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ASSIGNMENT CHARACTERISTICS TABLE
9A Analyze errors and their effects on the trial balance. Moderate 30–40
9B Analyze errors and their effects on the trial balance Moderate 30–40
3-2 Copyright © 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only)
ANSWERS TO QUESTIONS
1. The system of collecting and processing transaction data and communicating financial informa-
tion to decision makers is known as the accounting information system. The basic steps in the
recording process are: (1) Analyze each transaction in terms of its effect on the accounts (2) Enter
the transaction information in a journal (book of original entry) (3) Transfer the information to the
appropriate accounts in the ledger (book of accounts).
2. Yes, a business can enter into a transaction in which only the left side of the accounting equation
is affected. An example would be a transaction where an increase in one asset is offset by a
decrease in another asset. An increase in the equipment account which is offset by a decrease in
the cash account is a specific example.
3. Accounting transactions are the economic events of the enterprise recorded by accountants
because they affect the basic accounting equation.
(a) The death of a major stockholder of the company is not an accounting transaction as it does
not affect the basic accounting equation.
(b) Supplies purchased on account is an accounting transaction because it affects the basic
accounting equation.
(c) An employee being fired is not an accounting transaction as it does not affect the basic
accounting equation.
(d) Paying a cash dividend to stockholders is an accounting transaction as it does affect the
basic accounting equation.
5. An account consists of three parts: (a) the title, (b) the left or debit side, and (c) the right or credit
side. Because the alignment of these parts resembles the letter T, it is referred to as a T account.
6. Disagree. The terms debit and credit are synonymous with left and right, respectively.
7. Steve is incorrect. The double-entry system merely records the dual (two-sided) effect of a transac-
tion on the accounting equation. A transaction is not recorded twice; it is recorded once, with a
dual effect. In other words, for each transaction, debits must equal credits.
8. Marie is incorrect. A debit balance only means that debit amounts exceed credit amounts in an
account. Conversely, a credit balance only means that credit amounts are greater than debit
amounts in an account. Thus, a debit or credit balance is neither favorable or unfavorable.
Copyright © 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 3-3
Questions Chapter 3 (Continued)
14. Normal balances for accounts in Tootsie Roll’s financial statements: Accounts Receivable—debit;
Income Taxes Payable—credit; Sales—credit; Selling, Marketing, and Administrative Expense—
debit.
17. (a) Yes, debits and credits could be recorded directly in the ledger.
(b) The advantages of using the journal are:
(1) It discloses in one place the complete effect of a transaction.
(2) It provides a chronological record of all transactions.
(3) It helps to prevent or locate errors because the debit and credit amounts for each entry
can be readily compared.
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Questions Chapter 3 (Continued)
19. (a) The entire group of accounts maintained by a company, including all the asset, liability, and
stockholders’ equity accounts, is referred to collectively as the ledger.
(b) The chart of accounts is important, particularly for a company that has a large number of
accounts, because it helps organize the accounts and identify their location in the ledger.
20. A trial balance is a list of accounts and their balances at a given time. The primary purpose of a
trial balance is to prove the mathematical equality of debits and credits after all journalized trans-
actions have been posted. A trial balance also facilitates the discovery of errors in journalizing
and posting. In addition, it is useful in preparing financial statements.
