
(4)
Professional Fees Earned............................

Rent Earned...................................................
Dividends Earned.........................................
Interest Earned..............................................
Income Summary..................................
To close the revenue accounts.
47,000
3,600
500
1,120
Income Summary..........................................
Depreciation ExpenseBuilding.........
Depreciation ExpenseEquipment....
Wages Expense.....................................
Rent Expense.........................................
Postage Expense...................................
Repairs Expense...................................
Telephone Expense...............................
32,780
Income Summary..........................................
J. Giovanni, Capital...............................
19,440
J. Giovanni, Capital......................................
J. Giovanni, Withdrawals......................
6,000
52,220
2,000
1,000
17,500
1,200
1,425
1,800
900
310
3,825
579
421
1,820
19,440
Part 3
a.
Return on assets = $19,440/[($150,000 + $145,500)/2] = 13.2%
b.
Debt ratio = $40,260/$145,500 = 0.28
c.
Profit margin = $19,440/$52,220 = 37.2%
d.
Current ratio = $21,000/$14,660 = 1.43
4-66
6,000
Problem 4-5B (90 minutes) Part 1

CRUSH DEMOLITION COMPANY
Work Sheet
For Year Ended April 30, 2011
Unadjusted
Trial Balance
No.
10
1
12
6
12
8
16
7
16
8
20
1
20
3
20
8
21
0
21
3
25
1
30
1
30
2
40
1
61
Account Title
Dr.
Cr.
Adjusted
Trial Balance
Adjustments
Dr.
Cr.
Dr.
Cash................................... 9,000
Cr.
Income
Statement
Dr.
Cr.
Balance Sheet and

Statement of
Owners Equity
Dr.
Cr.
9,000
9,000
Supplies..............................18,000
(a) 9,900
8,100
8,100
Prepaid insurance................14,600
(b) 11,500
3,100
3,100
140,000
140,000
Equipment...........................
140,000
Equipment.........................
10,000
(c) 18,000
28,000
28,000
Accounts payable.................
16,000
(d)
700
16,700
16,700
Interest payable....................
(h)
200
200
200
Rent payable........................
(f) 5,360
5,360
5,360
Wages payable.....................
(e) 2,200
2,200
2,200
Property taxes payable..........
(g)
450
450
450
Long-term notes payable.......
20,000
20,000
20,000
J. Bonair, Capital...................
66,900
66,900
66,900
J. Bonair, Withdrawals...........24,000
Demolition fees earned.........
24,000
177,000
24,000
177,000
(c) 18,000
18,000
177,000
18,000
2
62
3
63
3
63
7
64
0
65
2
68
3
68
4
69
Equipment.........................
Wages expense....................51,400
(e) 2,200
53,600
53,600
Interest expense................... 2,200
(h)
200
2,400
2,400
Insurance expense...............
(b) 11,500
11,500
11,500
Rent expense....................... 8,800
(f) 5,360
14,160
14,160
Supplies expense.................
(a) 9,900
9,900
9,900
Property taxes expense......... 8,400
(g)
8,850
8,850
6,700
6,700
450
Repairs expense.................. 6,700

Utilities expense................... 6,800 ______
Totals..................................
289,900 289,900
Net Income..........................
Totals..................................
(d)
700
48,310
______
7,500 ______
7,500
48,310 316,810 316,810 132,610
44,390
177,000
4-62
______ ______ ______

177,000 184,200 139,810
______ ______ 44,390
177,000 184,200 184,200

Part 2
Adjusting entries (all on April 30, 2011):
(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)
Supplies Expense............................................. 9,900

Supplies.....................................................
To record consumption of supplies.
9,900
Insurance Expense........................................... 11,500

Prepaid Insurance.....................................
To record expiration of insurance.
11,500
Depreciation Expense, Equipment................. 18,000

Accumulated Depreciation, Equipment. .
18,000
Utilities Expense...............................................
Accounts Payable.....................................
To record accrued utilities costs.
700
700
Wages Expense................................................ 2,200

Wages Payable..........................................
2,200
Rent Expense.................................................... 5,360

Rent Payable..............................................
To record remainder of annual rent.
5,360
Property Taxes Expense..................................

