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 owner’s 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 accounts—revenue and expense (and gain and loss) accounts and withdrawals—for the next period by giving them zero balances. (ii) Closing entries also update the owner’s 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 owner’s capital account, and (iv) close the withdrawals account to the owner’s capital account. 4. The Income Summary account is used to summarize the period’s 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 owner’s 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. 8. A company’s 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 assets—where 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 liability—usually 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 Motion’s balance sheet are: Long-term investments; Property, plant and equipment, net; Intangible assets, net; Goodwill, and Deferred income tax asset. 15. Nokia’s 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-for-sale 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 company’s net loss to its Retained Earnings account would likely have been (in thousands): Retained Earnings 753,473 Income Summary 753,473  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. Quick Study 4-2 (10 minutes) 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. Quick Study 4-3 (5 minutes) Current assets: Cash $ 6,000 Accounts receivable 15,000 Office supplies 1,800 Prepaid insurance 2,500 Total current assets $25,300 Current liabilities: Accounts payable $10,000 Unearned services revenue 4,000 Total current liabilities $14,000 Current ratio = $25,300 / $14,000 = 1.81 Quick Study 4-4 (10 minutes) 1. D 2. A 3. B 4. F 5. A 6. E 7. C 8. E Quick Study 4-5 (5 minutes) a. IS d. IS b. BS e. BS c. BS f. BS Quick Study 4-6 (5 minutes) 3 1 2 4 5 Quick Study 4-7 (10 minutes) 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  Quick Study 4-8 (20 minutes) TERREL COMPANY Work Sheet Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet & Statement of Owner’s Equity Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Prepaid rent 800 (a) 240 560 560 Services revenue 11,600 (b) 180 11,780 11,780 Wages expense 5,000 (c) 160 5,160 5,160 Accounts receivable (b) 180 180 180 Wages payable (c) 160 160 160 Rent expense (a) 240 240 240 Quick Study 4-9 (15 minutes) Dec. 31 Services Revenue 10,000 Income Summary 10,000 To close the revenue account. 31 Income Summary 6,000 Wages Expense 5,200 Rent Expense 800 To close the expense accounts. 31 Income Summary 4,000 L. Avril, Capital 4,000 To close Income Summary. 31 L. Avril, Capital 400 L. Avril, Withdrawals 400 To close the withdrawals account. Quick Study 4-10 (5 minutes) 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 6,700 Accounts Receivable 6,700 To reverse accrued revenue. 16 Cash 15,500 Management Fees Earned 15,500 To record collection of management fees. Quick Study 4-12 (10 minutes) 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.  Exercises Exercise 4-1 (35 minutes) Closing entries: (1) Services Revenue 74,000 Income Summary 74,000 To close the revenue account. (2) Income Summary 52,100 Depreciation Expense 17,000 Salaries Expense 21,000 Insurance Expense 4,500 Rent Expense 9,600 To close the expense accounts. (3) Income Summary 21,900 M. Mallon, Capital 21,900 To close income summary. (4) M. Mallon, Capital 25,000 M. Mallon, Withdrawals 25,000 To close the withdrawals account. Posted T-accounts: M. Mallon, Capital No. 301 Salaries Expense No. 622 Date PR Debit Credit Balance Date PR Debit Credit Balance Mar.31 42,000 Mar.31 21,000 (3) 21,900 63,900 (2) 21,000 0 (4) 25,000 38,900 M. Mallon, Withdrawals No. 302 Insurance Expense No. 637 Date PR Debit Credit Balance Date PR Debit Credit Balance Mar.31 25,000 Mar.31 4,500 (4) 25,000 0 (2) 4,500 0 Services Revenue No. 401 Rent Expense No. 640 Date PR Debit Credit Balance Date PR Debit Credit Balance Mar.31 74,000 Mar.31 9,600 (1) 74,000 0 (2) 9,600 0 Depreciation Expense No. 603 Income Summary No. 901 Date PR Debit Credit Balance Date PR Debit Credit Balance Mar.31 17,000 (1) 74,000 74,000 (2) 17,000 0 (2) 52,100 21,900 (3) 21,900 0 Exercise 4-2 (40 minutes) Adjusted Trial Balance Closing Entry Information Post-Closing Trial Balance No. Account Title Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 8,200 8,200 106 Accounts receivable 24,000 24,000 153 Equipment 41,000 41,000 154 Accumulated depre- ciation—Equipment 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 66,900 302 H. Sundance, Withdrawals 14,400 (4) 14,400 401 Marketing fees earned 79,000 (1) 79,000 611 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 7,700 (2) 7,700 901 Income summary (2) 62,200 (1) 79,000 ______ ______ (3) 16,800 ______ ______ ______ Totals 179,800 179,800 172,400 172,400 103,200 103,200 Exercise 4-3 (30 minutes) 1. 2011 Dec. 31 Services Revenue 36,000 Income Summary 36,000 To close the revenue account. 31 Income Summary 28,100 Depreciation Expense--Equipment 2,000 Salaries Expense 21,000 Insurance Expense 1,500 Rent Expense 2,400 Supplies Expense 1,200 To close the expense accounts. 31 Income Summary 7,900 R. Showers, Capital 7,900 To close Income Summary. 31 R. Showers, Capital 6,000 R. Showers, Withdrawals 6,000 To close the withdrawals account. 2. SHOWERS company Post-Closing Trial Balance December 31, 2011 Debit Credit Cash $18,000 Supplies 12,000 Prepaid insurance 2,000 Equipment 23,000 Accumulated depreciation–Equipment $ 6,500 R. Showers, Capital*     48,500 Totals $55,000 $55,000 *$46,600 + $7,900 - $6,000 = $48,500 Exercise 4-4 (20 minutes) Webb Trucking CoMPANY Income Statement For Year Ended December 31, 2011 Trucking fees earned $128,000 Expenses Depreciation expense—Trucks $22,500 Salaries expense 60,000 Office supplies expense 7,000 Repairs expense—Trucks 11,000 Total expenses 100,500 Net income $ 27,500 Webb Trucking CoMPANY Statement of Owner’s Equity For Year Ended December 31, 2011 K. Webb, Capital, December 31, 2010 $161,000 Plus: Net income 27,500 188,500 Less: Owner withdrawals (19,000) K. Webb, Capital, December 31, 2011 $169,500 Exercise 4-5 (20 minutes) Webb Trucking CoMPANY Balance Sheet December 31, 2011 Assets Current assets Cash $ 7,000 Accounts receivable 16,500 Office supplies 2,000 Total current assets 25,500 Plant assets Trucks $170,000 Accumulated depreciation-Trucks (35,000) 135,000 Land 75,000 Total plant assets 210,000 Total assets $235,500 Liabilities Current liabilities Accounts payable $ 11,000 Interest payable 3,000 Total current liabilities 14,000 Long-term notes payable 52,000 Total liabilities 66,000 Equity K. Webb, Capital* 169,500 Total liabilities and equity $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 Exercise 4-6 (15 minutes) 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 = = = 1.82 Interpretation: This company’s 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. Exercise 4-7 (15 minutes) 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). Exercise 4-8 (15 minutes) 1. C 5. C 9. B 13. C 2. D 6. C 10. A 14. A 3. D 7. A 11. D 15. A 4. D 8. C 12. B 16. C Exercise 4-9 (20 minutes) Instructor note: Entries are shown without an account reference column because no posting is required. (a) Insurance Expense—Office Equipment 432 Insurance Expense—Store Equipment 468 Prepaid Insurance 900 To record expired insurance. (b) Office Supplies Expense 1,650 Office Supplies 1,650 To record consumed supplies. (c) Depreciation Expense—Office Equipment. 