Revised Summer 2012

CHAPTER 3
PREPARING FINANCIAL STATEMENTS

Key Terms and Concepts to Know

Accounting Period:
 Time Period Principle
 Calendar vs. Fiscal Year

Accounting Cycle:
 Know the steps in order.
 Use the steps as a reference to insure that journal entries, trial balances and
financial statements are prepared in the proper order.

Accrual Basis Accounting:

 Accrual vs. Cash Basis Accounting
 Revenue Recognition Principle requires that revenues are reported in the
period in which they are earned, regardless of when payment is received.
 Matching Principle requires that all expenses incurred (whether paid or not) are
recorded in the same accounting period as the revenues earned as a result of
these expenses.

Adjusting Entries:
 Accrued revenues and accrued expenses
 Deferred revenues and deferred expenses
 Unbilled vs. unearned revenues

Closing Process:
 Records the current year’s net income and dividends in retained earnings and
zeros-out the balance in all revenue, expense and dividend accounts at year-end.
 Revenue and expense account balances are transferred into the Income Summary
account. The balance in the income summary represents net income (revenues
minus expenses) which is then transferred into retained earnings.
 Dividends are transferred directly into retained earnings, bypassing the income
summary because dividends are not part of the calculation of net income and do
not appear on the income statement.

Profit Margin ratio and Current ratio

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Key Topics to Know

Adjusting Entries

Adjusting entries are required to record internal transactions and to bring assets and
liability accounts to their proper balances and record expenses or revenues in the proper
accounting period.

Therefore adjusting entries always affect one income statement account (revenue or
expense) and one balance sheet account (asset or liability).

There are two basic types of adjusting entries: Deferrals and Accruals

Deferred Revenue and Expense

Deferrals occur when cash changes hands prior to when the revenue is earned or
expense is incurred. Recording the revenue or expense is postponed or deferred until a
subsequent economic event has occurred which causes revenue to be earned or
expense to be incurred.

Deferred Revenues (also referred to as unearned revenue) are initially recorded as a

liability and adjusted at the end of the period for the portion that has been earned. This
occurs when payment is received in advance of performing the service.

Any Date Cash (Cash received in advance)

Unearned
Revenue

Dec. 31 Unearned Revenue (Amount earned as of year-end)

Fees Earned

Deferred Expenses (also referred to as prepaid expenses) are initially recorded as assets
and adjusted at the end of the period for the portion that has been used up or expired.

Any Date Prepaid Insurance (Cost of insurance policy)

Cash

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Dec. 31 Insurance Expense (Portion of policy that has
expired)
Prepaid Insurance

Accrued Revenue and Expense

Accruals occur when revenue is earned or expense is incurred prior to the cash changing
hands. Deferred revenues and deferred expenses have not been recorded prior to
preparing and recording the adjusting entry.

Accrued Revenues – are revenues that have been earned, but have not been recorded.
Payment has not been received.

Dec. 31 Accounts Receivable (amount earned as of year-end)

Fees Earned

Accrued Expenses – are expenses that have been incurred and a debt or liability is owed
to a third party; however neither the expenses nor liability have been recorded.

Dec. 31 Interest Expense (amount owed as of year-end)

Interest Payable

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Example #1:
Journalize the adjusting entries and label them as accruals or deferrals, adding
accounts as needed.

a. Unexpired insurance at December 31 $1,500

b. Supplies on hand at December 31 $400
c. Depreciation of building for the year $1,750
d. Depreciation of equipment for the year $5,800
e. Revenue unearned at December 31 $2,000
f. Accrued salaries and wages at December 31 $2,300
g. Fees earned but unbilled on December 31 $4,850

Forever Green Lawn Care, Inc.

