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Copy of Chap004 1.doc
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Copy of Chap004 1.doc-Chapter 04 - Adjustments, Fi...
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Copy_of_Chap004_1.doc-Chapter 04 - Adjustments, Financial Statements,
Page 67
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–5.
Req. 1
Unadjusted
Trial Balance
Adjusted
Trial Balance
Post-Closing
Trial Balance
Account
Debit
Credit
Debit
Credit
Debit
Credit
Cash
20,000
20,000
20,000
Maintenance supplies
500
200
200
Service equipment
90,000
90,000
90,000
Accumulated depreciation,
service equipment
18,000
27,000
27,000
Remaining assets
42,500
42,500
42,500
Note payable, 8%
10,000
10,000
10,000
Interest payable
800
800
Income taxes payable
13,020
13,020
Wages payable
500
500
Unearned revenue
12,000
6,000
6,000
Contributed capital
50,000
56,000
50,000
Retained earnings
9,000
9,000
45,380
Service revenue
214,000
220,000
0
Expenses
160,000
183,620
0
313,000
313,000
336,320
336,320
152,700
152,700
Ending Retained Earnings = Beg., $9,000 + Net income, ($220,000 - $183,620)
Req. 2
(
a
)
To record the amount of supplies used during 2011, $300, and to reduce the
supplies account to the amount remaining on hand at the end of 2011.
(
b
)
To accrue interest expense for 2011 (the interest is payable in 2012, computed
as $10,000 x .08 = $800) and to record interest payable.
(
c
)
To reduce unearned revenue for the amount of revenue earned during 2011
$6,000.
(
d
)
To record depreciation expense for 2011, $9,000.
(
e
)
To record 2011 wages of $500 that will be paid in 2012.
(
f
)
To record 2011 income tax and the related liability, $13,020.
4-67
Page 68
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–5.
(continued)
Req. 3
Closing Entry on December 31, 2011:
Service revenue (from the adjusted trial balance) (
R)
..........
220,000
Retained earnings (+SE)
.............................................
36,380
Expenses (from the adjusted trial balance) (
E)
..........
183,620
Req. 4
Pretax income
x
Average income tax rate =
Income tax expense
($220,000 - 170,600) x
?
=
$13,020
$49,400
x
?
=
$13,020
?
=
26.4%
Req. 5
Number of shares issued x
Average issue price =
Total issue amount
10,000
x
?
=
$50,000
?
=
$5.00
per share
4-68
Page 69
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
CP4–6.
Transaction (a):
1.
This transaction will affect Carey’s financial statements for 14 years (from 2011 to
2024) in conformity with the matching principle.
[$14,000 ÷ $1,000 per year = 14
years]
2.
Income statement:
Depreciation expense, as given
$1,000 each year
3.
Balance sheet at December 31, 2013:
Assets:
Office equipment
$14,000
Less:
Accumulated depreciation*
3,000
Net book (carrying) value
$11,000
*$1,000 x 3 years = $3,000.
4.
An adjusting entry each year over the life of the asset would be recorded to reflect
the allocation of the cost of the asset when used to generate revenues:
Depreciation expense (+E,
SE)
. . . . . . . .
1,000
Accumulated depreciation (+XA,
A) .
1,000
Transaction (b):
1.
This transaction will affect Carey’s financial statements for 2 years--2013 and
2014--because four month’s rent revenue was earned in 2013, and two months'
rent revenue will be earned in 2014.
2.
The 2013 income statement should report rent revenue earned of $20,000
($30,000 x 4/6).
Occupancy was provided for only 4 months in 2013.
This is in
conformity with the revenue principle.
3.
This transaction created a $10,000 liability ($30,000 - $20,000 = $10,000) as of
December 31, 2013, because at that date Carey "owes'' the renter two more
months' occupancy for which it has already collected the cash.
4.
Yes, an adjusting entry must be made to (a) increase the Rent Revenue account by
$10,000 for two months’ rent earned in 2014 and (b) to decrease the liability to $0
representing no future occupancy owed (in conformity with the revenue principle).
December 31, 2014--Adjusting entry:
Unearned Rent Revenue (
L)
..........................
10,000
Rent Revenue (+R, +SE)
........................
10,000
4-69
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