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SOLUTIONS TO BRIEF EXERCISES
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BRIEF EXERCISE 3-5
2 Equipment....................................................................... 1,100
Accounts Payable................................................ 1,100
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BRIEF EXERCISE 3-8
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BRIEF EXERCISE 3-10
Accounts Receivable
5/5 3,800 5/12 1,900
TROWMAN COMPANY
Trial Balance
June 30, 2010
Debit Credit
Cash .......................................................................................... $ 5,400
Accounts Receivable........................................................... 3,000
Equipment ............................................................................... 15,000
Accounts Payable................................................................. $ 3,000
Common Stock ...................................................................... 18,000
Dividends................................................................................. 1,200
Service Revenue ................................................................... 8,600
Salaries Expense .................................................................. 4,000
Rent Expense ......................................................................... 1,000
$29,600 $29,600
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BRIEF EXERCISE 3-12
PETTENGILL COMPANY
Trial Balance
December 31, 2010
Debit Credit
Cash.......................................................................................... $20,800
Prepaid Insurance ................................................................ 3,500
Accounts Payable ................................................................ $ 2,500
Unearned Revenue .............................................................. 1,800
Common Stock...................................................................... 10,000
Retained Earnings................................................................ 6,400
Dividends ................................................................................ 5,000
Service Revenue................................................................... 25,600
Salaries Expense.................................................................. 14,600
Rent Expense......................................................................... 2,400
$46,300 $46,300
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SOLUTIONS TO DO IT! REVIEW EXERCISES
DO IT! 3-1
DO IT! 3-2
Josh would likely need the following accounts in which to record the trans-
actions necessary to ready his photography studio for opening day:
DO IT! 3-3
1. Cash....................................................................................... 8,000
Common Stock.......................................................... 8,000
2. Photography Supplies..................................................... 1,100
Cash.............................................................................. 400
Accounts Payable .................................................... 700
3. No entry because no transaction has occurred.
DO IT! 3-4
Cash
4/1 1,600 4/16 600
4/3 3,400 4/20 300
4/30 4,100
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SOLUTIONS TO EXERCISES
EXERCISE 3-1
EXERCISE 3-2
$30,000 $30,000
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EXERCISE 3-3
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EXERCISE 3-5
WITTEN COMPANY
Income Statement
For the Month Ended August 31, 2010
Revenues
Service revenue ................................................................. $9,800
Expenses
Salaries expense ............................................................... $3,000
Rent expense...................................................................... 800
Utilities expense ................................................................ 500
Total expenses .......................................................... 4,300
Net income ................................................................................... $5,500
WITTEN COMPANY
Retained Earnings Statement
For the Month Ended August 31, 2010
WITTEN COMPANY
Balance Sheet
August 31, 2010
Assets
Current Assets:
Cash............................................................................................. $15,800
Accounts receivable .............................................................. 4,950
Supplies ..................................................................................... 750
Total current assets ...................................................... 21,500
Office equipment..................................................................... 5,000
Total assets...................................................................... $26,500
Liabilities and Stockholders’ Equity
Current Liabilities
Accounts payable .......................................................... $ 3,000
Stockholders’ equity
Common stock................................................................ $20,000
Retained earnings.......................................................... 3,500 23,500
Total liabilities and stockholders’ equity ...... $26,500
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3-16
(a)
EXERCISE 3-6
(b)
General Journal
Trans. Account Titles Debit Credit
1. Cash .............................................................................. 15,000
Common Stock................................................. 15,000
2. Equipment................................................................... 8,000
Cash ..................................................................... 8,000
EXERCISE 3-7
2 No accounting transaction.
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EXERCISE 3-7 (Continued)
EXERCISE 3-8
General Journal
Date Account Titles Debit Credit
Oct. 1 Cash ............................................................................ 30,000
