SOLUTIONS TO EXERCISES

EXERCISE 3-1

1. True.
2. True.
3. False. Many business transactions affect more than one of these
artificial time periods. For example, the purchase of a building
affects expenses for many years.
4. True.
5. False. A time period that lasts less than one year, such as
monthly or quarterly periods, is called an interim period.
6. False. All calendar years are fiscal years, but not all fiscal years
are calendar years. An accounting time period that is one year in
length is referred to as a fiscal year. A fiscal year that starts on
January 1 and ends on December 31 is a calendar year.

EXERCISE 3-2

(a) Accrual-basis accounting records the transactions that change a

company’s financial statements in the periods in which the
events occur rather than in the periods in which the company
receives or pays cash. Information presented on an accrual basis
is useful because it reveals relationships that are likely to be
important in predicting future results. Conversely, under cash-
basis accounting, revenue is recorded only when cash is
received, and an expense is recognized only when cash is paid.
As a result, the cash basis of accounting often leads to
misleading financial statements.

(b) Politicians might desire a cash-basis accounting system over an

accrual-basis system because if an accrual-accounting system is
used, it could mean that billions in government liabilities
presently unrecorded would have to be reported in the federal
budget immediately. The recognition of these additional liabilities
 would make the deficit even worse. This is not what politicians
would like to see and be held responsible for.

EXERCISE 3-2 (Continued)

(c) Dear Senator,

It is my understanding, after having taken a beginning course in

accounting principles, that the Federal government uses a cash-
basis system rather than an accrual-basis accounting system.

I am shocked at such a practice! There must be billions of dollars

of liabilities hidden in many contracts that have not been
recorded yet for the mere reason that they haven’t been paid yet.
I realize that the deficit would dramatically increase if we were to
implement an accrual system, but in all fairness, we citizens
should be given a more accurate picture of what our government
is up to.

Sincerely,

CONCERNED STUDENT

EXERCISE 3-3

(a) Cash received from revenue............................................ $108,000

Cash paid for expenses.................................................... (72,000)
Cash-basis net income........................................... $ 36,000

(b) Revenues [($108,000 – $25,000) + $36,000].................... $119,000

Expenses [($72,000 – $30,000) + $42,000]...................... (84,000)
Accrual-basis net income....................................... $ 35,000

EXERCISE 3-4

1. Unearned revenue.
2. Accrued expense.
3. Accrued expense.
4. Accrued revenue.
5. Prepaid expense.
 6. Unearned revenue.
7. Accrued revenue.
8. Prepaid expense.
9. Prepaid expense.
10. Prepaid expense.
11. Accrued expense.

EXERCISE 3-5

1. Interest Expense...................................................... 300

Interest Payable
($10,000 X 9% X 4/12).................................... 300

2. Supplies Expense.................................................... 1,550

Supplies ($2,450 – $900).................................. 1,550

3. Depreciation Expense............................................. 1,000

Accumulated Depreciation—Equipment........ 1,000

4. Insurance Expense.................................................. 1,225

Prepaid Insurance
($2,100 X 7/12)............................................... 1,225

5. Unearned Service Revenue.................................... 8,000

Service Revenue
($32,000 X 1/4)............................................... 8,000

6. Accounts Receivable.............................................. 4,200

Service Revenue............................................... 4,200

7. Salaries and Wages Expense................................. 5,400

Salaries and Wages Payable
($9,000 X 3/5)................................................. 5,400
EXERCISE 3-6
(a) (b)
Item Type of Adjustment Accounts before Adjustment
1. Accrued Revenues Assets Understated
Revenues Understated

2. Prepaid Expenses Assets Overstated

Expenses Understated

3. Accrued Expenses Expenses Understated

Liabilities Understated

4. Unearned Revenues Liabilities Overstated

Revenues Understated

5. Accrued Expenses Expenses Understated

Liabilities Understated

6. Prepaid Expenses Assets Overstated

Expenses Understated

EXERCISE 3-7

1. Mar. 31 Depreciation Expense ($400 X 3)..................   1,200

Accumulated Depreciation—
  Equipment.............................................   1,200