3,300 Accumulated Depreciation—Office Equip 3,300 To record depreciation of office equip. (d) Interest Receivable 580 Interest Revenue 580 To record accrued interest income. (e) Office Salaries Expense 660 Salaries Payable 660 To record accrued salaries. Exercise 4-10 (20 minutes) Adjusted Trial Balance Income Statement Balance Sheet & Statement of Owner’s Equity No. Account Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 6,000 6,000 106 Accounts receivable 26,200 26,200 153 Trucks 41,000 41,000 154 Accumulated depreciation–Trucks 16,500 16,500 183 Land 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 J. Propel, Capital 64,500 64,500 302 J. Propel, Withdrawals 14,400 14,400 401 Plumbing fees earned 79,000 79,000 611 Depreciation expense—Trucks 5,500 5,500 622 Salaries expense 37,000 37,000 640 Rent expense 12,000 12,000 677 Miscellaneous expense 7,700 ______ 7,700 ______ _______ ______ Totals 179,800 179,800 62,200 79,000 117,600 100,800 Net income 16,800 ______ _______ 16,800 Totals 79,000 79,000 117,600 117,600 Exercise 4-11 (25 minutes) 1. Account Title Debit Credit Rent earned 102,000 Salaries expense 45,300 Insurance expense 6,400 Dock rental expense 15,000 Boat supplies expense 3,200 Depreciation expense—Boats 19,500     Totals 89,400 102,000 Net income 12,600     Totals 102,000 102,000 2. Closing entries (1) Rent Earned 102,000 Income Summary 102,000 To close the revenue account. (2) Income Summary 89,400 Salaries Expense 45,300 Insurance Expense 6,400 Dock Rental Expense 15,000 Boat Supplies Expense 3,200 Depreciation Expense—Boats 19,500 To close the expense accounts. (3) Income Summary 12,600 L. Welch, Capital 12,600 To close Income Summary. Exercise 4-12 Part 1 (30 minutes) DALTON DELIVERY COMPANY Work Sheet For Year Ended December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet & Statement of Owner’s Equity Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Cash 14,000 14,000 14,000 Accounts receivable 33,000 33,000 33,000 Office supplies 4,000 (c) 3,000 1,000 1,000 Trucks 340,000 340,000 340,000 Accum. depreciation—Trucks 70,000 (a) 35,000 105,000 105,000 Land 150,000 150,000 150,000 Accounts payable 22,000 22,000 22,000 Interest payable 6,000 (b) 2,000 8,000 8,000 Long-term notes payable 104,000 104,000 104,000 V. Dalton, Capital 322,000 322,000 322,000 V. Dalton, Withdrawals 38,000 38,000 38,000 Delivery fees earned 256,000 256,000 256,000 Depreciation expense—Trucks 45,000 (a) 35,000 80,000 80,000 Salaries expense 120,000 120,000 120,000 Office supplies expense 14,000 (c) 3,000 17,000 17,000 Interest expense 6,000 (b) 2,000 8,000 8,000 Repairs expense—Trucks 16,000 ______ _____ _____ 16,000 ______ 16,000 ______ ______ ______ Totals 780,000 780,000 40,000 40,000 817,000 817,000 241,000 256,000 576,000 561,000 Net income 15,000 ______ ______ 15,000 Totals 256,000 256,000 576,000 576,000  Exercise 4-12 (Concluded) 2. Closing entries: Delivery Fees Earned 256,000 Income Summary 256,000 To close the revenue account. Income Summary 241,000 Depreciation Expense—Trucks 80,000 Salaries Expense 120,000 Office Supplies Expense 17,000 Interest Expense 8,000 Repairs Expense—Trucks 16,000 To close the expense accounts. Income Summary 15,000 V. Dalton, Capital 15,000 To close Income Summary. V. Dalton, Capital 38,000 V. Dalton, Withdrawals 38,000 To close the withdrawals account. V. Dalton, Capital on the balance sheet: Beginning balance $322,000 Add: Net income 15,000 337,000 Less: Owner withdrawals (38,000) Ending balance $299,000 Exercise 4-13A (30 minutes) 1. Adjusting entries: Oct. 31 Rent Expense 3,200 Rent Payable 3,200 To record accrued rent expense. 31 Rent Receivable 750 Rent Earned 750 To record accrued rent income. 2. Subsequent entries without reversing: Nov. 5 Rent Payable 3,200 Rent Expense 3,200 Cash 6,400 To record payment of 2 months’ rent. 8 Cash 1,500 Rent Receivable 750 Rent Earned 750 To record collection of 2 months’ rent. 3. Reversing entries and subsequent entries: Nov. 1 Rent Payable 3,200 Rent Expense 3,200 To reverse accrual of rent expense. 1 Rent Earned 750 Rent Receivable 750 To reverse accrual of rent income. 5 Rent Expense 6,400 Cash 6,400 To record payment of 2 months’ rent. 8 Cash 1,500 Rent Earned 1,500 To record collection of 2 months’ rent. Exercise 4-14A (10 minutes) Reversing entries are appropriate for accounting adjustments (a) and (e): Sept. 1 Service Fees 5,000 Accounts Receivable 5,000 To reverse accrued revenues. 1 Salaries Payable 2,400 Salaries Expense 2,400 To reverse accrued salaries. Exercise 4-15 (10 minutes) Income Summary balance after closing revenues and expenses: Revenues: $35,000 + $3,500 = $38,500 Cr. Expenses: $19,000 + $4,000 + $2,300 = - 25,300 Dr. Credit balance = $13,200 Cr. D. Argosy, Capital balance after all closing entries: Beginning balance $14,000 Plus net income 13,200 27,200 Less withdrawals 6,000 Ending balance $21,200 Exercise 4-16 (10 minutes) Dec. 31 Net Sales 1,838,622 Income Summary 1,838,622 To close the revenue account. 31 Income Summary 1,559,533 Cost of Sales 1,044,981 Advertising Expense 117,308 Other Expense, Net 397,244 To close the expense accounts. Exercise 4-17 (25 minutes) madison company December 31, 2011 Unadjusted Trial Balance Dr. Cr. Adjustments Dr. Cr. Adjusted Trial Balance Dr. Cr. Cash 7 7 Accounts receivable 4 4 Supplies 8 (d) 3 5 Prepaid insurance 6 (e) 5 1 Equipment 13 13 Accumulated depreciation–Equip 5 (a) 1 6 Accounts payable 2 2 Salaries payable (b) 2 2 Unearned revenue 4 (c) 4 T. Madison, Capital 14 14 T. Madison, Withdrawals 2 2 Revenue 25 (c) 4 29 Depreciation expense– Equipment (a) 1 1 Salaries expense 6 (b) 2 8 Insurance expense (e) 5 5 Supplies expense (d) 3 3 Utilities expense 4 __ __ __ 4 __ Totals 50 50 15 15 53 53 Problem sET A Problem 4-1A (15 minutes) 1. C 6. C 11. Z 16. F 2. A 7. Z 12. A 17. E 3. C 8. A 13. A 18. A 4. A 9. E 14. E 19. G 5. C 10. B 15. C 20. E Problem 4-2A (90 minutes) 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 20,000 Computer Equipment 167 40,000 Stafford, Capital 301 60,000 Owner invested in the business. 2 Rent Expense 640 1,700 Cash 101 1,700 Paid one month’s rent. 3 Office Supplies 124 1,100 Cash 101 1,100 Acquired office supplies. 10 Prepaid Insurance 128 3,600 Cash 101 3,600 Paid 12-month’s premium in advance. 