Common Stock............................................... 30,000
2 No entry.
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EXERCISE 3-9
(a)
Cash Accounts Payable
Oct. 1 30,000 Oct. 27 700 Oct. 27 700 Oct. 3 4,600
10 140 30 3,500 Bal. 3,900
Bal. 25,940
Common Stock
Accounts Receivable Oct. 1 30,000
Oct. 6 10,800 Bal. 30,000
Bal. 10,800
Service Revenue
Office Furniture Oct. 6 10,800
Oct. 3 4,600 10 140
Bal. 4,600 Bal. 10,940
Salaries Expense
Oct. 30 3,500
Bal. 3,500
Debit Credit
Cash................................................................................. $25,940
Accounts Receivable ................................................. 10,800
Office Furniture............................................................ 4,600
Accounts Payable ....................................................... $ 3,900
Common Stock............................................................. 30,000
Service Revenue.......................................................... 10,940
Salaries Expense......................................................... 3,500
$44,840 $44,840
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EXERCISE 3-10
$22,500.. $22,500
(b)
General Journal J1
Date Account Titles Debit Credit
Sept. 1 Cash........................................................................... 20,000
Common Stock ............................................. 20,000
30 Dividends................................................................. 500
Cash.................................................................. 500
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EXERCISE 3-10 (Continued)
(c)
Cash Common Stock
9/1 20,000 9/5 2,000 9/1 20,000
9/25 5,000 Bal. 20,000
9/30 500
Bal. 12,500
Dividends
9/30 500
Equipment Bal. 500
9/5 10,000
Bal. 10,000
Accounts Payable
9/25 5,000 9/5 8,000
Bal. 3,000
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EXERCISE 3-11
(a)
General Journal
Date Account Titles and Explanation Debit Credit
Apr. 1 Cash ............................................................................ 15,000
Common Stock............................................... 15,000
(Issued stock for cash)
4 Supplies..................................................................... 5,200
Accounts Payable.......................................... 5,200
(Purchased supplies on account)
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EXERCISE 3-11 (Continued)
Debit Credit
Cash................................................................................. $12,700
Accounts Receivable ................................................. 2,600
Supplies.......................................................................... 5,200
Accounts Payable ....................................................... $ 1,700
Unearned Revenue ..................................................... 600
Common Stock............................................................. 15,000
Service Revenue.......................................................... 4,100
Salaries Expense......................................................... 900
$21,400 $21,400
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EXERCISE 3-12
(a)
Cash Notes Payable
Aug. 1 5,000 Aug. 12 1,200 Aug. 12 5,000
10 1,700 Bal. 5,000
31 600
Bal. 6,100
Common Stock
Aug. 1 5,000
Accounts Receivable Bal. 5,000
Aug. 25 3,100 Aug. 31 600
Bal. 2,500
Service Revenue
Aug. 10 1,700
Office Equipment 25 3,100
Aug. 12 6,200 Bal. 4,800
Bal. 6,200
Debit Credit
Cash ................................................................................ $ 6,100
Accounts Receivable................................................. 2,500
Office Equipment ........................................................ 6,200
Notes Payable .............................................................. $ 5,000
Common Stock ............................................................ 5,000
Service Revenue ......................................................... 4,800
$14,800 $14,800
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EXERCISE 3-13
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EXERCISE 3-13 (Continued)
Debit Credit
Cash ................................................................................ $15,600
Accounts Receivable................................................. 920
Supplies ......................................................................... 220
Furniture ........................................................................ 3,000
Notes Payable .............................................................. $ 8,000
Accounts Payable....................................................... 1,500
Common Stock ............................................................ 9,000
Dividends....................................................................... 300
Service Revenue ......................................................... 2,470
Store Wages Expense ............................................... 500
Supplies Expense....................................................... 180
Rent Expense ............................................................... 250
$20,970 $20,970
EXERCISE 3-14
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EXERCISE 3-15
Debit Credit
Cash ($98,450 – Debit total without Cash
$85,246)....................................................................... $13,204
Accounts Receivable .................................................. 13,400
Prepaid Insurance........................................................ 1,800
Delivery Equipment ..................................................... 59,360
Accounts Payable ........................................................ $ 8,400
Salaries Payable ........................................................... 900
Notes Payable due 2013 ............................................ 28,450
Common Stock ............................................................. 40,000
Retained Earnings ....................................................... 5,200
Dividends........................................................................ 700
Service Revenue........................................................... 15,500
Salaries Expense.......................................................... 7,428
Gas and Oil Expense .................................................. 758
Repair Expense............................................................. 1,200
Insurance Expense...................................................... 600
$98,450 $98,450
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EXERCISE 3-15 (Continued)
Revenues
Service revenue.......................................................... $15,500
Expenses
Salaries expense........................................................ $7,428
Repair expense........................................................... 1,200
Gas and oil expense ................................................. 758
Insurance expense .................................................... 600
Total expenses ....................................................... 9,986
Net income ....................................................................... $ 5,514
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EXERCISE 3-15 (Continued)
Assets
Current Assets
Cash ................................................................................ $13,204
Accounts receivable.................................................. 13,400
Prepaid insurance ...................................................... 1,800
Total current assets............................................... $28,404
Delivery equipment ........................................................ 59,360
Total assets .............................................................. $87,764
Copyright © 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 3-29
EXERCISE 3-16
(a) (b)
Normal Balance Balance Sheet or
Account Debit or Credit Income Statement
Accounts payable Credit Balance sheet
Accounts receivable Debit Balance sheet
Common stock Credit Balance sheet
Depreciation expense Debit Income statement
Interest expense Debit Income statement
Interest income Credit Income statement
Inventories Debit Balance sheet
Prepaid expenses Debit Balance sheet
Property and equipment Debit Balance sheet
Revenues Credit Income statement
EXERCISE 3-17
1. Financing activity
2. Operating activity
3. Operating activity
4. Non-cash event
5. Financing activity
6. Non-cash event
7. Operating activity
8. Investing activity
9. Non-cash event
EXERCISE 3-18
1. Financing activity
2. Financing activity
3. Investing activity
4. Operating activity
5. Non-cash event
6. Operating activity
7. Non-cash event
8. Operating activity
9. Financing activity
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(a) FLINT HILLS TRAVEL AGENCY INC.