Trial Balance
December 31, 20--
Cash 8,700
Accounts Receivable 20,600
Prepaid Insurance 4,400
Supplies 1,950
Land 45,000
Building 134,500
Accumulated 86,700
Depreciation-Bldg
Equipment 80,100
Accumulated 61,300
Depreciation-Equip.
Accounts Payable 7,500
Unearned Revenue 6,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 199,400
Salaries and Wages 70,200
Expense
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Miscellaneous Expense 4,050
Totals 430,200 430,200

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Solution #1

a) Deferred Expense
Insurance Expense 2,900
Prepaid Insurance 2,900

b) Deferred Expense
Supplies Expense 1,550
Supplies 1,550

c) Deferred Expense
Depreciation Expense-Bldg 1,750
Accum. Depr.- Bldg 1,750

d) Deferred Expense
Depreciation Expense-Equip 5,800
Accum. Depr.-Equipment 5,800

e) Deferred Revenue
Unearned Revenue 4,000
Fees Earned 4,000

f) Accrued Expense
Wages Expense 2,300
Wages Payable 2,300

g) Accrued Revenue
Accounts Receivable 4,850
Fees Earned 4,850

Example #2:

Using the data in Example #1, determine the adjusted balances of the accounts and
prepare an adjusted trial balance.

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Solution #2

Forever Green Lawn Care, Inc.

Adjusted Trial Balance
December 31, 20--
Cash 8,700
Accounts Receivable 25,450
Prepaid Insurance 1,500
Supplies 400
Land 45,000
Building 134,500
Accumulated Depreciation-Bldg 88,450
Equipment 80,100
Accumulated Depreciation-Equip. 67,100
Accounts Payable 7,500
Salaries & Wages Payable 2,300
Unearned Revenue 2,000
Capital Stock 15,300
Retained Earnings 54,000
Dividends 8,000
Fees Earned 208,250
Salaries and Wages Expense 72,500
Utilities Expense 23,200
Advertising Expense 18,000
Repairs Expense 11,500
Depreciation Expense-Equipment 5,800
Depreciation Expense-Bldg 1,750
Miscellaneous Expense 4,050
Insurance Expense 2,900
Supplies Expense 1,550
Totals 444,900 444,900

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Practice Problem #1:

1) Journalize the adjusting entries and label them as accruals or deferrals.
2) Update the account balances of the selected accounts given below.

a) Supplies on hand on August 31 $800

b) Depreciation of equipment during the year $3,400
c) Rent expired during the year $11,000
d) Wages accrued, but not paid at August 31 $2,500
e) Unearned fees at August 31 $1,500
f) Unbilled fees at August 31 $5,260
g) Supplies on hand on August 31 $800

Selected Account Current Adjust. Adjusted

Balances Balance Entry Balance
Debit Credit (+ / - ) Debit Credit
Accounts Receivable 12,350
Supplies 1,980
Prepaid Rent 20,000
Equipment 73,800
Accumulated Depreciation- 24,700
Equipment
Capital Stock 20,480
Dividends 2,000
Unearned Fees 7,500
Fees Earned 99,650
Wages Expense 42,200
Rent Expense
Depreciation Expense
Supplies Expense

Adjusting Entries and Errors

Failure to journalize and post adjusting entries at the end of the period will cause
multiple financial statement items to be misstated.

Company A failed to record accrued wages of $5,000 at the end of the period.

The adjusting entry should have been:

Wages Expense 5,000
Wages Payable 5,000
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This entry should have increased wages expense with a debit and increased wages
payable with a credit. Failing to record this entry caused the following errors:

a) Wages Expense will be understated by $5,000, so

b) Total Expenses will be understated by $5,000, so
c) Net Income will be overstated by $5,000, and when closed to RE
d) Retained Earnings will be overstated by $5,000
e) Wages Payable will be understated by $5,000, so
f) Total Liabilities will be understated by $5,000

Example #2:
At the end of October, the first month of operations, the following selected data were
taken from the financial statements of Crisp Cleaners:

Net Income for October $102,500

Total Assets at October 31 228,750
Total Liabilities at October 31 60,500
Total Stockholders’ Equity at October 31 168,250

The following adjusting entries were omitted at the end of the month:

a) Supplies used during October $800

b) Depreciation of equipment for October $3,000
c) Unbilled fees earned at October 31 $1,200
d) Accrued wages at October 31 $500

Required:
1) Journalize the entries to record the omitted adjustments.
2) Determine the correct amounts for Net Income, Total Assets, Total Liabilities and
Total Stockholders’ Equity as of October 31.