14 Salaries Expense 622 1,800 Cash 101 1,800 Paid two weeks’ salaries. 24 Cash 101 7,900 Commissions Earned 405 7,900 Collected commissions from airlines. 28 Salaries Expense 622 1,800 Cash 101 1,800 Paid two weeks’ salaries. 29 Repairs Expense 684 250 Cash 101 250 Repaired the computer. 30 Telephone Expense 688 650 Cash 101 650 Paid the telephone bill. 30 J. Stafford, Withdrawals 302 1,500 Cash 101 1,500 Owner withdrew cash for personal use. Problem 4-2A (Continued) Part 3 SEE-IT-NOW TRAVEL Unadjusted Trial Balance April 30, 2011 No. Account Title Debit Credit 101 Cash $15,500 106 Accounts receivable 0 124 Office supplies 1,100 128 Prepaid insurance 3,600 167 Computer equipment 40,000 168 Accumulated depreciation— Computer equipment $ 0 209 Salaries payable 0 301 J. Stafford, Capital 60,000 302 J. Stafford, Withdrawals 1,500 405 Commissions earned 7,900 612 Depreciation expense— Computer equipment 0 622 Salaries expense 3,600 637 Insurance expense 0 640 Rent expense 1,700 650 Office supplies expense 0 684 Repairs expense 250 688 Telephone expense 650   Totals $67,900 $67,900 Problem 4-2A (Continued) 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 650 400 Office Supplies 124 400 To record cost of supplies used ($1,100 - $700). (c) 30 Depreciation Exp—Computer Equipment 612 600 Accumulated Depreciation— Computer Equipment 168 600 To record depreciation. (d) 30 Salaries Expense 622 320 Salaries Payable 209 320 To record accrued salaries. (e) 30 Accounts Receivable 106 1,650 Commissions Earned 405 1,650 To record accrued commissions. Part 5 SEE-IT-NOW TRAVEL Income Statement For Month Ended April 30, 2011 Commissions earned $9,550 Expenses Depreciation expense—Computer 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 7,720 Net income $1,830  Problem 4-2A (Continued) Part 5—continued SEE-IT-NOW TRAVEL Statement of Owner’s Equity For Month Ended April 30, 2011 J. Stafford, Capital, April 1, 2011 $ 0 Plus: Investment by owner 60,000 Net income 1,830 61,830 Less: Owner withdrawals (1,500) J. Stafford, Capital, April 30, 2011 $60,330 SEE-IT-NOW TRAVEL Balance Sheet April 30, 2011 Assets Cash $15,500 Accounts receivable 1,650 Office supplies 700 Prepaid insurance 3,400 Computer equipment $40,000 Accumulated depreciation–Computer equipment (600) 39,400 Total assets $60,650 Liabilities Salaries payable $ 320 Equity J. Stafford, Capital 60,330 Total liabilities and equity $60,650 Problem 4-2A (Continued) Part 6 Closing entries: April 30 Commissions Earned 405 9,550 Income Summary 901 9,550 To close the revenue account. 30 Income Summary 901 7,720 Depreciation Exp–Computer Equip 612 600 Salaries Expense 622 3,920 Insurance Expense 637 200 Rent Expense 640 1,700 Office Supplies Expense 650 400 Repairs Expense 684 250 Telephone Expense 688 650 To close the expense accounts. 30 Income Summary 901 1,830 J. Stafford, Capital 301 1,830 To close the Income Summary account. 30 J. Stafford, Capital 301 1,500 J. Stafford, Withdrawals 302 1,500 To close the withdrawals account. Part 7 SEE-IT-NOW TRAVEL Post-Closing Trial Balance April 30, 2011 Debit Credit Cash $15,500 Accounts receivable 1,650 Office supplies 700 Prepaid insurance 3,400 Computer equipment 40,000 Accumulated depreciation– Computer equipment $ 600 Salaries payable 320 J. Stafford, Capital     60,330 Totals $61,250 $61,250 Problem 4-2A (Continued) Part 7—continued Ledger as of April 30: Cash Acct. No. 101 Date Explanation PR Debit Credit Balance April 1 20,000 20,000 2 1,700 18,300 3 1,100 17,200 10 3,600 13,600 14 1,800 11,800 24 7,900 19,700 28 1,800 17,900 29 250 17,650 30 650 17,000 30 1,500 15,500 Accounts Receivable Acct. No. 106 Date Explanation PR Debit Credit Balance April 30 Adjusting 1,650 1,650 Office Supplies Acct. No. 124 Date Explanation PR Debit Credit Balance April 3 1,100 1,100 30 Adjusting 400 700 Prepaid Insurance Acct. No. 128 Date Explanation PR Debit Credit Balance April 10 3,600 3,600 30 Adjusting 200 3,400 Computer Equipment Acct. No. 167 Date Explanation PR Debit Credit Balance April 1 40,000 40,000 Accumulated Depreciation–Computer Equipment Acct. No. 168 Date Explanation PR Debit Credit Balance April 30 Adjusting 600 600 Salaries Payable Acct. No. 209 Date Explanation PR Debit Credit Balance April 30 Adjusting 320 320 Problem 4-2A (Continued) J. Stafford, Capital Acct. No. 301 Date Explanation PR Debit Credit Balance April 1 60,000 60,000 30 Closing 1,830 61,830 30 Closing 1,500 60,330 J. Stafford, Withdrawals Acct. No. 302 Date Explanation PR Debit Credit Balance April 30 1,500 1,500 30 Closing 1,500 0 Commissions Earned Acct. No. 405 Date Explanation PR Debit Credit Balance April 24 7,900 7,900 30 Adjusting 1,650 9,550 30 Closing 9,550 0 Depreciation Expense–Computer Equipment Acct. No. 612 Date Explanation PR Debit Credit Balance April 30 Adjusting 600 600 30 Closing 600 0 Salaries Expense Acct. No. 622 Date Explanation PR Debit Credit Balance April 14 1,800 1,800 28 1,800 3,600 30 Adjusting 320 3,920 30 Closing 3,920 0 Insurance Expense Acct. No. 637 Date Explanation PR Debit Credit Balance April 30 Adjusting 200 200 30 Closing 200 0 Rent Expense Acct. No. 640 Date Explanation PR Debit Credit Balance April 2 1,700 1,700 April 30 Closing 1,700 0 Office Supplies Expense Acct. No. 650 Date Explanation PR Debit Credit Balance April 30 Adjusting 400 400 30 Closing 400 0 Problem 4-2A (Concluded) Repairs Expense Acct. No. 684 Date Explanation PR Debit Credit Balance April 29 250 250 30 Closing 250 0 Telephone Expense Acct. No. 688 Date Explanation PR Debit Credit Balance April 30 650 650 30 Closing 650 0 Income Summary Acct. No. 901 Date Explanation PR Debit Credit Balance April 30 Closing 9,550 9,550 30 Closing 7,720 1,830 30 Closing 1,830 0 Problem 4-3A (90 minutes) Part 1 KOBE REPAIRS Income Statement For Year Ended December 31, 2011 Repair fees earned $77,750 Expenses Depreciation expense—Equipment $ 4,000 Wages expense 36,500 Insurance expense 700 Rent expense 9,600 Office supplies expense 2,600 Utilities expense 1,700 Total expenses 55,100 Net income $22,650 KOBE REPAIRS Statement of Owner's Equity For Year Ended December 31, 2011 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 Problem 4-3A (Continued) Part 1 (concluded) koBE REPAIRS Balance Sheet December 31, 2011 Assets Current assets Cash $13,000 Office supplies 1,200 Prepaid insurance 1,950 Total current assets $16,150 Plant assets Equipment 48,000 Accumulated depreciation—Equipment (4,000) 44,000 Total assets $60,150 Liabilities Current liabilities Accounts payable $12,000 Wages payable 500 Total current liabilities 12,500 Equity S. Kobe, Capital 47,650 Total liabilities and equity $60,150 Problem 4-3A (Continued) Parts 2 and 3 KOBE REPAIRS For Year Ended December 31, 2011 Adjusted Trial Balance Closing Entry Information Post-Closing Trial Balance No. Account Title Dr. Cr. Dr. Cr. 