2. 31 Unearned Rent Revenue............................... 3,400

Rent Revenue ($10,200 X 1/3)............... 3,400

3. 31 Interest Expense............................................   500

Interest Payable......................................   500

4. 31 Supplies Expense.......................................... 2,050

Supplies ($2,800 – $750)........................ 2,050

5. 31 Insurance Expense ($300 X 3)......................   900

Prepaid Insurance..................................   900
EXERCISE 3-8

1. Jan. 31 Accounts Receivable.....................................   875

Service Revenue....................................   875

2. 31 Utilities Expense............................................   650

Utilities Payable......................................   650

3. 31 Depreciation Expense...................................   400

Accumulated Depreciation—
  Equipment.............................................   400

31 Interest Expense............................................   500

Interest Payable......................................   500

4. 31 Insurance Expense ($24,000 ÷ 12)................ 2,000

Prepaid Insurance.................................. 2,000

5. 31 Supplies Expense ($1,600 – $400)................ 1,200

Supplies.................................................. 1,200

EXERCISE 3-9

1. Oct. 31 Supplies Expense.......................................... 2,000

Supplies ($2,500 – $500)........................ 2,000

2. 31 Insurance Expense........................................   120

Prepaid Insurance..................................   120

3. 31 Depreciation Expense...................................    50

Accumulated Depreciation—
  Equipment.............................................    50

4. 31 Unearned Service Revenue...........................   600

Service Revenue....................................   600

5. 31 Accounts Receivable.....................................   360

Service Revenue....................................   360
EXERCISE 3-9 (Continued)

6. Oct. 31 Interest Expense......................................    95

Interest Payable...............................    95

7. 31 Salaries and Wages Expense................. 1,625

Salaries and Wages Payable........... 1,625

EXERCISE 3-10
MONTEE CO.
Income Statement
For the Month Ended July 31, 2017

Revenues
Service revenue ($5,500 + $650)..............................
$6,150
Expenses
Salaries and wages expense ($2,300 + $300)......... $2,600
Supplies expense ($1,200 – $250)...........................    950
Utilities expense........................................................    600
Insurance expense....................................................    400
Depreciation expense............................................... 150
Total expenses.................................................. 4,700
Net income........................................................................ $1,450

EXERCISE 3-11

Answer Computation

(a) Supplies balance = $800 Supplies expense $ 950

Add: Supplies (1/31)  850
Less: Supplies purchased (1,000
)
Supplies (1/1) $ 800

(b) Total premium = $4,800 Total premium = Monthly

premium X 12; $400 X 12 = $4,800

Purchase date = Aug. 1, 2016 Purchase date: On Jan. 31, there

are
 6 months’ coverage remaining
($400 X 6). Thus, the purchase
date was 6 months earlier on
Aug. 1, 2016.
EXERCISE 3-11 (Continued)

(c) Salaries and wages

   payable = $1,820 Cash paid $3,800
Salaries and wages
   payable (1/31/17) 920
 4,720
Less: Salaries and wages
expense 2,900
Salaries and wages
   payable (12/31/16) $1,820
EXERCISE 3-12

(a) July 10 Supplies..........................................................   650

Cash........................................................   650

14 Cash................................................................ 2,000
Service Revenue.................................... 2,000

15 Salaries and Wages Expense....................... 1,200

Cash........................................................ 1,200

20 Cash................................................................   1,000
Unearned Service Revenue...................   1,000

(b) July 31 Supplies Expense..........................................   800

Supplies..................................................   800

31 Accounts Receivable.....................................   500

Service Revenue....................................   500

31 Salaries and Wages Expense....................... 1,200

Salaries and Wages Payable................. 1,200

31 Unearned Service Revenue...........................   1,150

Service Revenue....................................   1,150
EXERCISE 3-13

Aug. 31 Accounts Receivable......................................   2,600

Service Revenue.......................   2,600

31 Supplies Expense........................................... 1,400

Supplies................................................... 1,400

31 Insurance Expense......................................... 1,500

Prepaid Insurance................................... 1,500

31 Depreciation Expense.................................... 900

Accumulated Depreciation—
  Equipment.............................................. 900

31 Salaries and Wages Expense........................ 1,100

Salaries and Wages Payable.................. 1,100

31 Unearned Rent Revenue................................ 1,100

Rent Revenue.......................................... 1,100

EXERCISE 3-14
TURNQUIST COMPANY
Income Statement
For the Year Ended August 31, 2017