Solution #2

a. Supplies Expense 800

Supplies 800
b. Depreciation Exp.-Equip. 3,000
Accum. Depr.- Equip. 3,000
c. Accounts Receivable 1,200
Fees Earned 1,200
d. Wages Expense 500
Wages Payable 500
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Net Income Assets Liabilities Equity

Reported Balance $102,500 $228,750 $60,500
Corrections:
Adjustment (a) -800 -800 --- -800
Adjustment (b) -3,000 -3,000 --- -3,000
Adjustment (c) +1,200 +1,200 --- +1,200
Adjustment (d) -500 --- +500 -500
Corrected Balance $ 99,400 $ 226,150 $ 61,000 $ 165,150

Practice Problem #2
At the end of January, the first month of operations, the following selected data were
taken from the financial statements of Wanda’s Car Wash:

Net Income for January $88,450

Total Assets at January 31 276,000
Total Liabilities at January 31 77,800
Total Stockholders’ Equity at January 31 198,200

The following adjusting entries were omitted at the end of the month:

a. Unbilled fees earned at January 31 $2,200

b. Supplies used during January 31 $1,800
c. Depreciation of equipment for January $7,500
d. Accrued wages at January 31 $1,500

Required: 1) Journalize the entries to record the omitted adjustments.

2) Determine the correct amounts for Net Income, Total Assets, Total
Liabilities, and Total Stockholders’ Equity as of January 31.

Closing Process

Closing prepares the general ledger for the next accounting cycle or year. The general
ledger is closed after financial statements have been prepared.

All general ledger accounts are classified as Permanent or Temporary for purposes of
the closing process.
Permanent Accounts are Balance Sheet accounts whose balances are carried forward
from year to year.

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Temporary accounts are the revenue, expense and dividend accounts which measure
activity for a specific time period. Temporary accounts are closed at the end of the
year.

Income Summary is a special temporary account used only during the closing process to
summarize net income.

The closing process involves four entries:

1) Zeroing-out the balance in each revenue account and transferring the total revenues
to the Income Summary account as a credit.
2) Zeroing-out the balance in each expense account and transferring the total revenues
to the Income Summary account as a debit.
3) Zeroing-out the balance in Income Summary, the net income (credit) or net loss
(debit) for the period, to the Retained Earnings account.
4) Zeroing-out the balance in each dividend account and transferring the total dividends
directly into retained earnings as a debit. Income Summary is not used because
dividends are not used to determine Net Income.

After closing, only asset, liability and permanent stockholders’ equity accounts should
have balances.

The following closing entries are based on the previous worksheet. There are four
closing entries that are numbered below.

1. Fees Revenue 190,150

Rent Revenue 2,000
Income Summary 192,150

2. Income Summary 201,620

Salaries and Wages Expense 102,250
Advertising Expense 58,200
Utilities Expense 19,000
Repairs Expense 11,500
Miscellaneous Expense 4,050
Insurance Expense 800
Supplies Expense 700
Depreciation Expense-Bldg 1,620
Depreciation Expense-Equipment 3,500

Balance in Income Summary account = Net Income

3. Retained Earnings 9,470

Income Summary 9,470
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4. Retained Earnings 10,000

Dividends 10,000

Practice Problem #3
For each of the following accounts indicate whether it is:
(IS) – Closed to Income Summary (RE) – Closed to Retained Earnings
(P) – A permanent account and not closed

1. Accounts Payable 7. Prepaid Advertising

2. Accounts Receivable 8. Wages Payable
3. Fees Earned 9. Unearned Fees
4. Dividends 10. Supplies
5. Insurance Expense 11. Prepaid Insurance
6. Accumulated 12. Salary Expense
Depreciation-Bldg

Trial Balance

A Trial Balance is a summary of all account balances in the general ledger. Each
account and its balance (debit or credit) is listed on the trial balance. Total of all debit
account balances must equal the total of all credit debit balances.

A trial balance is useful in determining whether the general ledger is in balance (total
debits equal total credits). It will not identify errors in the general ledger or in preparing
the trial balance for which debits equal credits or if an entry is not posted to the general
ledger at all.

