216 Chapter 5 The Accounting Cycle: Reporting Financial Results

6. What type of accounts are referred to as permanent or real 12. How does depreciation expense differ from other operating
accounts? What is meant by these terms? expenses?
7. Explain why the Dividends account is closed directly to the 13. Explain the need for closing entries and describe the process
Retained Earnings account. by which temporary owners’ equity accounts are closed at
8. Which accounts appear in a company’s after-closing trial year-end.
balance? How do these accounts differ from those reported 14. Explain the significance of measuring a company’s return
in an adjusted trial balance? on equity.
9. Can a company be profitable but not liquid? Explain. *15. Explain several purposes that may be served by preparing
10. What are interim financial statements? Do accounts that a worksheet (or using computer software that achieves the
appear in a company’s interim balance sheet require any goals of a worksheet).
special computations to be reported correctly? Explain.
11. Explain the accounting principle of adequate disclosure. *Supplemental Topic, “The Worksheet.”

Brief
Bri
ieff Exercises
Exerciises accounting

LO1 B
BRIEF During the current year, the total assets of Mifflinburg Corporation decreased by $60,000 and total
EXERCISE 5.1
E liabilities decreased by $300,000. The company issued $100,000 of new stock, and its net income
B
Balancing the for the year was $250,000. No other changes to stockholders’ equity occurred during the year.
LO2 Determine the dollar amount of dividends declared by the company during the year.
Accounting Equation
A

LO1 B
BRIEF On December 1, 2011, Millstone Corporation invested $45,000 in a new delivery truck. The truck
EXERCISE 5.2
E is being depreciated at a monthly rate of $500. During 2011, the company issued stock for $60,000
I
Income
In Statement and declared dividends of $5,000. Its net income in 2011 was $70,000. Millstone’s ending Retained
LO2 and Balance Sheet
an Earnings balance as reported in its December 31, 2011, balance sheet was $90,000. Its beginning
Relationships
R Capital Stock balance on January 1, 2011, was $200,000. Given this information, determine the
total stockholders’ equity reported in the company’s balance sheet dated December 31, 2011.

LO1 B
BRIEF Indicate in which section of the balance sheet each of the following accounts is classified. Use
EXERCISE 5.3
E the symbols CA for current assets, NCA for noncurrent assets, CL for current liabilities, LTL for
Classifying Balance
C long-term liabilities, and SHE for stockholders’ equity.
LO2 Sheet Accounts
S a. Prepaid Rent f. Mortgage Payable (due in 15 years)
b. Dividends Payable g. Unearned Service Revenue
c. Salaries Payable h. Accounts Receivable
d. Accumulated Depreciation: Equipment i. Land
e. Retained Earnings j. Office Supplies

LO4 B
BRIEF Indicate whether a debit or credit is required to close each of the following accounts. Use the sym-
EXERCISE 5.4
E bols D if a debit is required, C if a credit is required, and N if the account is not closed at the end
Id
Identifying and of the period.
Closing Temporary a. Salary Expense
Accounts
b. Unexpired Insurance
c. Consulting Fees Earned
d. Depreciation Expense
e. Dividends
f. Retained Earnings
g. Interest Revenue
h. Accumulated Depreciation
i. Income Taxes Expense
j. Unearned Revenue
k. Income Summary (of a profitable company)
l. Income Summary (of an unprofitable company)

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 Brief Exercises 217

LO4 B
BRIEF The following account balances were taken from Cal Tour Corporation’s year-end adjusted trial
EXERCISE 5.5
E balance (assume these are the company’s only temporary accounts):
C
Closing Entries of a
Profitable Company Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 600
Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,800
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 525
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,660
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,700
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 615

Prepare the company’s necessary closing entries.

LO4 B
BRIEF The following account balances were taken from Jachobson Consulting’s year-end adjusted trial
EXERCISE 5.6
E balance (assume these are the company’s only temporary accounts):
C
Closing Entries of an
Unprofitable Company
Consulting fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,000
Interest revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800
Depreciation expense: office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,600
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,400
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400

Prepare the company’s necessary closing entries.