Revenues
Service revenue......................................................... $36,600
Rent revenue............................................................. 12,100
Total revenues...................................................
$48,700
Expenses
Salaries and wages expense.................................... 18,100
Rent expense.............................................................  15,000
Insurance expense....................................................   1,500
Supplies expense......................................................   1,400
Depreciation expense............................................... 900
Total expenses.................................................. 36,900
Net income........................................................................ $11,800
EXERCISE 3-14 (Continued)

TURNQUIST COMPANY
Owner’s Equity Statement
For the Year Ended August 31, 2017

Owner’s capital, September 1, 2016...................................$15,600

Add: Net income................................................................ 11,800
Owner’s capital, August 31, 2017 ......................................$27,400

TURNQUIST COMPANY
Balance Sheet
August 31, 2017

Assets
Cash................................................................................... $10,400
Accounts receivable.........................................................   11,400
Supplies ............................................................................     900
Prepaid insurance.............................................................   2,500
Equipment......................................................................... $14,000
Less: Accum. depreciation—equipment....................... 4,500
9,500
Total assets........................................................ $34,700

Liabilities and Owner’s Equity

Liabilities
Accounts payable..........................................................$ 5,800
Salaries and wages payable..........................................  1,100
Unearned rent revenue................................................ 400
Total liabilities.........................................................  7,300
Owner’s equity
Owner’s capital............................................................. 27,400
Total liabilities and owner’s equity.....................$34,700
EXERCISE 3-15

(a) 1. Cash....................................................................  8,000

Accounts Receivable.................................  8,000

2. Unearned Service Revenue............................... 25,000

Service Revenue......................................... 25,000

3. Cash....................................................................  38,000
Unearned Service Revenue.......................  38,000

Unearned Service Revenue

($38,000 – $17,000)............................................. 21,000
  Service Revenue..............................................  21,000

4. Accounts Receivable......................................... 115,000

Service Revenue
  ($161,000 – $25,000 – $21,000)................ 115,000

5. Cash.................................................................... 99,000
Accounts Receivable
  ($115,000 – $16,000)................................. 99,000

(b) Cash received by the club = $8,000 + $99,000 + $38,000

= $145,000

*EXERCISE 3-16

1. Prepaid Insurance................................................... 1,125

Insurance Expense
 ($2,700 X 5/12).................................................. 1,125

2. Service Revenue...................................................... 30,000

Unearned Service Revenue
 ($40,000 X 3/4)..................................................
30,000

3. Supplies.................................................................... 900
Supplies Expense............................................. 900
*EXERCISE 3-17
(a) Jan. 2 Insurance Expense....................................... 1,920
Cash....................................................... 1,920

10 Supplies Expense......................................... 1,700

Cash....................................................... 1,700

15 Cash............................................................... 6,100
Service Revenue................................... 6,100

Cash Service Revenue

1/15 6,100  1/2 1,920  1/15 6,100
 1/10 1,700
Insurance Expense Supplies Expense
1/2 1,920  1/10 1,700 
(b) Jan. 31 Prepaid Insurance ($160 X 11 months)...... 1,760
Insurance Expense............................... 1,760

31 Supplies........................................................   650
Supplies Expense.................................   650

31 Service Revenue........................................... 4,000

Unearned Service Revenue................. 4,000

Unearned Service
Prepaid Insurance Supplies Revenue
1/31 1,760  1/31   650   1/31 4,000

Insurance Expense Supplies Expense Service Revenue

1/2 1,920  1/31 1,760 1/10 1,700  1/31 650 1/31 4,000  1/15 6,100
Bal.   160  Bal.   1,050   Bal. 2,100

(c) Prepaid insurance............................................................$1,760

Supplies...............................................................................   650
Unearned service revenue................................................ 4,000
Service revenue................................................................. 2,100
Insurance expense..............................................................  160
Supplies expense............................................................   1,050
*EXERCISE 3-18
(a) 2 Going concern assumption
(b) 6 Economic entity assumption
(c) 3 Monetary unit assumption
(d) 4 Time period assumption
(e) 5 Historical cost principle
(f) 1 Full disclosure principle

*EXERCISE 3-19
(a) This is a violation of the historical cost principle. The inventory
was written up to its fair value when it should have remained at
cost.
(b) This is a violation of the economic entity assumption. The
treatment of the transaction treats Austin Weber and Weber Co.
as one entity when they are two separate entities. Salaries and
Wages Expense should have been debited for the purchase of
the truck.
(c) This is a violation of the time period assumption. This
assumption states that the economic life of a business can be
divided into artificial time periods (months, quarters, or a year).
By adding two more weeks to the year, Weber Co. would be
misleading financial statement readers. In addition, 2017 results
would not be comparable to previous years’ results. The
company should use a 52 week year.