5. –500 +$500
8. –200 –200
SOLUTIONS TO PROBLEM
$32,300 $32,300
OR
Revenues.............................................................................. $10,000
Less: Expenses................................................................. 2,300
Net income........................................................................... $ 7,700
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(a) KUHLMANN CONSULTING INC.
20 –500 –500
PROBLEM 3-2A
23 +1,500 –1,500
26 +5,000 +$5,000
$23,300 $23,300
Revenues
Service revenue ($1,000 + $4,200)................... $5,200
Expenses
Salaries expense................................................... $2,500
Rent expense ......................................................... 700
Utilities expense.................................................... 150
Advertising expense............................................ 150
Total expenses ............................................. 3,500
Net income....................................................................... $1,700
Assets
Current assets
Cash.......................................................................... $18,100
Accounts receivable............................................ 2,700
Supplies................................................................... 500
Total current assets.................................... $21,300
Office equipment .................................................. 2,000
Total assets ................................................... $23,300
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(a) DICK REBER INC.
7 +5,000 +$5,000
$7,050 + $3,400 + $500 + $9,000 = $5,000 + $5,550 + $6,200 + $1,600 + $5,400 – $3,100 – $700
$19,950 $19,950
Revenues
Service revenue......................................................... $5,400
Expenses
Salaries expense....................................................... $1,400
Rent expense ............................................................. 900
Utilities expense........................................................ 450
Advertising expense................................................ 350
Total expenses ................................................. 3,100
Net income........................................................................... $2,300
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PROBLEM 3-3A (Continued)
Assets
Current assets
Cash............................................................................. $7,050
Accounts receivable............................................... 3,400
Supplies...................................................................... 500
Total current assets....................................... $10,950
Office equipment ..................................................... 9,000
Total assets ...................................................... $19,950
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PROBLEM 3-4A
10 Equipment................................................................. 4,700
Accounts Payable.......................................... 4,700
(Purchased equipment on account)
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PROBLEM 3-4A (Continued)
31 Cash............................................................................. 800
Golf Revenue ................................................... 800
(Received cash for revenue earned)
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PROBLEM 3-5A
(a)