LO5 B
BRIEF Indicate whether each of the following accounts appears in the debit column or in the credit col-
EXERCISE 5.7
E umn of an after-closing trial balance. Use the symbols D for debit column, C for credit column,
After-Closing Trial and N if the account does not appear in an after-closing trial balance.
Balance a. Unearned Service Revenue
b. Accumulated Depreciation: Office Equipment
c. Land
d. Consulting Fees Earned
e. Capital Stock
f. Income Summary (of a profitable company)
g. Depreciation Expense: Office Equipment
h. Income Taxes Payable
i. Unexpired Insurance
j. Dividends
k. Retained Earnings
l. Dividends Payable

LO6 B
BRIEF Dog Daze, Inc., has provided the following information from its most current financial
EXERCISE 5.8
E statements:
P
Profitability and
Liquidity Measures
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $60,000
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Total stockholders’ equity, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37,000
Total stockholders’ equity, December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000

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 218 Chapter 5 The Accounting Cycle: Reporting Financial Results

a. Compute the company’s net income percentage in 2011.

b. Compute the company’s return on equity in 2011.
c. Compute the company’s current ratio at December 31, 2011.

LO7 B
BRIEF The following revenue figures were taken from Rosemont Corporation’s adjusted trial balance at
EXERCISE 5.9
E the end of the following months (adjusting entries are performed monthly whereas closing entries
M
Measuring Interim are performed annually, on December 31):
Revenue
March 31 (end of the first quarter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,000
September 30 (end of the third quarter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 450,000
December 31 (end of the fourth quarter) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 680,000

Compute how much revenue the company earned from:

a. April 1 through September 30.
b. October 1 through December 31 (the fourth quarter).
c. April 1 through December 31.

LO8 * BRIEF Accountants at Warner Co. use worksheets similar to the one shown in Exhibit 5–13, on page 209.
EXERCISE 5.10
E In the company’s most current year-end worksheet, the amounts transferred from the adjusted trial
The Worksheet
T balance columns to the balance sheet and income statement columns are as follows:

Total amount transferred to the credit column of the balance sheet. . . . . . . . . . . . . $410,000
Total amount transferred to the debit column of the balance sheet . . . . . . . . . . . . . 540,000
Total amount transferred to the credit column of the income statement. . . . . . . . . . 380,000

a. What was the company’s net income for the year?

b. What was the total amount transferred from the adjusted trial balance columns to the debit
column of the income statement?

Exercises
Exerci
ises accounting

LO1 EXERCISE 5.1

E Listed below are nine technical terms used in this chapter:
A
Accounting Liquidity Nominal accounts Real accounts
through
g Terminology
T
Adequate disclosure After-closing trial balance Closing entries
LO7 Income summary Interim financial statements Dividends
Each of the following statements may (or may not) describe one of these technical terms. For each
statement, indicate the accounting term described, or answer “None” if the statement does not
describe any of the items.
a. The accounting principle intended to assist users in interpreting financial statements.
b. A term used to describe a company’s ability to pay its obligations as they come due.
c. A term used in reference to accounts that are closed at year-end.
d. A term used in reference to accounts that are not closed at year-end.
e. A document prepared to assist management in detecting whether any errors occurred in post-
ing the closing entries.
f. A policy decision by a corporation to distribute a portion of its income to stockholders.
g. The process by which the Retained Earnings account is updated at year-end.
h. Entries made during the accounting period to correct errors in the original recording of com-
plex transactions.

*
Supplemental Topic, “The Worksheet.”

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 Exercises 219

LO1 EXERCISE 5.2

E Tutors for Rent, Inc., performs adjusting entries every month, but closes its accounts only at
Financial Statement
F year-end. The company’s year-end adjusted trial balance dated December 31, 2011, was:
Preparation
P
LO2 TUTORS FOR RENT, INC.
ADJUSTED TRIAL BALANCE
LO6 DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 91,100
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Tutoring revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Supply expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,600
$176,000 $176,000