*EXERCISE 3-20

1. Comparability
2. Going concern assumption
3. Materiality
4. Full disclosure principle
5. Time period assumption
6. Relevance
7. Historical cost principle
8. Consistency
9. Economic entity assumption
10. Faithful representation
11. Monetary unit assumption
12. Expense recognition principle
*EXERCISE 3-21

(a) The primary objective of financial reporting is to provide financial

information that is useful to investors and creditors for making
decisions about providing capital. Since Speyeware’s shares
appear to be actively traded, investors must be capable of using
the information made available by Speyeware to make decisions
about the company.
(b) The investors must feel as if the company will show earnings in
the future. They must recognize that information relevant to their
investment choice is indicated by more than Speyeware’s net
income.
(c) The change from Canadian dollars to U.S. dollars for reporting
purposes should make Speyeware more comparable with
companies traded on U.S. stock exchanges.

*EXERCISE 3-22

(a) Accounting information is the compilation and presentation of

financial information for a company. It provides information in
the form of financial statements and additional disclosures that is
useful for decision making.
The accounting rules and practices that have substantial
authoritative support and are recognized as a general guide for
financial reporting purposes are referred to as international
financial reporting standards (GAAP). The biotechnology
company that employs Gina will follow GAAP to report its assets,
liabilities, equity, revenues, and expenses as it prepares financial
statements.
(b) Gina is correct in her understanding that the low success rate for
new biotech products will be a cause of concern for investors.
Her suggestion that detailed scientific findings be reported to
prospective investors might offset some of their concerns but it
probably won’t conform to the qualitative characteristics of
accounting information.
These characteristics consist of relevance, faithful
representation, comparability, and consistency, verifiability,
timeliness, and understandability. They apply to accounting
information rather than the scientific findings that Gina wants to
include.
 SOLUTIONS TO EXERCISES

EXERCISE 4-1

DIXON COMPANY
Worksheet
For the Month Ended June 30, 2017

Account Titles Trial Balance Adjustments Adj. Trial Balance Income Statement Balance Sheet
Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 2,320 2,320 2,320
Accounts
Receivable 2,440 2,440 2,440
Supplies 1,880 (a) 1,380 500 500
Accounts Payable 1,120 1,120 1,120
Unearned Service
Revenue 240 (b) 140 100 100
Owner’s Capital 3,600 3,600 3,600
Service Revenue 2,400 (b) 140 2,540 2,540
Salaries and
Wages Expense 560 (c) 210 770 770
Miscellaneous
Expense 160           160 160
Totals 7,360 7,360
(a)
Supplies Expense 1,380 1,380 1,380
Salaries and
Wages Payable           (c) 210           210                               210
Totals 1,730 1,730 7,570 7,570 2,310 2,540 5,260 5,030
Net Income    230                        230
Totals 2,540 2,540 5,260 5,260
EXERCISE 4-2

SAVAGLIA COMPANY
(Partial) Worksheet
For the Month Ended April 30, 2017

Adjusted Income
Trial Balance Statement Balance Sheet
Account Titles Dr. Cr. Dr. Cr. Dr. Cr.
Cash 10,000 10,000
Accounts Receivable 7,840 7,840
Prepaid Rent 2,280 2,280
Equipment 23,050 23,050
Accum. Depreciation
—   Equipment 4,900 4,900
Notes Payable 5,700 5,700
Accounts Payable 4,920 4,920
Owner’s Capital 27,960 27,960
Owner’s Drawings 3,650 3,650
Service Revenue 15,590 15,590
Salaries and Wages
Expense 10,840 10,840
Rent Expense 760 760
Depreciation Expense 650 650
Interest Expense 57 57
Interest Payable             57                                     57
Totals 59,127 59,127 12,307 15,590 46,820 43,537
Net Income 3,283                         3,283
Totals 15,590 15,590 46,820 46,820
EXERCISE 4-3