Property Taxes Payable............................
To record additional property taxes.
450
Interest Expense (1% x $20,000).....................

Interest Payable.........................................
To record Aprils interest expense.
200
4-63
450
200

Closing entries (all on April 30, 2011):
(1)
(2)
(3)
(4)
Demolition Fees Earned............................... 177,000

Income Summary..................................
177,000
Income Summary.......................................... 132,610

Wages Expense.....................................
Rent Expense.........................................
Repairs Expense...................................
18,000
53,600
2,400
11,500
14,160
9,900
8,850
6,700
7,500
Income Summary..........................................
J. Bonair, Capital...................................
44,390
44,390
J. Bonair, Capital...........................................
J. Bonair, Withdrawals..........................
24,000
4-64
24,000

Part 3
Income Statement
Demolition fees earned........................................
Expenses
Depreciation expenseEquipment.................. $18,000
Wages expense................................................... 53,600
2,400
Insurance expense............................................. 11,500
Rent expense...................................................... 14,160
9,900
8,850
Repairs expense.................................................
6,700
7,500
Total expenses....................................................
Net income............................................................
$177,000
132,610
$ 44,390

J. Bonair, Capital, April 30, 2010.........................
$ 36,900

Net income..................................................
J. Bonair, Capital, April 30, 2011.........................
4-65
44,390
74,390
111,290
(24,000)
$ 87,290

Part 3 (concluded)
Balance Sheet
April 30, 2011
Assets
Current assets
Cash...................................................................... $ 9,000
Supplies................................................................
8,100
Prepaid insurance...............................................
3,100
Total current assets.............................................
$ 20,200
Plant assets
Equipment............................................................ 140,000
Accumulated depreciationEquipment........... (28,000)
112,000
Total assets............................................................
$132,200
Liabilities
Current liabilities
Accounts payable................................................ $ 16,700
Interest payable...................................................
200
Rent payable........................................................
5,360
Wages payable.....................................................
2,200
Property taxes payable.......................................
450
Current portion of long-term note payable....
4,000
Total current liabilities........................................
Long-term note payable (less current portion)..
Total liabilities........................................................
Equity
J. Bonair, Capital...................................................
Total liabilities and equity.....................................
4-66
$ 28,910
16,000
44,910
87,290
$132,200

Part 4
(a) This error enters the wrong amount in the correct accounts. The
ending balance of the Prepaid Insurance account should be $3,100, but
the entry reduces that account by $3,100. Because its unadjusted
balance was $14,600, the adjusted balance will be $11,500 ($14,600 $3,100), which is $8,400 greater than the correct $3,100 balance. In
addition, the Insurance Expense account balance will be only $3,100
instead of $11,500.
The adjusted trial balance columns in the work sheet will be equal, but
the error will cause the work sheets net income to be overstated by
$8,400 because of the understatement of the expense. In addition, the
balance sheet columns will include the overstated balance for the
Prepaid Insurance account.
This error is not likely to be detected as a result of completing the work
sheet. If it is not, the income statement will overstate net income by
$8,400, and the balance sheet will overstate the cost of the unexpired
insurance and owner's equity by $8,400.
(b) This error inserts a debit in the balance sheet columns instead of the
income statement columns. In the unlikely event that this error is not
immediately detected, it will cause the work sheet measure of net
income to be overstated because the total debits will incorrectly omit
the $6,700 expense for repairs.
In all likelihood, the error will be discovered in the process of drafting
the balance sheet because the accountant will realize that repairs
expense is not an asset. If it is detected and corrected, the financial
statements will be unaffected. However, if the repairs expense is
erroneously included on the balance sheet, the reported net income will
be overstated by $6,700. On the balance sheet, a nonexistent asset will
be reported for the repairs expense and owner's equity will be
overstated by $6,700.
4-67
Problem 4-6BA (40 minutes)