a. Prepare an income statement and statement of retained earnings for the year ended December
31, 2011. Also prepare the company’s balance sheet dated December 31, 2011.
b. Does the company appear to be liquid? Defend your answer.
c. Has the company been profitable in the past? Explain.
LO1 EXERCISE 5.3
E Wilderness Guide Services, Inc., performs adjusting entries every month, but closes its accounts
Financial Statement
F only at year-end. The company’s year-end adjusted trial balance dated December 31, 2011, follows:
Preparation
P
LO2 WILDERNESS GUIDE SERVICES, INC.
ADJUSTED TRIAL BALANCE
LO6 DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,200
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,000
Camping supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,900
Unexpired insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 70,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,000
Notes payable (due 4/1/12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,500
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Guide revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102,000
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87,500
Camping supply expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
$229,500 $229,500

a. Prepare an income statement and statement of retained earnings for the year ended
December 31, 2011. Also prepare the company’s balance sheet dated December 31, 2011.
(Hint: Unprofitable companies have no income taxes expense.)
b. Does the company appear to be liquid? Defend your answer.
c. Has the company been profitable in the past? Explain.

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 220 Chapter 5 The Accounting Cycle: Reporting Financial Results

LO2 EXERCISE 5.4

E Refer to the adjusted trial balance of Tutors for Rent, Inc., illustrated in Exercise 5.2 to respond to
Preparing Closing
P the following items:
Entries and an After-
E a. Prepare all necessary closing entries at December 31, 2011.
LO4 Closing Trial Balance
C b. Prepare an after-closing trial balance dated December 31, 2011.
c. Compare the Retained Earnings balance reported in the after-closing trial balance prepared in
LO5 part b to the balance reported in the adjusted trial balance. Explain why the two balances are
different. (Include in your explanation why the balance reported in the after-closing trial bal-
ance has increased or decreased subsequent to the closing process.)
LO2 EXERCISE 5.5
E Refer to the adjusted trial balance of Wilderness Guide Services, Inc., illustrated in Exercise 5.3 to
Preparing Closing
P respond to the following items:
Entries and an After-
E a. Prepare all necessary closing entries at December 31, 2011.
LO4 Closing Trial Balance
C b. Prepare an after-closing trial balance dated December 31, 2011.
c. Compare the Retained Earnings balance reported in the after-closing trial balance prepared
LO5 in part b to the balance reported in the adjusted trial balance. Explain why the two balances
are different. (Include in your explanation why the balance reported in the after-closing trial
balance has increased or decreased subsequent to the closing process.)
LO3 EXERCISE 5.6
E The following information was taken directly from the footnotes to the financial statements of
Adequate Disclosure
A Best Buy:
1. “We recognize revenue at the time the customer takes possession of the merchandise.”
2. “We sell gift cards to customers and initially establish an Unredeemed Gift Card Liability for
the cash value of the gift card.”
3. “Advertising costs are recorded as expenses the first time the advertisement runs.”
4. “We compute depreciation using the straight-line method.”
a. Discuss what is meant by each of the above footnote items.
b. As noted, Best Buy uses a Unredeemed Gift Card Liability account to record the sale of gift
cards. Assume that you purchase a $500 gift card from Best Buy as a birthday present for a
friend. Prepare the journal entries made by Best Buy to record (1) your purchase of the gift
card and (2) the use of the gift card by your friend to purchase a $500 television.
c. Discuss how the matching principle relates to Best Buy’s treatment of advertising
expenditures.
LO2 EXERCISE 5.7
E Gerdes Psychological Services, Inc., closes its temporary accounts once each year on December 31.
Closing Entries of a
C The company recently issued the following income statement as part of its annual report:
Profitable Company
P
LO4 GERDES PSYCHOLOGICAL SERVICES, INC.
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Counseling revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $225,000
Expenses:
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,800
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,000
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 850
Malpractice insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Continuing education expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,650
Depreciation expense: fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29,400 170,400
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,600

The firm’s statement of retained earnings indicates that a $6,000 cash dividend was declared and
paid during 2011.
a. Prepare the necessary closing entries on December 31, 2011.
b. If the firm’s Retained Earnings account had a $92,000 balance on January 1, 2011, at what amount
should Retained Earnings be reported in the firm’s balance sheet dated December 31, 2011?