1 No entry—not a transaction.
3 Supplies..................................................................... 1,000
Accounts Payable.......................................... 1,000
(Purchased supplies on account
from Spring Green Company)
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PROBLEM 3-5A (Continued)
(b)
Cash Salaries Expense
4/1 15,000 4/2 900 4/30 1,500
4/11 500 4/30 1,500 Bal. 1,500
4/20 2,300 4/30 300
Bal. 15,100
Rent Expense
4/2 900
Accounts Receivable Bal. 900
4/10 1,500
Bal. 1,500
Supplies
4/3 1,000
Bal. 1,000
Accounts Payable
4/30 300 4/3 1,000
Bal. 700
Unearned Revenue
4/11 500
Bal. 500
Common Stock
4/1 15,000
Bal. 15,000
Service Revenue
4/10 1,500
4/20 2,300
Bal. 3,800
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PROBLEM 3-5A (Continued)
Debit Credit
Cash ................................................................................ $15,100
Accounts Receivable................................................. 1,500
Supplies ......................................................................... 1,000
Accounts Payable....................................................... $ 700
Unearned Revenue..................................................... 500
Common Stock ............................................................ 15,000
Service Revenue ......................................................... 3,800
Salaries Expense ........................................................ 1,500
Rent Expense ............................................................... 900
$20,000 $20,000
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PROBLEM 3-6A
Unearned Revenue
10/17 600 10/1 Bal. 900
Bal. 300
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PROBLEM 3-6A (Continued)
(b)
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PROBLEM 3-6A (Continued)
Debit Credit
Cash................................................................................. $ 5,900
Accounts Receivable ................................................. 6,400
Supplies.......................................................................... 2,100
Equipment...................................................................... 8,000
Accounts Payable ....................................................... $ 3,600
Unearned Revenue ..................................................... 300
Common Stock............................................................. 15,000
Dividends ....................................................................... 300
Service Revenue.......................................................... 5,700
Salaries Expense......................................................... 1,400
Utilities Expense.......................................................... 500
$24,600 $24,600
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PROBLEM 3-7A
TITUS CO.
Trial Balance
June 30, 2010
Debit Credit
Cash ($3,090 – $590 + $950).................................... $ 3,450
Accounts Receivable* ............................................... 3,820
Supplies ($800 – $340) .............................................. 460
Equipment ($3,000 + $340) ...................................... 3,340
Accounts Payable ($3,666 – $206 – $260)........... $ 3,200
Unearned Revenue..................................................... 1,200
Common Stock ............................................................ 9,000
Dividends ($800 + $600)............................................ 1,400
Service Revenue ......................................................... 3,480
Salaries Expense ($3,600 + $500 – $600) ............ 3,500
Office Expense ............................................................ 910
$16,880 $16,880
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PROBLEM 3-8A
Salaries Expense
Accounts Payable 3/31 3,800
3/10 10,600 3/1 Bal. 12,000 Bal. 3,800
3/2 8,000
Bal. 9,400
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PROBLEM 3-8A (Continued)
(b)
3 No entry—not a transaction.
9 Cash............................................................................ 9,200
Admission Revenue ..................................... 9,200
(Received cash for admissions)
11 No entry—not a transaction.
20 Cash............................................................................ 7,100
Admission Revenue ..................................... 7,100
(Received cash for admissions)
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PROBLEM 3-8A (Continued)
Debit Credit
Cash............................................................................. $ 31,750
Accounts Receivable ............................................. 750
Land ............................................................................. 38,000
Buildings .................................................................... 22,000
Equipment.................................................................. 16,000
Accounts Payable ................................................... $ 9,400
Common Stock......................................................... 80,000
Admission Revenue ............................................... 36,300
Concession Revenue ............................................. 1,500
Advertising Expense .............................................. 900
Film Rental Expense .............................................. 14,000
Salaries Expense..................................................... 3,800
$127,200 $127,200
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PROBLEM 3-9A
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(a) HERMESCH WINDOW WASHING INC.
2. –7,000 +$7,000
$23,760 $23,760
OR
Revenues.............................................................................. $6,800
Less: Expenses................................................................. 3,290
Net income........................................................................... $3,510
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(a) SPEEDY SERVICE INC.