Part 1
SOLUTIONS CO.
December 31, 2011
Unadjusted
Trial Balance
Adjustments
Adjusted
Trial Balance
Cash.......................................9,000
9,000
Accounts receivable.................
(e)
2,350
Supplies..................................6,600
2,350
(b)
4,150
Machinery................................
40,100
Machinery..............................
2,450
40,100
15,800
(f)
3,800
19,600
(c)
500
500
Salaries payable.......................
(a)
420
420
Unearned rental fees.................
5,200
(d)
2,100
3,100
Notes payable..........................
20,000
20,000
G. Clay, Capital.........................
13,200
13,200
G. Clay, Withdrawals.................
10,500
Rental fees earned....................
10,500
37,000
(d)
(e)
2,100
2,350
41,450
Machinery..............................
(f)
3,800
3,800
Salaries expense......................
23,500
(a)
420
23,920
Interest expense.......................1,500
(c)
500
2,000
Supplies expense.....................
______ ______
(b)
4,150
______
13,320
13,320
Totals......................................
91,200
91,200
4-68
4,150 ______
98,270
98,270
Problem 4-6BA (Continued)

Part 2 (all adjusting entries dated December 31, 2011)
(a)
(b)
(c)
(d)
(e)
(f)
Salaries Payable....................................
420
Supplies.................................................
To record cost of consumed supplies.
4,150
To record accrued interest expense.
500
Unearned Rental Fees..................................

Rental Fees Earned...............................
To record earned fees.
2,100
Accounts Receivable....................................
To record accrued revenues.
2,350
Depreciation Expense, Machinery..............

Accumulated Depreciation
Machinery.............................................
3,800
420
4,150
500
2,100
2,350
3,800
Part 3 (all reversing entries dated January 1, 2012)

(a)
(c)
(e)
Salaries Payable...........................................
To reverse accrued wages.
420
Interest Payable............................................
To reverse accrued interest expense.
500
Rental Fees Earned......................................

2,350
4-69
420
500
2,350
Problem 4-6BA (Concluded)

Part 4
2012
Jan. 4
15
31
Cash........................................................
To record payroll.
1,250
Cash........................................................
To record interest payment.
600
Cash ($2,350 + $4,400)..................................

To record collection of rental fees.
6,750
4-70
1,250
600
6,750
SERIAL PROBLEM SP 4
Serial Problem, Business Solutions (20 minutes) Part 1
<Note: The general ledger is displayed at the end of Part 2>
Closing entries
2011
Dec. 31 Computer Services Revenue .......................... 403

Income Summary...................................... 901
31,284
31,284
31 Income Summary.............................................. 901

Depreciation ExpOffice Equipment....... 612
Depreciation ExpComputer Equipment... 613
Wages Expense ........................................ 623
Insurance Expense .................................. 637
Rent Expense ........................................... 640
Computer Supplies Expense .................. 652
Advertising Expense ................................ 655
Mileage Expense ...................................... 676
Miscellaneous Expenses ......................... 677
Repairs ExpenseComputer ................. 684
16,824
400
1,250
3,875
555
2,475
3,065
2,753
896
250
1,305
31
Income Summary.............................................. 901

S. Rey, Capital........................................... 301
14,460
14,460
31
S. Rey, Capital................................................... 301

S. Rey, Withdrawals.................................. 302
7,100
7,100
Note: All accounts with numbers that start with the digits 1 or 2 (the permanent
accounts) are unaffected by the closing process.
4-71
Serial Problem, SP 4 (Continued)

Part 2
BUSINESS SOLUTIONS
December 31, 2011
Debit
Credit
Cash.................................................................................. $ 48,372
Accounts receivable........................................................
5,668
Computer supplies..........................................................
580
Prepaid insurance...........................................................
1,665
Prepaid rent......................................................................
825
Office equipment.............................................................
8,000
Accumulated depreciationOffice equipment............

Computer equipment......................................................
400
20,000
Accumulated depreciationComputer equipment......
1,250
Accounts payable............................................................
1,100
Wages payable.................................................................
500
Unearned computer services revenue..........................
1,500
S. Rey, Capital.................................................................. _______
80,360
Totals................................................................................ $ 85,110
$ 85,110
4-72

[Instructor Note: Ledger includes all entries from prior three months. The Working
Papers shorten the solution by showing account balances as of December 31.]
General Ledger
Cash
Date
Oct.
Nov.
Dec.
Explanation
PR
1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31
Debit
45,000
4,800
1,400
4,633
2,208
3,950
1,500
5,625
3,000
4-73
Acct. No. 101