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 48,000 168 Accumulated depreciation— Equipment 4,000 4,000 201 Accounts payable 12,000 12,000 210 Wages payable 500 500 301 S. Kobe, Capital 40,000 (4) 15,000 (3) 22,650 47,650 302 S. Kobe, Withdrawals 15,000 (4) 15,000 401 Repair fees earned 77,750 (1) 77,750 612 Depreciation expense— 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) 1,700 901 Income summary (2) 55,100 (1) 77,750 ______ ______ (3) 22,650 ______ ______ ______ Totals 134,250 134,250 170,500 170,500 64,150 64,150 Closing entries (all dated December 31, 2011): (1) Repair Fees Earned 77,750 Income Summary 77,750 To close the revenue account. Problem 4-3A (Concluded) (2) Income Summary 55,100 Depreciation Expense, Equipment 4,000 Wages Expense 36,500 Insurance Expense 700 Rent Expense 9,600 Office Supplies Expense 2,600 Utilities Expense 1,700 To close the expense accounts. (3) Income Summary 22,650 S. Kobe, Capital 22,650 To close the Income Summary account. (4) S. Kobe, Capital 15,000 S. Kobe, Withdrawals 15,000 To close the withdrawals account. 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. Problem 4-4A (75 minutes) Part 1 SHARP CONSTRUCTION Income Statement For Year Ended December 31, 2011 Revenues Professional fees earned $96,000 Rent earned 13,000 Dividends earned 1,900 Interest earned 1,000 Total revenues $111,900 Expenses Depreciation expense—Building 10,000 Depreciation expense—Equipment 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 98,800 Net income $ 13,100 SHARP CONSTRUCTION Statement of Owner's Equity For Year Ended December 31, 2011 J. Sharp, Capital, December 31, 2010 $32,700 Add: Investments by owner $50,000 Net income 13,100 63,100 95,800 Less: Withdrawals by owner (12,000) J. Sharp, Capital, December 31, 2011 $83,800 Problem 4-4A (Continued) SHARP CONSTRUCTION Balance Sheet December 31, 2011 Assets Current assets Cash $ 4,000 Short-term investments 22,000 Supplies 7,100 Prepaid insurance 6,000 Total current assets $ 39,100 Plant assets Equipment 39,000 Accumulated depreciation—Equipment (20,000) 19,000 Building 130,000 Accumulated depreciation—Building (55,000) 75,000 Land 45,000 Total plant assets 139,000 Total assets $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Problem 4-4A (Concluded) Part 2 Closing entries (all dated December 31, 2011): (1) Professional Fees Earned 96,000 Rent Earned 13,000 Dividends Earned 1,900 Interest Earned 1,000 Income Summary 111,900 To close the revenue accounts. (2) Income Summary 98,800 Depreciation Expense, Building 10,000 Depreciation Expense, Equipment 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 To close the expense accounts. (3) Income Summary 13,100 J. Sharp, Capital 13,100 To close the income summary account. (4) J. Sharp, Capital 12,000 J. Sharp, Withdrawals 12,000 To close the withdrawals account. 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  Problem 4-5A (90 minutes) Part 1 ADAMS CONSTRUCTION CO. Work Sheet For Year Ended June 30, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet & Statement of Owner’s Equity No. Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 17,500 17,500 17,500 126 Supplies 8,900 (a) 5,700 3,200 3,200 128 Prepaid insurance 6,200 (b) 3,900 2,300 2,300 167 Equipment 131,000 131,000 131,000 168 Accumulated depreciation— Equipment 25,250 (c) 8,500 33,750 33,750 201 Accounts payable 5,800 (d) 550 6,350 6,350 203 Interest payable (h) 240 240 240 208 Rent payable (f) 200 200 200 210 Wages payable (e) 1,600 1,600 1,600 213 Property taxes payable (g) 900 900 900 251 Long-term notes payable 24,000 24,000 24,000 301 S. Adams, Capital 77,660 77,660 77,660 302 S. Adams, Withdrawals 30,000 30,000 30,000 401 Construction fees earned 134,000 134,000 134,000 612 Depreciation expense— Equipment (c) 8,500 8,500 8,500 623 Wages expense 45,860 (e) 1,600 47,460 47,460 633 Interest expense 2,640 (h) 240 2,880 2,880 637 Insurance expense (b) 3,900 3,900 3,900 640 Rent expense 13,200 (f) 200 13,400 13,400 652 Supplies expense (a) 5,700 5,700 5,700 683 Property taxes expense 4,600 (g) 900 5,500 5,500 684 Repairs expense 2,810 2,810 2,810 690 Utilities expense 4,000 ______ (d) 550 _____ 4,550 ______ 4,550 ______ ______ ______ Totals 266,710 266,710 21,590 21,590 278,700 278,700 94,700 134,000 184,000 144,700 Net Income 39,300 ______ ______ 39,300 Totals 134,000 134,000 184,000 184,000 Problem 4-5A (Continued) Part 2 Adjusting entries (all dated June 30, 2011): (a) Supplies Expense 5,700 Supplies 5,700 To record consumption of supplies. (b) Insurance Expense 3,900 Prepaid Insurance 3,900 To record expiration of insurance. (c) Depreciation Expense, Equipment 8,500 Accumulated Depreciation, Equipment 8,500 To record depreciation. (d) Utilities Expense 550 Accounts Payable 550 To record accrued utilities costs. (e) Wages Expense 1,600 Wages Payable 1,600 To record accrued wages. (f) Rent Expense 200 Rent Payable 200 To record remainder of annual rent. (g) Property Taxes Expense 900 Property Taxes Payable 900 To record additional property taxes. (h) Interest Expense (1% x $24,000) 240 Interest Payable 240 To record the month’s interest expense. Problem 4-5A (Continued) Closing entries (all dated June 30, 2011): (1) Construction Fees Earned 134,000 Income Summary 134,000 To close the revenue account. (2) Income Summary 94,700 Depreciation Expense, Equipment 8,500 Wages Expense 47,460 Interest Expense 2,880 Insurance Expense 3,900 Rent Expense 13,400 Supplies Expense 5,700 Property Taxes Expense 5,500 Repairs Expense 2,810 Utilities Expense 4,550 To close the expense accounts. (3) Income Summary 39,300 S. Adams, Capital 39,300 To close the Income Summary account. (4) S. Adams, Capital 30,000 S. Adams, Withdrawals 30,000 To close the withdrawals account. Problem 4-5A (Continued) Part 3 Adams Construction Co. Income Statement For Year Ended June 30, 2011 Construction fees earned $134,000 Expenses Depreciation expense—Equipment $ 8,500 Wages expense 47,460 Interest expense 2,880 Insurance expense 3,900 Rent expense 13,400 Supplies expense 5,700 Property taxes expense 5,500 Repairs expense 2,810 Utilities expense 4,550 Total expenses 94,700 Net income $ 39,300 Adams Construction Co. Statement of Owner's Equity For Year Ended June 30, 2011 S. Adams, Capital, June 30, 2010 $ 52,660 Add: Investment by owner $25,000 Net income 39,300 64,300 116,960 Less: Withdrawals by owner (30,000) S. Adams, Capital, June 30, 2011 $ 86,960 Problem 4-5A (Continued) Adams Construction Co. 