Trial balances are typically prepared three times during the accounting cycle:
 Unadjusted which is prepared prior to adjusting entries
 Adjusted which is prepared after adjusting entries and is the basis for preparing
financial statements
 Post-closing which is prepared after closing entries.

Practice Problem #4
Using the completed worksheet from Practice Problem #1, prepare closing entries and
the Post-Closing Trial Balance.

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Classified Balance Sheet

A classified balance sheet divides assets and liabilities into Current and Non-Current
based on the company’s operating cycle (typically one year).

Current Assets are cash and other assets expected to be converted to cash or sold
within one year through normal operations of the business.

Current Liabilities are debts due within one year or less that will be paid out of current
assets.

Non-Current Assets include fixed assets such as plant and equipment, which are
depreciated over time, property or land and investments expected to be owned after
one year.

Non-current (Long-term) Liabilities are debts due after one year.

Although not referred to as such, capital stock and retained earnings represent long-
term or non-current investments in the business by stockholders and the business itself.

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Sample True / False Questions

1. Accrual-basis accounting involves recording revenues when earned

and recording expenses with their related revenues.
True False

2. Adjusting entries should be prepared after financial statements are

prepared.
True False

3. Prepaid expenses involve payment of cash (or an obligation to pay

cash) for the purchase of an asset before the expense is incurred.
True False

4. Unearned revenues occur when cash is received after the revenue

is earned.
True False

5. Accrued expenses involve the payment of cash before recording

an expense and a liability.
True False

6. Accrued revenues involve the receipt of cash after the revenue has
been earned and an asset has been recorded.
True False

7. The adjusting entry for an accrued expense always includes a

debit to an expense account and a credit to a liability account.
True False

8. Adjusting entries for accrued revenues always includes a debit to a

liability account and a credit to a revenue account.
True False

9. Adjusting entries are not necessary when cash is paid at the same
time expenses are incurred.
True False

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10. A post-closing trial balance is a list of all accounts and their

balances after we have updated account balances for adjusting
entries.
True False

11. A classified balance sheet separates assets into current and long-
term, and separates liabilities into current and long-term.
True False

12. Closing entries transfer the balances of all temporary accounts

(revenues, expenses, and dividends) to the balance of the
Common Stock account.
True False

13. The closing entry for expense accounts includes a debit to

Retained Earnings and a credit to all expense accounts.
True False

14. The closing entry for dividends includes a debit to the Dividends
account and a credit to Retained Earnings.
True False

15. After closing entries are prepared, the balance of Retained

Earnings is updated to reflect the activity in the revenue, expense,
and dividend accounts for the period.
True False

16. The post-closing trial balance is a list of all accounts and their
balances at a particular date after the account balances have been
updated for closing entries.
True False

17. According to the revenue recognition principle, if a company

provides services to a customer in the current year but does not
collect cash until the following year, the company should report
the revenue in the current year.
True False

18. The matching principle states that we recognize expenses in the

same period as the revenues they help to generate.
True False

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19. Because cash-basis accounting violates both the revenue

recognition principle and the matching principle, it is generally not
accepted in preparing financial statements.
True False

20. Adjusting entries involve recording events that have occurred but
that have not yet been recorded by the end of the period.
True False

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Sample Multiple Choice Questions

1. The revenue recognition concept
a) Determines when revenue is credited to a revenue account.
b) States that revenue is not recorded until the cash is received.
c) Controls all revenue reporting for the cash basis of accounting.
d) Is in conflict with accrual accounting.

2. The matching principle:

a) Addresses the relationship between the journal and the ledger.
b) Determines the normal balance of an account.
c) Requires that expenses related to revenue and revenue be
reported at the same time.
d) Requires that the dollar amount of debits equal the dollar
amount of credits in a journal entry.