Credit
Balance
45,000
3,300
41,700
2,220
39,480
1,420
38,060
42,860
805
42,055
1,728
40,327
41,727
875
40,852
3,600
37,252
320
36,932
41,565
1,125
40,440
42,648
250
42,398
384
42,014
1,750
40,264
2,000
38,264
1,025
37,239
500
36,739
40,689
750
39,939
41,439
47,064
50,064
192
49,872
1,500
48,372

Date
Oct.
Nov.
Dec.
Date
Oct.
Nov.
Dec.
Date
Oct.
Dec.
Date
Oct.
Dec.
Date
Oct.
Date
Dec.
6
12
15
22
28
8
18
24
4
28
Accounts Receivable
Explanation
PR
Debit
4,800
1,400
5,208
5,668
3,950
Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1
Acct. No. 106

Credit
Balance
4,800
6,200
4,800
1,400
1,400
0
5,208
10,876
2,208
8,668
12,618
3,950
8,668
3,000
5,668
Debit
1,420
1,125
1,100
Acct. No. 126

Credit
Balance
1,420
2,545
3,645
3,065
580
Debit
2,220
Acct. No. 128

Credit
Balance
2,220
555
1,665
Debit
3,300
Acct. No. 131

Credit
Balance
3,300
2,475
825
Debit
8,000
Acct. No. 163

Credit
Balance
8,000
Accumulated DepreciationOffice Equipment

Acct. No. 164
Explanation
PR
Debit
Credit
Balance
31
400
400
4-74

Date
Oct.
Date
Dec.
Date
Oct.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Dec.
Date
Oct.
Nov.
Dec.
Computer Equipment
Explanation
PR
Debit
20,000
Acct. No. 167

Credit
Balance
20,000
Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Accounts Payable
Explanation
PR
Debit
3
8
15
1,420
Explanation
Wages Payable
PR
Debit
31
Acct. No. 236

Credit
Balance
1,500
1,500
S. Rey, Capital
Explanation
PR
Acct. No. 301

Credit
Balance
73,000
73,000
14,460
87,460
80,360
Closing
Closing
Debit
7,100
S. Rey, Withdrawals
Explanation
PR
31
30
31
31
Acct. No. 210

Credit
Balance
500
500
Unearned Computer Services Revenue

Explanation
PR
Debit
14
1
31
31
Acct. No. 201

Credit
Balance
1,420
1,420
0
1,100
1,100
Closing
4-75
Debit
3,600
2,000
1,500
Acct. No. 302

Credit
Balance
3,600
5,600
7,100
7,100
0

Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
Date
Oct.
Nov.
Dec.
Date
Dec.
Date
Dec.
Computer Services Revenue

Explanation
PR
Debit
Acct. No. 403

Credit
Balance
4,800
4,800
1,400
6,200
5,208
11,408
4,633
16,041
5,668
21,709
3,950
25,659
5,625
31,284
0
6
12
28
2
8
24
20
31
Closing
31
31
Depreciation ExpenseOffice Equipment

Acct. No. 612
Explanation
PR
Debit
Credit
Balance
400
400
Closing
400
0
31,284
Depreciation ExpenseComputer Equipment

Acct. No. 613
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
31
Closing
1,250
0
Wages Expense
Explanation
PR
31
30
10
31
31
Debit
875
1,750
750
500
Closing
Acct. No. 623

Credit
Balance
875
2,625
3,375
3,875
3,875
0
31
31
Insurance Expense
Explanation
PR
Debit
555
Closing
Acct. No. 637

Credit
Balance
555
555
0
Explanation
31
31
Rent Expense
PR
Closing
4-76
Debit
2,475
Acct. No. 640

Credit
Balance
2,475
2,475
0
Serial Problem, SP 4 (Concluded)

Date
Dec.
Date
Oct.
Dec.
Date
Nov.
Dec.
Date
Nov.
Dec.
Date
Oct.
Dec.
Date
Dec.
31
31
Computer Supplies Expense

Explanation
PR
Debit
3,065
Closing
Acct. No. 652

Credit
Balance
3,065
3,065
0
20
2
31
Advertising Expense
Explanation
PR
Debit
1,728
1,025
Closing
Acct. No. 655