SAVAGLIA COMPANY
Income Statement
For the Month Ended April 30, 2017

Revenues
Service revenue.........................................................
$15,590
Expenses
Salaries and wages expense.................................... $10,840
Rent expense............................................................. 760
Depreciation expense............................................... 650
Interest expense........................................................ 57
Total expenses.................................................. 12,307
Net income........................................................................ $ 3,283

SAVAGLIA COMPANY
Owner’s Equity Statement
For the Month Ended April 30, 2017

Owner’s Capital, April 1............................................................. $27,960

Add: Net income....................................................................... 3,283
31,243
Less: Drawings.......................................................................... 3,650
Owner’s Capital, April 30........................................................... $27,593

SAVAGLIA COMPANY
Balance Sheet
April 30, 2017

Assets
Current assets
Cash........................................................................... $10,000
Accounts receivable................................................. 7,840
Prepaid rent............................................................... 2,280
 Total current assets.......................................... $20,120
Property, plant, and equipment
Equipment................................................ 23,050
Less: Accumulated depreciation—equipment 4,900 18,150
Total assets........................................................ $38,270

EXERCISE 4-3 (Continued)

SAVAGLIA COMPANY
Balance Sheet (Continued)
April 30, 2017

Liabilities and Owner’s Equity

Current liabilities
Notes payable............................................................ $5,700
Accounts payable..................................................... 4,920
Interest payable......................................................... 57
Total current liabilities...................................... $10,677
Owner’s equity
Owner’s capital.......................................................... 27,593
Total liabilities and owner’s equity.................. $38,270

EXERCISE 4-4

(a) Apr. 30 Service Revenue....................................... 15,590

Income Summary............................... 15,590

30 Income Summary...................................... 12,307

Salaries and Wages Expense........... 10,840
Rent Expense..................................... 760
Depreciation Expense....................... 650
Interest Expense................................ 57

30 Income Summary...................................... 3,283

Owner’s Capital................................. 3,283

30 Owner’s Capital......................................... 3,650

Owner’s Drawings............................. 3,650
(b)
Income Summary Owner’s Capital
(2) 12,307   (1) 15,590 (4) 3,650  Bal. 27,960
(3) 3,283  (3) 3,283
15,590  15,590  Bal. 27,593
EXERCISE 4-4 (Continued)

(c) SAVAGLIA COMPANY

Post-Closing Trial Balance
April 30, 2017

Debit Credit
Cash...................................................................... $10,000
Accounts Receivable.......................................... 7,840
Prepaid Rent........................................................ 2,280
Equipment............................................................ 23,050
Accumulated Depreciation—Equipment........... $ 4,900
Notes Payable...................................................... 5,700
Accounts Payable................................................ 4,920
Interest Payable................................................... 57
Owner’s Capital...................................................               27,593
$43,170 $43,170

EXERCISE 4-5

(a) Accounts Receivable.......................................... 1,100

Service Revenue.......................................... 1,100

Insurance Expense.............................................. 300

Prepaid Insurance........................................ 300

Depreciation Expense......................................... 900

Accumulated Depreciation—Equipment. . . 900

Salaries and Wages Expense............................. 500

Salaries and Wages Payable....................... 500
EXERCISE 4-5 (Continued)

(b) Income Statement Balance Sheet

Dr. Cr. Dr. Cr.
Accounts Receivable X
Prepaid Insurance X
Accum. Depreciation—Equip. X
Salaries and Wages Payable X
Service Revenue X
Salaries and Wages Expense X
Insurance Expense X
Depreciation Expense X

EXERCISE 4-6

(a) Accounts Receivable—$25,000 ($34,000 – $9,000).

Supplies—$2,500 ($7,000 – $4,500).
Accumulated Depreciation—Equipment—$22,000 ($12,000 +
$10,000).
Salaries and Wages Payable—$0 No liability recorded until
adjustments
are made.
Insurance Expense—$6,000 ($26,000 – $20,000).
Salaries and Wages Expense—$43,400 ($49,000 – $5,600).