3. Using accrual accounting, expenses are recorded only:

a) When they are incurred and paid at the same time
b) If they are paid before they are incurred
c) If they are paid after they are incurred
d) When they are incurred, whether or not cash is paid

4. The primary difference between deferred and accrued expenses is

that deferred expenses have:
a) Been recorded and accrued expenses have not been incurred
b) Been incurred and accrued expenses have not
c) Not been incurred and accrued expenses have been incurred
d) Not been recorded and accrued expenses have been incurred

5. Adjusting entries affect at least one:

a) Revenue and one expense account
b) Asset and one liability account
c) Revenue and one stockholders’ equity account
d) Income statement account and one balance sheet account

6. The year-end balance in the prepaid rent account before

adjustment is $18,000, representing three months’ rent paid on
December 1. The adjusting entry required on December 31 is:
a) Debit Rent Expense, $6,000; credit Prepaid Rent, $6,000
b) Debit Prepaid Rent, $6,000; credit Rent Expense, $6,000
c) Debit Rent expense, $12,000; credit Prepaid Rent, $12,000
d) Debit Prepaid Rent, $12,000; credit Rent expense, $12,000
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7. At the end of the fiscal year, the usual adjusting entry for accrued
salaries owed to employees was omitted. Which of the following
statements is true?
a) Stockholders’ equity at the end of the year was overstated
b) Salary Expense for the year was overstated
c) The total of the liabilities at the end of the year was overstated
d) Net Income for the year was understated

8. What is the proper adjusting entry at June 30, the end of the fiscal
year, based on a supplies account balance before adjustment,
$7,200, and supplies inventory on June 30, $1,200?
a) Debit Supplies, $1,200; credit Supplies Expense, $1,200
b) Debit Supplies Expense, $1,200; credit Supplies, $1,200
c) Debit Supplies Expense, $6,000; credit Supplies, $6,000
d) Debit Supplies, $6,000; credit Supplies Expense, $6,000

9. A business enterprise pays weekly salaries of $45,000 on Friday

for a five-day week ending on that day. The adjusting entry
necessary at the end of the fiscal period ending on Thursday is:
a) Debit Salaries Payable, $36,000; credit Cash, $36,000
b) Debit Salary Expense, $36,000; credit Dividends, $36,000
c) Debit Salary Expense, $36,000; credit Salaries Payable,
$36,000
d) Debit Dividends, $36,000; credit Cash, $36,000

10. At the end of the fiscal year, May Company omitted the usual
adjusting entry for depreciation on equipment. Which of the
following statements is true?
a) Total assets will be understated at the end of the current year.
b) The balance sheet, income statement, and retained earnings
statement will be misstated for the current year.
c) Expenses will be overstated at the end of the current year.
d) Net income will be understated for the current year.

11. Data for an adjusting entry described as “accrued wages, $800”

means to debit:
a) Capital Stock and credit Wages Payable
b) Wages Expense and credit Wages Payable
c) Wages Payable and credit Wages Expense
d) Accounts Receivable and credit Wages Expense

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12. Supplies are recorded as assets when purchased. The credit to

supplies in the adjusting entry is for the amount of supplies:
a) Purchased
b) Used
c) Either used or remaining
d) Remaining

13. If cash is received in advance from a customer, then

a) Assets will decrease.
b) Retained earnings will increase.
c) Liabilities will increase.
d) Stockholders’ equity will decrease.

14. Which of the following appears on the Balance Sheet?

a) Unearned Fees
b) Supplies Expense
c) Service Revenue
d) Fees Earned

15. Which of the following does not appear on the Income Statement?
a) Service Revenue
b) Prepaid Insurance
c) Wages Expenses
d) Rent Income

16. When preparing the retained earnings statement, the beginning

retained earnings balance can always be found:
a) In the Income Statement columns of the worksheet
b) By subtracting expenses from revenue
c) In the general journal
d) In the general ledger

17. Depreciation Expense appears on the

a) Balance Sheet
b) Retained Earnings Statement
c) Statement of Cash Flows
d) Income Statement

18. Accumulated Depreciation appears on the:

a) Balance Sheet in the Fixed Asset section
b) Balance Sheet in the Current Assets section
c) Balance Sheet in the Long-Term Liabilities section
d) Income Statement as an Operating Expense
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19. Notes Receivable due in 60 days appears on the:

a) Balance Sheet in the Current Assets section
b) Balance Sheet in the Fixed Asset section
c) Balance Sheet in the Current Liabilities section
d) Income Statement as Revenue

20. Adjusting entries are dated in the journal as of:

a) The last day of the accounting period, although they are
actually journalized after the end of the accounting period.
b) The date they are actually journalized, although this date is
generally after the end of the accounting period.
c) The first day of the accounting period, although they are
actually journalized after the end of the accounting period.
d) The first day of the subsequent accounting period.