Credit
Balance
1,728
2,753
2,753
0
Mileage Expense
Explanation
PR
1
28
29
31
Debit
320
384
192
Closing
Acct. No. 676

Credit
Balance
320
704
896
896
0
22
31
Miscellaneous Expense
Explanation
PR
Debit
250
Closing
Acct. No. 677

Credit
Balance
250
250
0
17
3
31
Repairs ExpenseComputer
Explanation
PR
Debit
805
500
Closing
Acct. No. 684

Credit
Balance
805
1,305
1,305
0
31
31
31
Income Summary
Explanation
PR
Debit
Closing
Closing
16,824
Closing
14,460
Acct. No. 901

Credit
Balance
31,284
31,284
14,460
0
4-77
Reporting in Action
BTN 4-1
1. The revenue items from its income statement must be identified, and
those would be credited to Income Summary as step 1 in the closing
entry process. For Research In Motions fiscal year ended February 27,
2010, its revenue items consist of ($ thousands): (1) total revenue of
$14,953,224, and (2) investment income of $28,640. Thus, its total
revenue that is closed to Income Summary is $14,981,864. (All amounts
are in thousands.)
2. The total expenses that would be debited to Income Summary as step 2
in the closing entry process must be computed. Research In Motions
total expenses for the fiscal year ended February 27, 2010, are (in
thousands):
Cost of sales...................................................................
$ 8,368,958
Research and development..........................................
964,841
Selling, marketing and administration.........................
1,907,398
Amortization...................................................................
310,357
Litigation.........................................................................
163,800
Provision for income taxes...........................................
809,366
Total expenses...............................................................
$12,524,720
3. The balance of Income Summary before it is closed as of February 27,
2010, equals the net income for Research In Motion of $2,457,144 ($
thousands).
This can also be computed from taking $14,981,864 from part 1 and
subtracting $12,524,720 from part 2.
4. From the cash flow statement, we see that Research In Motion paid no
cash dividends.
5. Solution depends on the financial statements accessed.
4-78
Comparative Analysis
1. Research In Motions current ratios:
Current year......... $5,813 / $2,432
Prior year.............. $4,842 / $2,115
BTN 4-2
= 2.39
= 2.29
Apples current ratios:

Current year......... $31,555 / $11,506 = 2.74
Prior year.............. $30,006 / $11,361 = 2.64
2. In both years, Apple has the higher current ratio (2.74 vs. 2.39 for the
current year; 2.64 vs. 2,29 in the prior year), suggesting a better ability
to pay short-term obligations. Overall, neither company is in immediate
danger of failing to make payment on short-term obligations.
3. Research In Motions current ratio improved, increasing from 2.29 to
2.39. RadioShacks current ratio improved from 2.64 to 2.74.
4. Apples current ratio is above (better than) the industry average for
both years, and Research In Motions is below (worse than) the industry
average for both years. However, neither company appears at risk of
failing to pay its current creditors.
4-79
Ethics Challenge
BTN 4-3
1. There are several courses of action that Tamira could have taken. Two
possibilities follow:
a. She could have consulted with the president and told him that
finalized financial statements would not be ready by the time of the
meeting. She could explain that delay in financial statement
preparation is a normal event given the need to wait for final
information to prepare accurate adjustments. Possibly the meeting
could be rescheduled or Tamira could have asked how the president
preferred her to proceed.
b. The estimation decision was not a bad choice in itself, but she
should have informed the president. Tamira probably should have
used less optimistic estimates instead of recording expenses on the
low side. Users of financial statements normally prefer knowing
worst-case scenarios over best-case outcomes. Use of estimates
gets the financial statements closer to their final form than ignoring
the adjustments completely.
2.
Students may offer one of the above alternatives or another response