12 +$150 +$150
15 +750 –750
23 –800 –800
29 –150 –150
$29,300 $29,300
Revenues
Service revenue ($2,400 + $1,500)................... $3,900
Expenses
Salaries expense................................................... $750
Rent expense ......................................................... 500
Utilities expense.................................................... 250
Gasoline expense ................................................. 200
Total expenses ............................................. 1,700
Net income....................................................................... $2,200
Assets
Current Assets
Cash .......................................................................... $12,500
Accounts receivable ............................................ 1,650
Supplies ................................................................... 150
Total current assets .................................... $14,300
Delivery van..................................................................... 15,000
Total assets ............................................................ $29,300
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(a) GREY COMPANY
1. –3,400 –3,400
2. +1,600 –1,600
8. +5,000 +$5,000
$10,950 + $7,300 + $600 + $10,100 = $5,000 + $4,470 + $12,000 + $700 + $9,500 – $2,120 – $600
3-55
PROBLEM 3-3B (Continued)
Revenues
Service revenue............................................................. $9,500
Expenses
Salaries expense........................................................... $900
Rent expense ................................................................. 800
Advertising expense.................................................... 250
Utilities expense............................................................ 170
Total expenses ..................................................... 2,120
Net income............................................................................... $7,380
GREY COMPANY
Retained Earnings Statement
For the Month Ended September 30, 2010
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PROBLEM 3-3B (Continued)
GREY COMPANY
Balance Sheet
September 30, 2010
Assets
Current assets
Cash........................................................................... $10,950
Accounts receivable............................................. 7,300
Supplies.................................................................... 600
Total current assets..................................... $18,850
Office equipment ................................................... 10,100
Total assets .................................................... $28,950
Copyright © 2009 John Wiley & Sons, Inc. Kimmel, Financial Accounting, 5/e, Solutions Manual (For Instructor Use Only) 3-57
PROBLEM 3-4B
12 No entry—not a transaction.
20 Cash............................................................................ 5,000
Admission Revenue ..................................... 5,000
(Received cash for services
rendered)
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PROBLEM 3-4B (Continued)
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PROBLEM 3-5B
(a)
2 No entry—not a transaction.
3 Supplies..................................................................... 800
Accounts Payable.......................................... 800
(Purchased supplies on account)
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PROBLEM 3-5B (Continued)
(b)
Cash Salaries Expense
5/1 50,000 5/7 1,100 5/31 2,000
5/12 4,200 5/31 2,000 Bal. 2,000
5/17 3,600 5/31 400
Bal. 54,300
Rent Expense
5/7 1,100
Accounts Receivable Bal. 1,100
5/11 1,000
Bal. 1,000
Supplies
5/3 800
Bal. 800
Accounts Payable
5/31 400 5/3 800
Bal. 400
Unearned Revenue
5/12 4,200
Bal. 4,200
Common Stock
5/1 50,000
Bal. 50,000
Service Revenue
5/11 1,000
5/17 3,600
Bal. 4,600
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PROBLEM 3-5B (Continued)
Debit Credit
Cash ................................................................................ $54,300
Accounts Receivable................................................. 1,000
Supplies ......................................................................... 800
Accounts Payable....................................................... $ 400
Unearned Revenue..................................................... 4,200
Common Stock ............................................................ 50,000
Service Revenue ......................................................... 4,600
Salaries Expense ........................................................ 2,000
Rent Expense ............................................................... 1,100
$59,200 $59,200
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PROBLEM 3-6B
Equipment
7/1 Bal. 25,950 Salaries Expense
Bal. 25,950 7/9 2,100
7/30 3,114
Bal. 5,214
Accounts Payable
7/14 10,750 7/1 Bal. 15,800
7/17 720 Utilities Expense
Bal. 5,770 7/30 1,767
Bal. 1,767
Unearned Revenue
7/1 Bal. 1,730
Bal. 1,730
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PROBLEM 3-6B (Continued)
(b)
11 Cash............................................................................ 6,100
Dry Cleaning Revenue ................................. 6,100
(Received cash for services
provided)
17 Supplies..................................................................... 720
Accounts Payable ......................................... 720
(Purchased supplies on account)
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PROBLEM 3-6B (Continued)
Debit Credit
Cash................................................................................. $ 5,198
Accounts Receivable ................................................. 10,047
Supplies.......................................................................... 4,232
Equipment...................................................................... 25,950
Accounts Payable ....................................................... $ 5,770
Unearned Revenue ..................................................... 1,730
Common Stock............................................................. 35,000
Dividends ....................................................................... 400
Dry Cleaning Revenue ............................................... 10,800
Repair Expense............................................................ 492
Salaries Expense......................................................... 5,214
Utilities Expense.......................................................... 1,767
$53,300 $53,300
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PROBLEM 3-7B
SCHUMAKER COMPANY
Trial Balance
May 31, 2010
Debit Credit
Cash ($6,340 + $350 – $405).............................................. $ 6,285
Accounts Receivable ($2,750 – $180 – $240) .............. 2,330
Prepaid Insurance ($700 + $100) ..................................... 800
Supplies ($0 + $350) ............................................................ 350
Equipment ($8,000 – $350) ................................................ 7,650
Accounts Payable ($4,100 – $100 + $350 – $240) ...... $ 4,110
Property Taxes Payable ..................................................... 750
Common Stock ($5,700 + $800) ....................................... 6,500
Retained Earnings................................................................ 6,000
Dividends ($0 + $800).......................................................... 800
Service Revenue ($7,690 + $270) .................................... 7,960
Salaries Expense ($4,200 + $400) ................................... 4,600
Advertising Expense ($1,100 + $405)............................. 1,505
Property Tax Expense ($900 + $100) ............................. 1,000
$25,320 $25,320
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PROBLEM 3-8B
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PROBLEM 3-8B (Continued)
(b)