21. Closing entries:

a) Need not be journalized since they appear on the worksheet
b) Need not be posted if the financial statements are prepared
from the worksheet
c) Must be journalized and posted
d) Are not needed if adjusting entries are prepared

22. Which of the following accounts should be closed to Income

Summary?
a) Accumulated Depreciation
b) Supplies Expense
c) Prepaid Expenses
d) Dividends

23. Which of the following accounts ordinarily appears in the post-

closing trial balance?
a) Salaries Expense
b) Supplies Expense
c) Accumulated Depreciation
d) Fees Earned

24. The entry to close the income summary account when there is net
income at the end of the accounting period is:
a) Debit Retained Earnings; credit Income Summary
b) Debit Income Summary; credit Retained Earnings
c) Debit Income Summary; credit Dividends
d) Debit Dividends; credit Income Summary

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25. In the normal manual accounting cycle the:

a) Financial statements are prepared after the adjusting entries
are posted
b) Financial statements are prepared after the closing entries are
posted
c) Adjusting and closing entries are journalized before financial
statements are prepared
d) Post-closing trial balance is prepared before the closing entries
are posted

26. The ability of a company to pay its debts is called

a) Solvency
b) Working capital
c) Current ratio
d) Net worth

27. A current ratio of 5.6 means that

a) There is $5.60 in current assets available to pay each dollar of
current liabilities
b) The company cannot pay its debts as they come due
c) There is $5 in current assets for every $6 in current liabilities
d) There is $6 in current assets for every $5 in current liabilities

28. Receipt of an unearned revenue

a) Increases an asset; increases a liability.
b) Increases an asset; increases a revenue.
c) Decreases a liability; increases stockholders’ equity.
d) Decreases a revenue; increases stockholders’ equity.

29. If revenues are recognized only when a customer pays, what

method of accounting is being used?
a) Accrual basis
b) Recognition basis
c) Cash basis
d) Matching basis

30. Which of the following is not a typical example of a prepaid

expense?
a) Supplies
b) Insurance
c) Rent
d) Wages

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31. Payments received in advance of services provided are recorded

as
a) Revenues
b) Equity
c) Expenses
d) Liabilities

32. If the adjusting entry is not made for unearned revenues the
result will be to
a) Overstate assets and understate liabilities.
b) Overstate liabilities and understate revenues.
c) Understate net income and overstate retained earnings
d) Understate retained earnings and overstate revenues.

33. Greenland Property Management Co. received a check for $30,000

on October 1 which represents a one year advance payment of
rent on an office it rents to a client. Unearned Rental Revenue
was credited for the full $30,000. Financial statements are
prepared on December 31. The appropriate adjusting journal
entry to make on December 31 would be
a) Debit Rental Revenue $2,500; credit Unearned Rental Revenue
$2,500.
b) Debit Unearned Rental Revenue $7,500; credit Rental Revenue
$7,500
c) Debit Unearned Rental Revenue $22,500; credit Rental
Revenue $22,500
d) Debit Rental Revenue $22,500; credit Unearned Rental
Revenue $22,500

34. On July 1, East Lake, Inc. purchased a 3-year insurance policy for
$12,600. Prepaid Insurance was debited for the entire amount.
On December 31, when the annual financial statements are
prepared, the appropriate adjusting journal entry would be
a) Debit Prepaid Insurance $2,100; credit Insurance Expense
$2,100
b) Debit Insurance Expense $10,500; credit Prepaid Insurance
$10,500
c) Debit Prepaid Insurance $10,500; credit Insurance Expense
$10,500
d) Debit Insurance Expense $2,100; credit Prepaid Insurance
$2,100