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 Exercises 221

LO2 EXERCISE 5.8

E Ferraro Consulting provides risk management services to individuals and to corporate clients. The
Closing Entries of an
C company closes its temporary accounts once each year on December 31. The company recently
Unprofitable Company
U issued the following income statement as part of its annual report:
LO4
FERRARO CONSULTING
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Consulting revenue—individual clients . . . . . . . . . . . . . . . . . . . . . $ 40,000
Consulting revenue—corporate clients . . . . . . . . . . . . . . . . . . . . . 160,000
$200,000
Expenses:
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,000
Depreciation expense: computers . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,600
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400
Travel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,800
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
Telephone and Internet expense . . . . . . . . . . . . . . . . . . . . . . . . . . 1,900
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 155,500
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500 275,000
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (75,000)

The firm’s statement of retained earnings indicates that a $25,000 cash dividend was declared and
paid in 2011.
a. Prepare the necessary closing entries on December 31, 2011.
b. If the firm’s Retained Earnings account had a $300,000 balance on January 1, 2011, at what amount
should Retained Earnings be reported in the firm’s balance sheet dated December 31, 2011?
LO2 EXERCISE 5.9
E When Torretti Company began business on August 1, it purchased a one-year fire insurance policy
Distinction between
D and debited the entire cost of $7,200 to Unexpired Insurance. Torretti adjusts its accounts at the
the Adjusting and the
th end of each month and closes its books at the end of the year.
LO4 Closing Process
C a. Give the adjusting entry required at December 31 with respect to this insurance policy.
b. Give the closing entry required at December 31 with respect to insurance expense. Assume
that this policy is the only insurance policy Torretti had during the year.
c. Compare the dollar amount appearing in the December 31 adjusting entry (part a) with that in
the closing entry (part b). Are the dollar amounts the same? Why or why not? Explain.
LO6 EXERCISE 5.10
E A recent balance sheet of Oregon Foods is provided below:
M
Measuring and
Evaluating Profitability OREGON FOODS
and Liquidity BALANCE SHEET
DECEMBER 31, 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . (4,800) $ 7,200
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,200

Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,200
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,000

Stockholders’ Equity
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,200
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $19,200
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . $23,200

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 222 Chapter 5 The Accounting Cycle: Reporting Financial Results

Other information provided by the company is as follows:

Total revenue for the year ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . $25,500
Total expenses for the year ended December 31, 2011. . . . . . . . . . . . . . . . . . . . . . . 20,400
Total stockholders’ equity, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,800

Compute and discuss briefly the significance of the following measures as they relate to Oregon
Foods:
a. Net income percentage in 2011.
b. Return on equity in 2011.
c. Working capital on December 31, 2011.
d. Current ratio on December 31, 2011.

LO6 EXERCISE 5.11

E A recent balance sheet of Denver Tours is provided below:
M
Measuring and
Evaluating Profitability
E
and Liquidity DENVER TOURS
BALANCE SHEET
DECEMBER 31, 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,100
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400
Buses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 240,000
Accumulated depreciation: buses. . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,000) $222,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $316,000

Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,200
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94,800
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $235,000

Stockholders’ Equity
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 80,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 81,000
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . $316,000

Other information provided by the company is as follows:

Total revenue for the year ended December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . $152,000
Total expenses for the year ended December 31, 2011. . . . . . . . . . . . . . . . . . . . . . 148,960
Total stockholders’ equity, January 1, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,000

Compute and discuss briefly the significance of the following measures as they relate to Denver
Tours:
a. Net income percentage in 2011.
b. Return on equity in 2011.
c. Working capital on December 31, 2011.
d. Current ratio on December 31, 2011.

wil11048_ch05_190-243.indd 222 11/3/10 1:44 PM

 Exercises 223

LO1 EXERCISE 5.12

E Ski Powder Resort ends its fiscal year on April 30. The business adjusts its accounts monthly,
Interim Results
In but closes them only at year-end (April 30). The resort’s busy season is from December 1
through March 31.
LO2 Adrian Pride, the resort’s chief financial officer, keeps a close watch on Lift Ticket Rev-
enue and Cash. The balances of these accounts at the end of each of the last five months are as
follows:
LO7

Lift Ticket
Revenue Cash
November 30 $ 30,000 $ 9,000
December 31 200,000 59,000
January 31 640,000 94,000
February 28 850,000 116,000
March 31 990,000 138,000

Mr. Pride prepares income statements and balance sheets for the resort. Indicate what amounts
will be shown in these statements for (1) Lift Ticket Revenue and (2) Cash, assuming they are pre-
pared for:
a. The month ended February 28.
b. The entire “busy season to date”—that is, December 1 through March 31.
c. In terms of Lift Ticket Revenue and increases in Cash, which has been the resort’s best month?
(Indicate the dollar amounts.)