they may think of, given the situation. Try to generate a discussion of
ethical concerns and the impact of her decisions on the well-being of
users (such as the bankers and the investors in the banks).
4-80
Communicating in Practice
TO:
FROM:
DATE:
SUBJECT:
BTN 4-4
_____________________
_____________________
______________________
CLARIFICATIONSOBJECTIVE OF THE CLOSING PROCESS
[Note: Following is a sample of what the memorandums contents might include.]
When we speak of closing the books or the closing process we are not
talking about ending or closing the business nor doing anything that reflects
this thinking in the financial statements. Let me use an analogy to explain the
concept of the closing process and then you will see the distinction more
clearly.
Scoreboards are used to temporarily hold information that will allow us to
determine who won or lost in an athletic game or event. When the athletic
event is over, the result of the game is permanently recorded elsewhere-probably in the teams record book. If the scoreboard was not cleared before
the start of a new game, the scores from the second game would be combined
with scores from the first game. As a result, the scoreboard would reflect data
or scores that were not relevant to either game. You can see that the
scoreboard must be zeroed-out to prepare it for accumulating data to
determine the outcome of the next game.
The revenue and expense accounts temporarily hold the information to
determine if the owner(s) won or lost in the game of business. Each fiscal
period should be viewed as a separate game. After the data in these accounts
has allowed us to determine if the owner(s) won or lost, in other words, the net
income or loss, these accounts must be cleared to accumulate data for the
next game or period. We record the score for the game of business, or the net
income or loss, in the permanent recordbook or the capital account. A win, or
net income, increases capital and a loss, or net loss, decreases capital.
I hope this memo clarifies the objective of the closing process.
[Note: The memorandum need not discuss the income summary account since the assignment
requires explaining the concept, not the procedure.]
4-81
Taking It to the Net
BTN 4-5
1. The Motley Fool states that a benchmark of 1.5 is generally regarded as

sufficient to meet near-term operating needs.
2. One should always check a companys current ratio (as well as any
other ratio) against its main competitors in a given industry. Industries
have their own norms as far as what values of current ratios make sense
and which do not.
3. A current ratio that is too high can suggest that a company is hoarding
assets instead of using them to effectively grow the businessthis is an
inefficient use of resources that can potentially impair long-term returns.
Teamwork in Action
BTN 4-6
[Note: Each team member will be working on a different component of the solution and will
ultimately combine information and verify the final check figures using the accounting equation.]
1. Accounts and adjusted balances to be extended to Balance Sheet columns:

Trial Balance
Account Title
Debit
Credit
Cash...................................$15,000
Accounts receivable.........
Supplies............................. 11,000
Prepaid insurance............. 2,000
Equipment......................... 24,000
Acc. deprecEquip..........
$ 6,000
Accounts payable.............
2,000
D. Noseworthy, Capital.....
31,000
D. Noseworthy,
Withdrawals..................... 5,000
Adjustments
Debit
Credit
(d) 500
(c) 7,000
(a) 1,200
(b) 3,000
Balance Sheet
Debit
Credit
$15,000
500
4,000
800
24,000
9,000
2,000
31,000
5,000
Total Assets = $44,300 - $9,000 = $35,300

(Cash + AR + Supplies + Prepaid Ins. + Equipment - Accum. Depreciation)
Total Liabilities = $2,000 (only accounts payable)
4-82
Teamwork in Action (Continued)

2. Adjusted revenue account balance:
Trial Balance
Title
Debit
Credit
Investigation Fees
Earned..........................................
32,000
Income
Statement
Debit
Credit
Adjustments
Debit
Credit
(d) 500
32,500
Closing entry:
Account Titles and Explanation
Investigation Fees Earned
Income Summary
To close revenue accounts to Income Summary
Debit
32,500
Credit
32,500
3. Adjusted balances of expense accounts:

Title
Rent Expense
Insurance Expense
Supplies Expense
Trial Balance
Debit
Credit
14,000
Adjustments
Debit
Credit
(a) 1,200
(b) 3,000
(c) 7,000
Income
Statement
Debit
Credit
14,000
1,200
3,000
7,000
Closing entry:
Income Summary
Rent Expense
Insurance Expense
Supplies Expense
To close expense accounts to Income Summary
4-83
Debit
25,200
Credit
14,000
1,200
3,000
7,000
Teamwork in Action (Continued)

4.
(4)
D. Noseworthy, Capital
5,000 31,000
7,300 (3)
33,300 Ending
(2)
(3)
Income Summary
25,200
32,500 (1)
7,300
Third and Fourth closing entries:

Income Summary
To close Income Summary to Capital
D. Noseworthy, Withdrawals
To close Withdrawals to Capital
Credit
7,300
5,000
5,000
5. Proving the accounting equation:

ASSETS = LIABILITIES + OWNERS EQUITY
$35,300 = $2,000
Debit
7,300
+ $ 33,300
4-84
Entrepreneurial Decision
BTN 4-7
1. A classified balance sheet classifies liabilities into current and noncurrent. The current liabilities are those that are due in the short-term,
and must be paid soon. In addition, some assets are also classified as
current. These assets are those that can be used to satisfy the current
liabilities. Keith can use this information to calculate his current ratio.
This will give him an idea of how liquid his firm is and how easy it will
be for him to satisfy short-term liabilities.
2. To better understand his companys operations, he must make sure that
all revenues earned in a particular accounting period are included in
that periods income statement. In addition, he must match his
expenses to the revenues. Without closing entries, revenues and
expenses would continue to accumulate from one period to the next.
Closing entries transfer the balances in the temporary revenues,
expenses, and owners withdrawals to Keiths permanent equity
account. These temporary accounts then start each accounting period
with a zero balance. These temporary account balances then reflect
only the current accounting periods activities.
3. Closing procedures will accomplish two objectives for Keith. First, the
temporary accounts will be reset to zero and be readied for use in the
next accounting period. Second, the profitability of the period will be
updated to the companys equity account.
Hitting the Road
BTN 4-8
There is no formal solution to this field activity. The instructor may wish to
tally students findings to show results across companies as to use of work
sheets, software preferences, and time it takes to prepare finalized annual
financial statements.
Global Decision
BTN 4-9
1. Current ratio
Current year: 23,613 / 15,188 = 1.55
Prior year:
24,470 / 20,355 = 1.20
2. Analysis: Nokias current ratio increased (improved) for the current year.
This puts Nokia in an improved liquidity position (meaning it is more able
to meet current obligations).
4-85

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Chapter 04 - Completing the Accounting Cycle

Closing entries affect temporary accounts: revenues, expenses, withdrawals, and

Chapter 04 - Completing the Accounting Cycle

Unearned revenue is reported as a liabilityusually a current liability.

Chapter 04 - Completing the Accounting Cycle

Analyzing transactions and events.

Journalizing transactions and events.

Posting the journal entries.

Preparing the unadjusted trial balance.

Journalizing and posting adjusting entries.

Preparing the adjusted trial balance.

Preparing the financial statements.

Journalizing and posting closing entries.

Preparing the post-closing trial balance.

Quick Study 4-2 (10 minutes)

Temporary accounts accumulate data related to one accounting period.

Permanent accounts report on activities related to one or more future

Temporary accounts include all income statement accounts, the

Permanent accounts generally consist of all balance sheet accounts,

Chapter 04 - Completing the Accounting Cycle

Quick Study 4-3 (5 minutes)

Current ratio = $25,300 / $14,000 = 1.81

Quick Study 4-4 (10 minutes)

Quick Study 4-5 (5 minutes)

Chapter 04 - Completing the Accounting Cycle

Quick Study 4-6 (5 minutes)

Quick Study 4-7 (10 minutes)

Quick Study 4-8 (20 minutes)

Wages expense............. 5,000

Balance Sheet &

Quick Study 4-9 (15 minutes)

To close the revenue account.

To close the expense accounts.

To close Income Summary.

31 L. Avril, Capital ............................................

To close the withdrawals account.

Quick Study 4-10 (5 minutes)

To reverse accrued revenue.

To record collection of management fees.

Quick Study 4-12 (10 minutes)

The closing process is identical under U.S. GAAP and IFRS.

To close the revenue account.

To close the expense accounts.

To close income summary.

M. Mallon, Capital .........................................

To close the withdrawals account.

Exercise 4-2 (40 minutes)

Closing Entry Information

106 Accounts receivable......... 24,000

153 Equipment...................... 41,000

154 Accumulated depreciationEquipment........

193 Franchise........................ 30,000

201 Accounts payable............

209 Salaries payable...............

233 Unearned fees.................

301 H. Sundance, Capital........

611 Depreciation expense

622 Salaries expense.............. 31,500

640 Rent expense.................. 12,000

677 Miscellaneous expense....

302 H. Sundance, Withdrawals. 14,400

901 Income summary.............