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 depreciation—Equipment (33,750) 97,250 Total assets $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 Problem 4-5A (Concluded) 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 sheet’s 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. Problem 4-6AA (40 minutes) Part 1 bullseye RANGES December 31, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Cash 13,000 13,000 Accounts receivable (e) 9,100 9,100 Supplies 5,500 (b) 2,800 2,700 Equipment 130,000 130,000 Accumulated depreciation– Equipment 25,000 (f) 12,500 37,500 Interest payable (c) 1,250 1,250 Salaries payable (a) 900 900 Unearned member fees 14,000 (d) 8,400 5,600 Notes payable 50,000 50,000 T. Allen, Capital 58,250 58,250 T. Allen, Withdrawals 20,000 20,000 Member fees earned 53,000 (d) (e) 8,400 9,100 70,500 Depreciation expense– Equipment (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 Problem 4-6AA (Continued) Part 2 (all adjusting entries dated December 31, 2011) (a) Salaries Expense 900 Salaries Payable 900 To record accrued salaries. (b) Supplies Expense 2,800 Supplies 2,800 To record cost of consumed supplies. (c) Interest Expense 1,250 Interest Payable 1,250 To record accrued interest expense. (d) Unearned Member Fees 8,400 Member Fees Earned 8,400 To record earned fees. (e) Accounts Receivable 9,100 Membership Fees Earned 9,100 To record accrued revenues. (f) Depreciation Expense, Equipment 12,500 Accumulated Depreciation, Equipment 12,500 To record depreciation. Part 3 (all reversing entries dated January 1, 2012) (a) Salaries Payable 900 Salaries Expense 900 To reverse accrued salaries. (c) Interest Payable 1,250 Interest Expense 1,250 To reverse accrued interest expense. (e) Member Fees Earned 9,100 Accounts Receivable 9,100 To reverse accrued revenues.  Problem 4-6AA (Concluded) Part 4 2012 Jan. 4 Salaries Expense 1,600 Cash 1,600 To record payroll. 15 Interest Expense 1,500 Cash 1,500 To record interest payment. 31 Cash ($9,100 + $8,000) 17,100 Member Fees Earned 17,100 To record collection of membership fees.  Problem sET b Problem 4-1B (15 minutes) 1. C 6. C 11. A 16. E 2. A 7. D 12. E 17. Z 3. E 8. Z 13. G 18. E 4. A 9. Z 14. A 19. C 5. A 10. B 15. C 20. F Problem 4-2B (90 minutes) 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 20,000 Buildings 173 120,000 L. Fogle, Capital 301 140,000 Owner invested in the business. 2 Rent Expense 640 1,800 Cash 101 1,800 Paid one month’s rent. 5 Office Supplies 124 2,300 Cash 101 2,300 Acquired office supplies. 10 Prepaid Insurance 128 5,400 Cash 101 5,400 Paid 12-month’s premium in advance. 14 Salaries Expense 622 900 Cash 101 900 Paid two weeks’ salary. 24 Cash 101 8,800 Storage Fees Earned 401 8,800 Collected fees from customers. 28 Salaries Expense 622 900 Cash 101 900 Paid two weeks’ salary. 29 Repairs Expense 684 850 Cash 101 850 Repaired the roof. 30 Telephone Expense 688 300 Cash 101 300 Paid the telephone bill. 31 L. Fogle, Withdrawals 302 1,600 Cash 101 1,600 Owner withdrew cash.. 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 0 124 Office supplies 2,300 128 Prepaid insurance 5,400 173 Buildings 120,000 174 Accum. depreciation–Buildings $ 0 209 Salaries payable 0 301 L. Fogle, Capital 140,000 302 L. Fogle, Withdrawals 1,600 401 Storage fees earned 8,800 606 Depreciation expense–Buildings 0 622 Salaries expense 1,800 637 Insurance expense 0 640 Rent expense 1,800 650 Office supplies expense 0 684 Repairs expense 850 688 Telephone expense 300     Totals $148,800 $148,800 Problem 4-2B (Continued) Part 4 Adjusting entries: July 31 Insurance Expense 637 300 Prepaid Insurance 128 300 To record expired insurance (2/3 x $450 per month). 31 Office Supplies Expense 650 750 Office Supplies 124 750 To record the cost of consumed supplies ($2,300 - $1,550). 31 Depreciation Expense—Buildings 606 1,200 Accum. Depreciation—Buildings 174 1,200 To record depreciation. 31 Salaries Expense 622 180 Salaries Payable 209 180 To record accrued salaries. 31 Accounts Receivable 106 950 Storage Fees Earned 401 950 To record accrued storage fees. Part 5 KEEPSAFE CO. Income Statement For Month Ended July 31, 2011 Storage fees earned $9,750 Expenses Depreciation expense–Buildings $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 7,180 Net income $ 2,570 Problem 4-2B (Continued) Part 5 KEEPSAFE CO. Statement of Owner’s Equity For Month Ended July 31, 2011 L. Fogle, Capital, July 1, 2011 $ 0 Add: Investments by owner 140,000 Net income 2,570 142,570 Less: Owner withdrawals (1,600) L. Fogle, Capital, July 31, 2011 $140,970 KEEPSAFE CO. Balance Sheet July 31, 2011 Assets Cash $ 14,750 Accounts receivable 950 Office supplies 1,550 Prepaid insurance 5,100 Buildings $120,000 Accumulated depreciation--Buildings (1,200) 118,800 Total assets $141,150 Liabilities Salaries payable $ 180 Equity L. Fogle, Capital 140,970 Total liabilities and equity $141,150 Problem 4-2B (Continued) Part 6 Closing entries July 31 Storage Fees Earned 401 9,750 Income Summary 901 9,750 To close the revenue account. 31 Income Summary 901 7,180 Depreciation Exp—Buildings 606 1,200 Salaries Expense 622 1,980 Insurance Expense... 637 300 Rent Expense 640 1,800 Office Supplies Expense 650 750 Repairs Expense 684 850 Telephone Expense 688 300 To close the expense accounts. 31 Income Summary 901 2,570 L. Fogle, Capital 301 2,570 To close the Income Summary. 31 L. Fogle, Capital 301 1,600 L. Fogle, Withdrawals 302 1,600 To close the Withdrawals account.. Part 7 KEEPSAFE CO. Post-Closing Trial Balance July 31, 2011 Debit Credit Cash $ 14,750 Accounts receivable 950 Office supplies 1,550 Prepaid insurance 5,100 Buildings 120,000 Accumulated depreciation–Buildings $ 1,200 Salaries payable 180 L. Fogle, Capital     140,970 Totals $142,350 $142,350 Problem 4-2B (Continued) Ledger as of July 31: Cash Acct. No. 101 Date Explanation PR Debit Credit Balance July 1 20,000 20,000 2 1,800 18,200 5 2,300 15,900 10 5,400 10,500 14 900 9,600 24 8,800 18,400 28 900 17,500 29 850 16,650 30 300 16,350 31 1,600 14,750 Accounts Receivable Acct. No. 106 Date Explanation PR Debit Credit Balance July 31 Adjusting 950 950 Office Supplies Acct. No. 124 Date Explanation PR Debit Credit Balance July 5 2,300 2,300 31 Adjusting 750 1,550 Prepaid Insurance Acct. No. 128 Date Explanation PR Debit Credit Balance July 10 5,400 5,400 31 Adjusting 300 5,100 Buildings Acct. No. 173 Date Explanation PR Debit Credit Balance July 1 120,000 120,000 Accumulated Depreciation—Buildings Acct. No. 174 Date Explanation PR Debit Credit Balance July 31 Adjusting 1,200 1,200 Salaries Payable Acct. No. 209 Date Explanation PR Debit Credit Balance July 31 Adjusting 180 180 Problem 4-2B (Continued) L. Fogle, Capital Acct. No. 301 Date Explanation PR Debit Credit Balance July 1 140,000 140,000 31 Closing 2,570 142,570 31 Closing 1,600 140,970 L. Fogle, Withdrawals Acct. No. 302 Date Explanation PR Debit Credit Balance July 31 1,600 1,600 31 Closing 1,600 0 Storage Fees Earned Acct.No. 401 Date Explanation PR Debit Credit Balance July 24 8,800 8,800 31 Adjusting 950 9,750 31 Closing 9,750 0 Depreciation Expense—Buildings Acct. No. 606 Date Explanation PR Debit Credit Balance July 31 Adjusting 1,200 1,200 31 Closing 1,200 0 Salaries Expense Acct. No. 622 Date Explanation PR Debit Credit Balance July 14 