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SOLUTIONS TO PRACTICE PROBLEMS

Practice Problem #1

a) Deferred Expense
Supplies Expense 1,180
Supplies 1,180

b) Deferred Expense
Depreciation Expense-Equip 3,400
Accum. Depr.- Equip 3,400

c) Deferred Expense
Rent Expense 11,000
Prepaid rent 11,000

d) Accrued Expense
Wages Expense 2,500
Wages Payable 2,500

e) Deferred Revenue
Unearned Revenue 6,000
Fees Earned 6,000

f) Accrued Revenue
Accounts Receivable 5,260
Fees Earned 5,260

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Selected Account Current Adjusted

Adjustment
Balances Balance Balance
Debit Credit (+ / - ) Debit Credit
Accounts Receivable 12,350 +5,260 17,610
Supplies 1,980 -1,180 800
Prepaid Rent 20,000 -11,000 9,000
Equipment 75,800 ----- 75,800
Accumulated Depreciation- 24,700
+3,400 0 28,100
Equipment
Capital Stock 20,480 0 20,480
Wages Payable 0 +2,500 0 2,500
Unearned Fees 7,500 -6,000 0 1,500
Fees Earned 99,650 +11,260 0 110,910
Wages Expense 42,200 +2,500 44,700 0
Rent Expense +11,000 11,000 0
Depreciation Expense +3,400 3,400 0
Supplies Expense +1,180 1,180 0
152,330 152,330 163,490 163,490

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Practice Problem #2

a. Accounts Receivable 2,200

Fees Earned 2,200
b. Supplies Expense 1,800
Supplies 1,800
c. Depreciation Expense-Equip. 7,500
Accum. Depr.-Equip. 7,500
d. Wages Expense 1,500
Wages Payable 1,500

Net Income Assets Liabilities Equity

Reported Balance $88,450 $276,000 $77,800 $198,200
Corrections:
Adjustment (a) +2,200 +2,200 --- +2,200
Adjustment (b) -1,800 -1,800 --- -1,800
Adjustment (c) -7,500 -7,500 --- -7,500
Adjustment (d) -1,500 --- +1,500 +2,200
Corrected Balance $79,850 $268,900 $79,300 $189,600

Practice Problem #3

1. P 7. P
2. P 8. P
3. IS 9. P
4. RE 10. P
5. IS 11. P
6. P 12. IS

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Practice Problem #4

1. Fees Earned 110,910

Income Summary 110,910

2. Income Summary 60,280

Wages Expense 44,700
Rent Expense 11,000
Depreciation Expense 3,400
Supplies Expense 1,180

3. Income Summary 50,630

Retained Earnings 50,630

4. Retained Earnings 2,000

Dividends 2,000

Post-Closing Trial Balance

Accounts Receivable 17,610

Supplies 800
Prepaid Rent 9,000
Equipment 73,800
Accumulated
28,100
Depreciation-Equip
Capital Stock 20,480
Wages Payable 2,500
Unearned Fees 1,500
Retained Earnings 48,630
Total 101,210 101,210

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SOLUTIONS TO TRUE / FALSE QUESTIONS

1. True
2. False - adjusting entries should be prepared before financial
statements are prepared.
3. True
4. False - unearned revenues occur when cash is received before the
revenue is earned.
5. False - accrued expenses involve the payment of cash after
recording an expense and a liability.
6. True
7. True
8. False - the debit is to an asset account.
9. True
10. False - this is an adjusted trial balance.
11. True
12. False - balances of temporary accounts are transferred to Retained
Earnings.
13. True
14. False - the closing entry for dividends includes a debit to Retained
Earnings and a credit to the Dividends account
15. True
16. True
17. True
18. True
19. True
20. True

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SOLUTIONS TO MULTIPLE CHOICE QUESTIONS

1. A
2. C
3. D
4. C
5. D
6. A
7. A
8. C
9. C
10. B
11. B
12. B
13. C
14. A
15. B
16. D
17. D
18. A
19. A
20. A
21. C
22. B
23. C
24. B
25. A
26. A
27. A
28. A
29. C
30. D
31. D
32. B
33. B
34. D

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