(b) Accounts Receivable.................................................. 9,000

Service Revenue................................................. 9,000

Insurance Expense..................................................... 6,000

Prepaid Insurance............................................... 6,000

Supplies Expense....................................................... 4,500

Supplies............................................................... 4,500

Depreciation Expense................................................ 10,000

Accumulated Depreciation—Equipment........... 10,000

Salaries and Wages Expense.................................... 5,600

Salaries and Wages Payable.............................. 5,600
EXERCISE 4-7

(a) Service Revenue..................................................... 4,300

Income Summary.............................................. 4,300

Income Summary.................................................... 3,416

Salaries and Wages Expense.......................... 1,260
Miscellaneous Expense................................... 256
Supplies Expense............................................. 1,900

Income Summary.................................................... 884

Owner’s Capital................................................. 884

Owner’s Capital....................................................... 550

Owner’s Drawings............................................ 550

(b) VICTORIA LEE COMPANY

Post-Closing Trial Balance
June 30, 2017

Account Titles   Debit   Credit 

Cash......................................................................... $3,712
Accounts Receivable.............................................. 3,904
Supplies................................................................... 480
Accounts Payable................................................... $1,382
Salaries and Wages Payable.................................. 460
Unearned Service Revenue.................................... 160
Owner’s Capital.......................................................          6,094
$8,096$8,096
EXERCISE 4-8

(a)
General Journal J15
Date Account Titles Ref. Debit Credit
July 31 Service Revenue.................................. 400 64,000
Rent Revenue....................................... 429 6,500
Income Summary........................ 350 70,500

31 Income Summary................................. 350 78,600

Salaries and Wages Expense.... 726 55,700
Utilities Expense......................... 732 14,900
Depreciation Expense................ 711 8,000

31 Owner’s Capital.................................... 301 8,100

Income Summary........................ 350 8,100

31 Owner’s Capital.................................... 301 16,000

Owner’s Drawings...................... 306 16,000

(b)

Owner’s Capital No. 301

Date Explanation Ref. Debit Credit Balance
July 31 Balance ✓ 45,200
31 Close net loss J15 8,100 37,100
31 Close drawing J15 16,000 21,100

Income Summary No. 350

Date Explanation Ref. Debit Credit Balance
July 31 Close revenue J15 70,500 70,500
31 Close expenses J15 78,600 (8,100)
31 Close net loss J15 8,100 0
EXERCISE 4-8 (Continued)

(c) OKABE COMPANY

Post-Closing Trial Balance
July 31, 2017

Debit Credit
Cash...................................................................... $9,840
Accounts Receivable.......................................... 8,780
Equipment............................................................ 15,900
Accumulated Depreciation—Equipment........... $ 7,400
Accounts Payable................................................ 4,220
Unearned Rent Revenue..................................... 1,800
Owner’s Capital...................................................               21,100
$34,520 $34,520

EXERCISE 4-9

(a) OKABE COMPANY

Income Statement
For the Year Ended July 31, 2017

Revenues
Service revenue........................................... $64,000
Rent revenue................................................ 6,500
Total revenues...................................... $70,500
Expenses
Salaries and wages expense...................... 55,700
Utilities expense.......................................... 14,900
Depreciation expense.................................. 8,000
Total expenses..................................... 78,600
Net loss................................................................. ($ 8,100)
EXERCISE 4-9 (Continued)

OKABE COMPANY
Owner’s Equity Statement
For the Year Ended July 31, 2017

Owner’s Capital, August 1, 2016........................ $45,200

Less: Net loss..................................................... $ 8,100
Drawings................................................... 16,000 24,100
Owner’s Capital, July 31, 2017........................... $21,100

(b) OKABE COMPANY

Balance Sheet
July 31, 2017

Assets
Current assets
Cash................................................................. $9,840
Accounts receivable...................................... 8,780
Total current assets................................ $18,620
Property, plant, and equipment
Equipment....................................................... 15,900
Less: Accumulated depreciation................. 7,400
8,500
Total assets............................................. $27,120

Liabilities and Owner’s Equity

Current liabilities
Accounts payable........................................... $4,220
Unearned rent revenue.................................. 1,800
Total current liabilities........................... $ 6,020
Owner’s equity
Owner’s Capital.............................................. 21,100
Total liabilities and owner’s equity....... $27,120
EXERCISE 4-10

1. False “Analyze business transactions” is the first step in the

accounting cycle.
2. False. Reversing entries are an optional step in the accounting
cycle.
3. True.
4. True.
5. True.
6. False. Steps 1–3 may occur daily in the accounting cycle. Steps
4–7 are performed on a periodic basis. Steps 8 and 9 are usually
prepared only at the end of a company’s annual accounting
period.
7. False. The step of “journalize the transactions” occurs before the
step of “post to the ledger accounts.”
8. False. Closing entries are prepared after financial statements are
prepared.