900 900 28 900 1,800 31 Adjusting 180 1,980 31 Closing 1,980 0 Insurance Expense Acct. No. 637 Date Explanation PR Debit Credit Balance July 31 Adjusting 300 300 31 Closing 300 0 Rent Expense Acct. No. 640 Date Explanation PR Debit Credit Balance July 2 1,800 1,800 31 Closing 1,800 0 Problem 4-2B (Concluded) Office Supplies Expense Acct. No. 650 Date Explanation PR Debit Credit Balance July 31 Adjusting 750 750 31 Closing 750 0 Repairs Expense Acct. No. 684 Date Explanation PR Debit Credit Balance July 29 850 850 31 Closing 850 0 Telephone Expense Acct. No. 688 Date Explanation PR Debit Credit Balance July 30 300 300 31 Closing 300 0 Income Summary Acct. No. 901 Date Explanation PR Debit Credit Balance July 31 Closing 9,750 9,750 31 Closing 7,180 2,570 31 Closing 2,570 0 Problem 4-3B (90 minutes) Part 1 HEEL-TO-TOE SHOEs Income Statement For Year Ended December 31, 2011 Repair fees earned $62,000 Expenses Depreciation expense—Equipment $ 3,000 Wages expense 28,400 Insurance expense 1,100 Rent expense 2,400 Store supplies expense 1,300 Utilities expense 1,860 Total expenses 38,060 Net income $23,940 HEEL-TO-TOE SHOES Statement of Owner's Equity For Year Ended December 31, 2011 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 Problem 4-3B (Continued) 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 $19,790 Plant assets Equipment 33,000 Accumulated depreciation, equipment (9,000) 24,000 Total assets $43,790 Liabilities Current liabilities Accounts payable $ 1,000 Wages payable 3,200 Total current liabilities 4,200 Equity P. Holt, Capital 39,590 Total liabilities and equity $43,790 Problem 4-3B (Continued) Parts 2 and 3 HEEL-TO-TOE SHOES For Year Ended December 31, 2011 Adjusted Trial Balance Closing Entry Information Post-Closing Trial Balance No. Account Title Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 13,450 13,450 125 Store supplies 4,140 4,140 128 Prepaid insurance 2,200 2,200 167 Equipment 33,000 33,000 168 Accumulated deprecia- tion—Equipment 9,000 9,000 201 Accounts payable 1,000 1,000 210 Wages payable 3,200 3,200 301 P. Holt, Capital 31,650 (4) 16,000 (3) 23,940 39,590 302 P. Holt, Withdrawals 16,000 (4) 16,000 401 Repair fees earned 62,000 (1) 62,000 612 Depreciation expense— Equipment 3,000 (2) 3,000 623 Wages expense 28,400 (2) 28,400 637 Insurance expense 1,100 (2) 1,100 640 Rent expense 2,400 (2) 2,400 651 Store supplies expense 1,300 (2) 1,300 690 Utilities expense 1,860 (2) 1,860 901 Income summary (2) 38,060 (1) 62,000 ______ ______ (3) 23,940 ______ _____ _____ Totals 106,850 106,850 140,000 140,000 52,790 52,790 Problem 4-3B (Concluded) Part 3 Closing entries (all dated December 31, 2011): (1) Repair Fees Earned 62,000 Income Summary 62,000 To close the revenue account. (2) Income Summary 38,060 Depreciation Expense, Equipment 3,000 Wages Expense 28,400 Insurance Expense 1,100 Rent Expense 2,400 Store Supplies Expense 1,300 Utilities Expense 1,860 To close the expense accounts. (3) Income Summary 23,940 P. Holt, Capital 23,940 To close the Income Summary account. (4) P. Holt, Capital 16,000 P. Holt, Withdrawals 16,000 To close the withdrawals account. 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. Problem 4-4B (75 minutes) Part 1 GIOVANNI CO. Income Statement For Year Ended December 31, 2011 Revenues Professional fees earned $47,000 Rent earned 3,600 Dividends earned 500 Interest earned 1,120 Total revenues $52,220 Expenses Depreciation expense—Building 2,000 Depreciation expense—Equipment 1,000 Wages expense 17,500 Interest expense 1,200 Insurance expense 1,425 Rent expense 1,800 Supplies expense 900 Postage expense 310 Property taxes expense 3,825 Repairs expense 579 Telephone expense 421 Utilities expense 1,820 Total expenses 32,780 Net income $19,440 GIOVANNI CO. Statement of Owner's Equity For Year Ended December 31, 2011 J. Giovanni, Capital, December 31, 2010 $ 61,800 Add: Investments by owner $30,000 Net income 19,440 49,440 111,240 Less: Withdrawals by owner (6,000) J. Giovanni, Capital, December 31, 2011 $105,240 Problem 4-4B (Continued) 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 depreciation—Equipment (3,000) 15,000 Building 90,000 Accumulated depreciation—Building (9,000) 81,000 Land 28,500 Total plant assets 124,500 Total assets $145,500 Liabilities Current liabilities Accounts payable $ 2,500 Interest payable 1,400 Rent payable 200 Wages payable 1,180 Property taxes payable 2,330 Unearned professional fees 650 Current portion of long-term note payable 6,400 Total current liabilities $ 14,660 Long-term liabilities Long-term notes payable* 25,600 Total liabilities 40,260 Equity J. Giovanni, Capital 105,240 Total liabilities and equity $145,500 * $32,000-$6,400Problem 4-4B (Concluded) Part 2 Closing entries (all dated December 31, 2011): (1) Professional Fees Earned 47,000 Rent Earned 3,600 Dividends Earned 500 Interest Earned 1,120 Income Summary 52,220 To close the revenue accounts. (2) Income Summary 32,780 Depreciation Expense—Building 2,000 Depreciation Expense—Equipment 1,000 Wages Expense 17,500 Interest Expense 1,200 Insurance Expense 1,425 Rent Expense 1,800 Supplies Expense 900 Postage Expense 310 Property Taxes Expense 3,825 Repairs Expense 579 Telephone Expense 421 Utilities Expense 1,820 To close the expense accounts. (3) Income Summary 19,440 J. Giovanni, Capital 19,440 To close the Income Summary account. (4) J. Giovanni, Capital 6,000 J. Giovanni, Withdrawals 6,000 To close the withdrawals account. 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  Problem 4-5B (90 minutes) Part 1 CRUSH DEMOLITION COMPANY Work Sheet For Year Ended April 30, 2011 Unadjusted Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet and Statement of Owner’s Equity No. Account Title Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. 101 Cash 9,000 9,000 9,000 126 Supplies 18,000 (a) 9,900 8,100 8,100 128 Prepaid insurance 14,600 (b) 11,500 3,100 3,100 167 Equipment 140,000 140,000 140,000 168 Accumulated depreciation— Equipment 10,000 (c) 18,000 28,000 28,000 201 Accounts payable 16,000 (d) 700 16,700 16,700 203 Interest payable (h) 200 200 200 208 Rent payable (f) 5,360 5,360 5,360 210 Wages payable (e) 2,200 2,200 2,200 213 Property taxes payable (g) 450 450 450 251 Long-term notes payable 20,000 20,000 20,000 301 J. Bonair, Capital 66,900 66,900 66,900 302 J. Bonair, Withdrawals 24,000 24,000 24,000 401 Demolition fees earned 177,000 177,000 177,000 612 Depreciation expense— Equipment (c) 18,000 18,000 18,000 623 Wages expense 51,400 (e) 2,200 53,600 53,600 633 Interest expense 2,200 (h) 200 2,400 2,400 637 Insurance expense (b) 11,500 11,500 11,500 640 Rent expense 8,800 (f) 5,360 14,160 14,160 652 Supplies expense (a) 9,900 9,900 9,900 683 Property taxes expense 8,400 (g) 450 8,850 8,850 684 Repairs expense 6,700 6,700 6,700 690 Utilities expense 6,800 ______ (d) 700 ______ 7,500 7,500 ______ 7,500 ______ ______ ______ Totals 289,900 289,900 48,310 48,310 316,810 316,810 132,610 177,000 184,200 139,810 Net Income 44,390 ______ ______ 44,390 Totals 177,000 177,000 184,200 184,200  Problem 4-5B (Continued) Part 2 Adjusting entries (all on April 30, 2011): (a) Supplies Expense 9,900 Supplies 9,900 To record consumption of supplies. (b) Insurance Expense 11,500 Prepaid Insurance 11,500 To record expiration of insurance. (c) Depreciation Expense, Equipment 18,000 Accumulated Depreciation, Equipment 18,000 To record depreciation. (d) Utilities Expense 700 Accounts Payable 700 To record accrued utilities costs. (e) Wages Expense 2,200 Wages Payable 2,200 To record accrued wages. (f) Rent Expense 5,360 Rent Payable 5,360 To record remainder of annual rent. (g) Property Taxes Expense 450 Property Taxes Payable 450 To record additional property taxes. (h) Interest Expense (1% x $20,000) 200 Interest Payable 200 To record April’s interest expense. Problem 4-5B (Continued) Closing entries (all on April 30, 2011): (1) Demolition Fees Earned 177,000 Income Summary 177,000 To close the revenue account. (2) Income Summary 132,610 Depreciation Expense, Equipment 18,000 Wages Expense 53,600 Interest Expense 2,400 Insurance Expense 11,500 Rent Expense 14,160 Supplies Expense 9,900 Property Taxes Expense 8,850 Repairs Expense 6,700 Utilities Expense 7,500 To close the expense accounts. (3) Income Summary 44,390 J. Bonair, Capital 44,390 To close the Income Summary account. (4) J. Bonair, Capital 24,000 J. Bonair, Withdrawals 24,000 To close the withdrawals account. Problem 4-5B (Continued) Part 3 CRUSH Demolition Company Income Statement For Year Ended April 30, 2011 Demolition fees earned $177,000 Expenses Depreciation expense—Equipment $18,000 Wages expense 53,600 Interest expense 2,400 Insurance expense 11,500 Rent expense 14,160 Supplies expense 9,900 Property taxes expense 8,850 Repairs expense 6,700 Utilities expense 7,500 Total expenses 132,610 Net income $ 44,390 CRUSH Demolition Company Statement of Owner's Equity For Year Ended April 30, 2011 J. Bonair, Capital, April 30, 2010 $ 36,900 Add: Investments by owner $30,000 Net income 44,390 74,390 111,290 Less: Withdrawals by owner (24,000) J. Bonair, Capital, April 30, 2011 $ 87,290 Problem 4-5B (Continued) Part 3 (concluded) CRUSH Demolition Company 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 depreciation—Equipment (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 $ 28,910 Long-term liabilities Long-term note payable (less current portion) 16,000 Total liabilities 44,910 Equity J. Bonair, Capital 87,290 Total liabilities and equity $132,200 Problem 4-5B (Concluded) 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 sheet’s 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. 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 2,350 Supplies 6,600 (b) 4,150 2,450 Machinery 40,100 40,100 Accumulated depreciation— Machinery 15,800 (f) 3,800 19,600 Interest payable (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 10,500 Rental fees earned 37,000 (d) (e) 2,100 2,350 41,450 Depreciation expense— 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 ______ 4,150 ______ Totals 91,200 91,200 13,320 13,320 98,270 98,270 Problem 4-6BA (Continued) Part 2 (all adjusting entries dated December 31, 2011) (a) Salaries Expense 420 Salaries Payable 420 To record accrued wages. (b) Supplies Expense 4,150 Supplies 4,150 To record cost of consumed supplies. (c) Interest Expense 500 Interest Payable 500 To record accrued interest expense. (d) Unearned Rental Fees 2,100 Rental Fees Earned 2,100 To record earned fees. (e) Accounts Receivable 2,350 Rental Fees Earned 2,350 To record accrued revenues. (f) Depreciation Expense, Machinery 3,800 Accumulated Depreciation— Machinery 3,800 To record depreciation. Part 3 (all reversing entries dated January 1, 2012) (a) Salaries Payable 420 Salaries Expense 420 To reverse accrued wages. (c) Interest Payable 500 Interest Expense 500 To reverse accrued interest expense. (e) Rental Fees Earned 2,350 Accounts Receivable 2,350 To reverse accrued revenues. Problem 4-6BA (Concluded) Part 4 2012 Jan. 4 Salaries Expense 1,250 Cash 1,250 To record payroll. 15 Interest Expense 600 Cash 600 To record interest payment. 31 Cash ($2,350 + $4,400) 6,750 Rental Fees Earned 6,750 To record collection of rental fees.  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 31,284 Income Summary 901 31,284 To close the revenue account. 31 Income Summary 901 16,824 Depreciation Exp–Office Equipment 612 400 Depreciation Exp–Computer Equipment 613 1,250 Wages Expense 623 3,875 Insurance Expense 637 555 Rent Expense 640 2,475 Computer Supplies Expense 652 3,065 Advertising Expense 655 2,753 Mileage Expense 676 896 Miscellaneous Expenses 677 250 Repairs Expense—Computer 684 1,305 To close the expense accounts. 31 Income Summary 901 14,460 S. Rey, Capital 301 14,460 To close the Income Summary account. 31 S. Rey, Capital 301 7,100 S. Rey, Withdrawals 302 7,100 To close the withdrawals account. Note: All accounts with numbers that start with the digits 1 or 2 (the permanent accounts) are unaffected by the closing process. Serial Problem, SP 4 (Continued) Part 2 BUSINESS SOLUTIONS Post-Closing Trial Balance 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 depreciation—Office equipment $ 400 Computer equipment 20,000 Accumulated depreciation—Computer 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 Serial Problem, SP 4 (Continued) [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 Acct. No. 101 Date Explanation PR Debit Credit Balance Oct. 1 45,000 45,000 2 3,300 41,700 5 2,220 39,480 8 1,420 38,060 15 4,800 42,860 17 805 42,055 20 1,728 40,327 22 1,400 41,727 31 875 40,852 31 3,600 37,252 Nov. 1 320 36,932 2 4,633 41,565 5 1,125 40,440 18 2,208 42,648 22 250 42,398 28 384 42,014 30 1,750 40,264 30 2,000 38,264 Dec. 2 1,025 37,239 3 500 36,739 4 3,950 40,689 10 750 39,939 14 1,500 41,439 20 5,625 47,064 28 3,000 50,064 29 192 49,872 31 1,500 48,372 Serial Problem, SP 4 (Continued) Accounts Receivable Acct. No. 106 Date Explanation PR Debit Credit Balance Oct. 6 4,800 4,800 12 1,400 6,200 15 4,800 1,400 22 1,400 0 28 5,208 5,208 Nov. 8 5,668 10,876 18 2,208 8,668 24 3,950 12,618 Dec. 4 3,950 8,668 28 3,000 5,668 Computer Supplies Acct. No. 126 Date Explanation PR Debit Credit Balance Oct. 3 1,420 1,420 Nov. 5 1,125 2,545 Dec. 15 1,100 3,645 31 3,065 580 Prepaid Insurance Acct. No. 128 Date Explanation PR Debit Credit Balance Oct. 5 2,220 2,220 Dec. 31 555 1,665 Prepaid Rent Acct. No. 131 Date Explanation PR Debit Credit Balance Oct. 2 3,300 3,300 Dec. 31 2,475 825 Office Equipment Acct. No. 163 Date Explanation PR Debit Credit Balance Oct. 1 8,000 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164 Date Explanation PR Debit Credit Balance Dec. 31 400 400 Serial Problem, SP 4 (Continued) Computer Equipment