3 No entry—not a transaction.
9 Cash............................................................................ 4,900
Admission Revenue ..................................... 4,900
(Received cash for admissions)
11 No entry—not a transaction.
25 Cash............................................................................ 3,000
Admission Revenue ..................................... 3,000
(Received cash for admissions)
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PROBLEM 3-8B (Continued)
Debit Credit
Cash............................................................................. $ 7,010
Accounts Receivable ............................................. 170
Prepaid Rentals........................................................ 1,000
Land ............................................................................. 10,000
Buildings .................................................................... 8,000
Equipment.................................................................. 6,000
Accounts Payable ................................................... $ 2,000
Mortgage Payable.................................................... 6,000
Common Stock......................................................... 20,000
Admission Revenue ............................................... 7,900
Concession Revenue ............................................. 340
Advertising Expense .............................................. 460
Film Rental Expense .............................................. 1,700
Salaries Expense..................................................... 1,900
$36,240 $36,240
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PROBLEM 3-9B
(a) Correct: 2, 7
Incorrect: 1, 3, 4, 5, 6, 8
(b)
Error (1) In Balance (2) Difference (3) Larger Column
1. No $270 Credit
3. No $880 Credit
4. Yes None N/A
5. Yes None N/A
6. Yes None N/A
8. No $7,000 Credit
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BYP 3-1 FINANCIAL REPORTING PROBLEM
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BYP 3-2 COMPARATIVE ANALYSIS PROBLEM
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BYP 3-3 RESEARCH CASE
(a) There are 15 items listed in this section. Students ranking of the top
three will vary. Their explanations for giving particular items high rank-
ings should provide a basis for good classroom discussion. An addi-
tional activity would be to apply these criteria to an actual annual report.
(b) The answers to this question will vary depending on the year. In 2006
the companies with the highest ranked annual reports were: Tellabs,
Inc., Manitowoc Co., Inc., Tyson Foods, TD Bank Financial Group, MDU
Resources, Scotiabank, F. Hoffmann-La Roche.
(c) The annual report is the primary mechanism for a company to com-
municate its result and financial position to outsiders. If outsiders think
that the company has made its best effort to communicate this infor-
mation effectively they may have more confidence in the result, and
may feel more comfortable relying on it to make decisions. On the
other hand, if outsiders feel that the company did not do its best to
communicate its results in an understandable fashion, or even tried to
conceal things, then they will be reluctant to rely on the annual report
as an information source.
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BYP 3-4 INTERPRETING FINANCIAL STATEMENTS
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BYP 3-5
(a) One advantage of using U.S. GAAP is that the U.S. financial markets are
the largest in the world, and by reporting under U.S. GAAP a company
is making it easier for these investors to evaluate the company. Also,
U.S. GAAP is widely respected as being a well designed approach to
financial reporting. A disadvantage of using U.S. GAAP for a foreign
company is that converting to U.S. GAAP will be costly. It will normally
require that the company keep records using the standards of its home
country, as well as U.S. GAAP.
(b) While there are many similarities between U.S. and Canadian standards,
some differences do exist. Sometimes these differences can result in
materially different results. Often it is not possible for analysts to make
adjustments to convert from one reporting model to another because
financial reports don’t typically provide enough detail to make such a
conversion. Therefore, making comparisons of companies that use
different reporting models can be time consuming, costly, and risky.