EXERCISE 4-11

(a) June 30 Service Revenue..................................... 18,100

Income Summary............ 18,100

30 Income Summary................................... 13,100

Salaries and Wages Expense........ 8,800
Rent Expense.................................. 3,000
Supplies Expense........................... 1,300

30 Income Summary................................... 5,000

Owner’s Capital............................... 5,000

30 Owner’s Capital...................................... 2,100

Owner’s Drawings.......................... 2,100
(b)
Income Summary
June 30 13,100   June 30 18,100
June 30 5,000 
18,100  18,100
EXERCISE 4-12

(a) 1. Cash................................................................... 700

Equipment................................................. 700

Salaries and Wages Expense.......................... 700

Cash........................................................... 700

2. Service Revenue............................................... 100

Cash........................................................... 100

Cash................................................................... 1,000
Accounts Receivable............................... 1,000

3. Accounts Payable............................................. 670

Equipment................................................. 670

Equipment......................................................... 760
Accounts Payable.................................... 760

(b) 1. Salaries and Wages Expense.......................... 700

Equipment................................................. 700

2. Service Revenue............................................... 100

Cash................................................................... 900
Accounts Receivable............................... 1,000

3. Equipment......................................................... 90
Accounts Payable..................................... 90
EXERCISE 4-13

1. Accounts Payable ($750 – $570).............................. 180

Cash.................................................................... 180

2. Supplies..................................................................... 560
Equipment.......................................................... 56
Accounts Payable.............................................. 504

3. Owner’s Drawings.................................................... 500

Salaries and Wages Expense........................... 500

EXERCISE 4-14

(a) MCCOY BOWLING ALLEY

Balance Sheet
December 31, 2017

Assets
Current assets
Cash.............................................. $18,040
Accounts receivable.................... 14,520
Prepaid insurance........................ 4,680
Total current assets............. $ 37,240
Property, plant, and equipment
Land.............................................. 67,000
Buildings....................................... $128,800
Less: Acc. depr.—buildings....... 42,600 86,200
Equipment.................................... 62,400
Less: Acc. depr.—equipment.... 18,720 43,680
196,880
Total assets.......................... $234,120
EXERCISE 4-14 (Continued)

MCCOY BOWLING ALLEY

Balance Sheet (Continued)
December 31, 2017

Liabilities and Owner’s Equity

Current liabilities
Notes payable(due 2018).................................. $20,000
Accounts payable.............................................. 12,300
Interest payable................................................. 3,800
Total current liabilities.............................. $ 36,100
Long-term liabilities
Notes payable.................................................... 77,780
Total liabilities........................................... 113,880
Owner’s equity
Owner’s capital ($115,000 + $5,240*)............... 120,240
Total liabilities and owner’s equity.......... $234,120

*Net income = $17,180 – $780 – $7,360 – $3,800 = $5,240

(b) Current assets exceed current liabilities by only $1,140 ($37,240 –

$36,100). However, approximately 50% of current assets are in the
form of cash. The company’s liquidity appears to be reasonably
good, but some caution is needed.

EXERCISE 4-15

CL Accounts payable PPE Accumulated depreciation–

equipment
CA Accounts receivable PPE Buildings
CA Cash PPE Land
OE Owner’s capital LTL Notes payable (due in 2
years)
IA Patents CA Supplies
CL Salaries and wages PPE Equipment
payable
CA Inventory CA Prepaid expenses
CA Stock investments
EXERCISE 4-16

J. PINEDA COMPANY
Balance Sheet
December 31, 2017
(in thousands)
Assets
Current assets
Cash............................................................. $ 2,668
Short-term investments.............................. 3,690
Accounts receivable................................... 1,696
Inventory...................................................... 1,256
Prepaid insurance....................................... 880
Total current assets............................ $10,190
Long-term investments...................................... 264
Property, plant, and equipment
Equipment.................................................... 11,500
Less: Accumulated depreciation—
           equipment......................................... (5,655)
5,845
Total assets.......................................... $16,299