Acct. No. 167 Date Explanation PR Debit Credit Balance Oct. 1 20,000 20,000 Accumulated Depreciation—Computer Equipment Acct. No. 168 Date Explanation PR Debit Credit Balance Dec. 31 1,250 1,250 Accounts Payable Acct. No. 201 Date Explanation PR Debit Credit Balance Oct. 3 1,420 1,420 8 1,420 0 Dec. 15 1,100 1,100 Wages Payable Acct. No. 210 Date Explanation PR Debit Credit Balance Dec. 31 500 500 Unearned Computer Services Revenue Acct. No. 236 Date Explanation PR Debit Credit Balance Dec. 14 1,500 1,500 S. Rey, Capital Acct. No. 301 Date Explanation PR Debit Credit Balance Oct. 1 73,000 73,000 Dec. 31 Closing 14,460 87,460 31 Closing 7,100 80,360 S. Rey, Withdrawals Acct. No. 302 Date Explanation PR Debit Credit Balance Oct. 31 3,600 3,600 Nov. 30 2,000 5,600 Dec. 31 1,500 7,100 31 Closing 7,100 0 Serial Problem, SP 4 (Continued) Computer Services Revenue Acct. No. 403 Date Explanation PR Debit Credit Balance Oct. 6 4,800 4,800 12 1,400 6,200 28 5,208 11,408 Nov. 2 4,633 16,041 8 5,668 21,709 24 3,950 25,659 Dec. 20 5,625 31,284 31 Closing 31,284 0 Depreciation Expense—Office Equipment Acct. No. 612 Date Explanation PR Debit Credit Balance Dec. 31 400 400 31 Closing 400 0 Depreciation Expense—Computer Equipment Acct. No. 613 Date Explanation PR Debit Credit Balance Dec. 31 1,250 1,250 31 Closing 1,250 0 Wages Expense Acct. No. 623 Date Explanation PR Debit Credit Balance Oct. 31 875 875 Nov. 30 1,750 2,625 Dec. 10 750 3,375 31 500 3,875 31 Closing 3,875 0 Insurance Expense Acct. No. 637 Date Explanation PR Debit Credit Balance Dec. 31 555 555 31 Closing 555 0 Rent Expense Acct. No. 640 Date Explanation PR Debit Credit Balance Dec. 31 2,475 2,475 31 Closing 2,475 0 Serial Problem, SP 4 (Concluded) Computer Supplies Expense Acct. No. 652 Date Explanation PR Debit Credit Balance Dec. 31 3,065 3,065 31 Closing 3,065 0 Advertising Expense Acct. No. 655 Date Explanation PR Debit Credit Balance Oct. 20 1,728 1,728 Dec. 2 1,025 2,753 31 Closing 2,753 0 Mileage Expense Acct. No. 676 Date Explanation PR Debit Credit Balance Nov. 1 320 320 28 384 704 Dec. 29 192 896 31 Closing 896 0 Miscellaneous Expense Acct. No. 677 Date Explanation PR Debit Credit Balance Nov. 22 250 250 Dec. 31 Closing 250 0 Repairs Expense—Computer Acct. No. 684 Date Explanation PR Debit Credit Balance Oct. 17 805 805 Dec. 3 500 1,305 31 Closing 1,305 0 Income Summary Acct. No. 901 Date Explanation PR Debit Credit Balance Dec. 31 Closing 31,284 31,284 31 Closing 16,824 14,460 31 Closing 14,460 0  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 Motion’s 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 Motion’s 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.  Comparative Analysis — BTN 4-2 1. Research In Motion’s current ratios: Current year $5,813 / $2,432 = 2.39 Prior year $4,842 / $2,115 = 2.29 Apple’s 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 Motion’s current ratio improved, increasing from 2.29 to 2.39. RadioShack’s current ratio improved from 2.64 to 2.74. 4. Apple’s current ratio is above (better than) the industry average for both years, and Research In Motion’s is below (worse than) the industry average for both years. However, neither company appears at risk of failing to pay its current creditors.  Ethics Challenge — BTN 4-3 1. There are several courses of action that Tamira could have taken. Two possibilities follow: 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. 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).  Communicating in Practice — BTN 4-4 TO: _____________________ FROM: _____________________ DATE: ______________________ SUBJECT: Clarifications—objective of the closing process [Note: Following is a sample of what the memorandum’s 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 team’s 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.]  Taking It to the Net — BTN 4-5 The Motley Fool states that a benchmark of 1.5 is generally regarded as sufficient to meet near-term operating needs. One should always check a company’s 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. A current ratio that is too high can suggest that a company is hoarding assets instead of using them to effectively grow the business—this 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.] Accounts and adjusted balances to be extended to Balance Sheet columns: Trial Balance Adjustments Balance Sheet Account Title Debit Credit Debit Credit Debit Credit Cash $15,000 $15,000 Accounts receivable (d) 500 500 Supplies 11,000 (c) 7,000 4,000 Prepaid insurance 2,000 (a) 1,200 800 Equipment 24,000 24,000 Acc. deprec—Equip $ 6,000 (b) 3,000 9,000 Accounts payable 2,000 2,000 D. Noseworthy, Capital 31,000 31,000 D. Noseworthy, Withdrawals 5,000 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) Teamwork in Action (Continued) Adjusted revenue account balance: Trial Balance Adjustments Income Statement Title Debit Credit Debit Credit Debit Credit Investigation Fees Earned 32,000 (d) 500 32,500 Closing entry: Account Titles and Explanation Debit Credit Investigation Fees Earned 32,500 Income Summary 32,500 To close revenue accounts to Income Summary Adjusted balances of expense accounts: Title Trial Balance Adjustments Income Statement Debit Credit Debit Credit Debit Credit Rent Expense 14,000 14,000 Insurance Expense (a) 1,200 1,200 Depreciation Expense (b) 3,000 3,000 Supplies Expense (c) 7,000 7,000 Closing entry: Account Titles and Explanation Debit Credit Income Summary 25,200 Rent Expense 14,000 Insurance Expense 1,200 Depreciation Expense 3,000 Supplies Expense 7,000 To close expense accounts to Income Summary Teamwork in Action (Continued) 4. D. Noseworthy, Capital Income Summary (4) 5,000 31,000 (2) 25,200 32,500 (1) 7,300 (3) (3) 7,300 33,300 Ending Third and Fourth closing entries: Account Titles and Explanation Debit Credit Income Summary 7,300 D. Noseworthy, Capital 7,300 To close Income Summary to Capital D. Noseworthy, Capital 5,000 D. Noseworthy, Withdrawals 5,000 To close Withdrawals to Capital 5. Proving the accounting equation: ASSETS = LIABILITIES + OWNER’S EQUITY $35,300 = $2,000 + $ 33,300  Entrepreneurial Decision — BTN 4-7 1. A classified balance sheet classifies liabilities into current and non-current. 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 company’s operations, he must make sure that all revenues earned in a particular accounting period are included in that period’s 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 owner’s withdrawals to Keith’s 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 period’s 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 company’s 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: Nokia’s 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). Chapter 04 - Completing the Accounting Cycle hapter 04 - Completing the Accounting Cycle 4-5 -6 $25,500 $14,000 Current assets Current liabilities