(c) Even if companies report financial information using the same GAAP,
in this case Canadian, it is still possible that they will apply the rules
differently. The application of GAAP in any country requires considerable
judgment. One company might apply the rules in a way that tends to
result in higher net income, while the other company might apply the rules
in a way that results in lower net income. Thus, even if both companies
use Canadian GAAP, significant problems can still arise when comparing
the results of the two companies.
(d) Despite the issues raised in part (c), the reality is that it is much easier to
compare the results of companies that use GAAP of the same country;
e.g., if both use U.S. standards or both use Canadian standards. For
example, under U.S. GAAP companies can choose different ways to
account for inventory, but U.S. GAAP also requires disclosures that
make comparison of companies that choose different methods easier.
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BYP 3-6 FINANCIAL ANALYSIS ON THE WEB
(a) CPA stands for Certified Public Accountant. CPAs work in public
accounting, business and industry, government, and education.
(d) Salary ranges are: $52,000 – $62,250 during the first three years for a
CPA at a large firm;
$252,500 – $358,750 for Chief Financial Officer (CFO) & Treasurer at a
large corporation.
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BYP 3-7 GROUP DECISION CASE
5 Correct.
7 Cash........................................................................... 500
Unearned Revenue....................................... 500
20 Cash........................................................................... 154
Riding Revenue............................................. 154
31 Veterinary Expense............................................... 75
Accounts Payable ........................................ 75
(b) The error in the entries of May 14 and May 20 would prevent the trial
balance from balancing.
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BYP 3-8 COMMUNICATION ACTIVITY
In the first transaction, bills totaling $6,000 were sent to customers for
services provided. Therefore, the asset Accounts Receivable is increased
$6,000 and the revenue Service Revenue is increased $6,000. Debits increase
assets and credits increase revenues, so the journal entry is:
The $6,000 amount is then posted to the debit side of the general ledger
account Accounts Receivable and to the credit side of the general ledger
account Service Revenue.
The $2,000 amount is then posted to the debit side of the general ledger
account Salaries Expense and to the credit side of the general ledger
account Cash.
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BYP 3-9 ETHICS CASE
(b) By adding $1,000 to the Equipment account, that account total is inten-
tionally misstated. By not locating the error causing the imbalance,
some other account may also be misstated by $1,000. If the amount of
$1,000 is determined to be immaterial, and the intent is not to commit
fraud (cover up an embezzlement or other misappropriation of assets),
Monica’s action might not be considered unethical in the preparation of
interim financial statements. However, if Monica is violating a company
accounting policy by her action, then she is acting unethically.
1. Miss the deadline but find the error causing the imbalance.
3. Do as she did and locate the error later, making the adjustment in
the next quarter.
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BYP 3-10 ETHICS CASE
(a) Employees in the rail unit accelerated revenue in each of the fourth
quarters from 2000 to 2003. That is, revenue that should have been
reported in the first quarter of a year was instead reported in the fourth
quarter of the previous year.
(b) One possible motivation for engaging in this activity is that bonuses
are frequently based on annual results. If it appeared that the rail unit
was not going to meet the performance level required for bonuses, the
employees may have shifted the revenue recognition forward on these
sales in order to boost annual results to meet performance targets.
(c) The employees were fired. In addition, the matter was being investigated
by the Securities and Exchange Commission (SEC).
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BYP 3-11 ALL ABOUT YOU ACTIVITY
(a) By taking out the bank loan your friend has incurred a liability. You do
not have a liability unless your friend defaults, or unless it becomes
clear that he will default. The loan application may, however, require you
to disclose any guarantees that you have signed, since they represent
potential liabilities.
(c) Losing your job would not create a financial liability, although it would
most certainly reduce your revenues. You are obviously concerned that
you might lose your job, but you don’t have specific information that
would suggest that it will happen. Therefore, you probably don’t have
an obligation to disclose this information to the bank. However, unless
you are relatively certain that you would be able to find suitable employ-
ment relatively quickly, you might want to wait until your job situation
has stabilized before pursuing a loan of this size.
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