Liabilities and Owner’s Equity

Current liabilities
Notes payable (due in 2018)....................... $ 500
Accounts payable....................................... 1,444
Total current liabilities........................ $
1,944
Long-term liabilities
Long-term debt............................................ 1,000
Notes payable.............................................. 400
Total long-term liabilities..................... 1,400
Total liabilities..................................................... 3,344
Owner’s equity
Owner’s capital............................................   12,955
Total liabilities and owner’s equity.... $16,299
EXERCISE 4-17

(a)
BASTEN COMPANY
Income Statement
For the Year Ended July 31, 2017

Revenues
Service revenue........................................ $63,000
Rent revenue............................................ 8,500
Total revenues..................................
$71,500
Expenses
Salaries and wages expense................... 48,700
Utilities expense....................................... 22,600
Depreciation expense.............................. 4,000
Total expense.................................... 75,300
Net loss............................................................. $ (3,800)

BASTEN COMPANY
Owner’s Equity Statement
For the Year Ended July 31, 2017

Owner’s Capital, August 1, 2016....................

$51,200
Less: Net loss.................................................. $3,800
Drawings................................................ 3,000 6,800
Owner’s Capital, July 31, 2017........................ $44,400
EXERCISE 4-17 (Continued)

(b)
BASTEN COMPANY
Balance Sheet
July 31, 2017

Assets
Current assets
Cash................................................................. $14,200
Accounts receivable....................................... 9,780
Total current assets................................ $23,980
Property, plant, and equipment
Equipment........................................................ 34,400
Less: Accumulated depreciation—
   equipment............................................. 6,000
28,400
Total assets ............................................. $52,380

Liabilities and Owner’s Equity

Current liabilities
Accounts payable........................................... $4,100
Salaries and wages payable........................... 2,080
Total current liabilities............................ $ 6,180
Long-term liabilities
Notes payable.................................................. 1,800
Total liabilities......................................... 7,980
Owner’s equity
Owner’s capital................................................   44,400
Total liabilities and owner’s equity........ $52,380
*EXERCISE 4-18

(a) Dec. 31 Salaries and Wages Expense

   ($12,000 X 2/5)....................................... 4,800
Salaries and Wages Payable.......... 4,800

Jan. 6 Salaries and Wages Payable.................. 4,800

Salaries and Wages Expense
   ($12,000 X 3/5)....................................... 7,200
Cash.................................................. 12,000

(b) Dec.31 Salaries and Wages Expense................. 4,800

Salaries and Wages Payable.......... 4,800

Jan. 1 Salaries and Wages Payable.................. 4,800

Salaries and Wages Expense......... 4,800

Jan. 6 Salaries and Wages Expense................ 12,000

Cash.................................................. 12,000

*EXERCISE 4-19

(a) Dec. 31 Service Revenue...................................... 92,500

Income Summary............................. 92,500

31 Income Summary..................................... 7,700

Interest Expense.............................. 7,700

(b) Jan. 1 Service Revenue...................................... 5,000

Accounts Receivable....................... 5,000

1 Interest Payable....................................... 2,200

Interest Expense.............................. 2,200
*EXERCISE 4-19 (Continued)

(c) & (e)

Accounts Receivable
Dec. 31 Balance *19,500 
31 Adjusting 5,000 
24,500 
 Jan. 1 Reversing 5,000
*($24,500 – $5,000)
Service Revenue
Dec. 31 Closing 92,500  Dec. 31 Balance 87,500*
  31 Adjusting 5,000
92,500  92,500
Jan. 1 Reversing 5,000  Jan. 10 5,000

*($92,500 – $5,000)

Interest Payable
 Dec. 31 Adjusting 2,200
Jan. 1 Reversing 2,200 

Interest Expense
Dec. 31 Balance *5,500   Dec. 31 Closing 7,700
31 Adjusting 2,200  .
 7,700  7,700
Jan. 15 3,000   Jan. 1 Reversing 2,200

*($7,700 – $2,200)

(d) (1)
Jan. 10 Cash................................................................ 5,000
Service Revenue.......................... 5,000

(2)
15 Interest Expense............................................ 3,000
Cash.............................................. 3,000