LO1 EXERCISE 5.13

E Custodian Commandos, Inc., provides janitorial services to public school systems. The business
Interim Results
In adjusts its accounts monthly, but closes them only at year-end. Its fiscal year ends on December 31.
A summary of the company’s total revenue and expenses at the end of five selected months is as
LO2 follows:

LO7
Total Total
Revenue Expenses
March 31 $ 69,000 $ 48,000
June 30 129,000 90,000
August 31 134,000 115,000
September 30 159,000 130,000
December 31 249,000 175,000

a. Rank the company’s fiscal quarters from most profitable to least profitable.
b. Compute the company’s income for the month of September.
c. Compute the company’s net income (or loss) for the first two months of the third quarter.
Provide a possible explanation why profitability for the first two months of the third quarter
differs significantly from profitability achieved in the third month of the quarter (as computed
in part b).

LO2 EXERCISE 5.14

E Indicate the effect of the following errors on each of the financial statement elements described in
Understanding the
U the column headings in the table below. Use the following symbols: O  overstated, U  under-
Effects of Errors
E stated, and NE  no effect.
LO3 on the Financial
o
Statements
S

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 224 Chapter 5 The Accounting Cycle: Reporting Financial Results

Net Total Total Retained

Error Income Assets Liabilities Earnings
a. Recorded a dividend as an expense
in the income statement.
b. Recorded unearned revenue as
earned revenue in the income
statement.
c. Failed to record accrued wages
payable at the end of the
accounting period.
d. Recorded a declared but unpaid
dividend by debiting Dividends
and crediting Cash.
e. Failed to disclose a pending lawsuit
in the notes accompanying the
financial statements.

LO3 EXERCISE 5.15

E The Home Depot, Inc., financial statements appear in Appendix A at the end of this textbook.
Examining Home
E a. Does the company use straight-line depreciation? How can you tell?
Depot, Inc., Financial
D b. At what point does the company recognize and record revenue from its customers?
LO6 Statements
S
c. Using information from the consolidated financial statements, evaluate briefly the company’s
profitability and liquidity.

Problem Set A accounting

LO1 PROBLEM 5.1A

P Party Wagon, Inc., provides musical entertainment at weddings, dances, and various other func-
Correcting
C tions. The company performs adjusting entries monthly, but prepares closing entries annually on
Classification Errors
C December 31. The company recently hired Jack Armstrong as its new accountant. Jack’s first
LO2 assignment was to prepare an income statement, a statement of retained earnings, and a balance
sheet using an adjusted trial balance given to him by his predecessor, dated December 31, 2011.
From the adjusted trial balance, Jack prepared the following set of financial statements:
LO4

PARTY WAGON, INC.

LO6 INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Party revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $130,000
Unearned party revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $140,800
Expenses:
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,800
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,000
Accumulated depreciation: van . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Accumulated depreciation: equipment and music . . . . . . . . . . . . . . . 14,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Travel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,400 137,000
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,800
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,400

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 Problem Set A 225

PARTY WAGON, INC.

STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2011
Retained earnings (per adjusted trial balance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Add: Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,400
Less: Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Retained earnings Dec. 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,400

PARTY WAGON, INC.

BALANCE SHEET
DECEMBER 31, 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500
Van . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $40,000
Less: Depreciation expense: van . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000 32,000
Equipment and music . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,000
Less: Depreciation expense: music and equipment . . . . . . . . . . . . . . . . . 7,000 28,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,500

Liabilities & Stockholders’ Equity

Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,000
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,100
Stockholders’ Equity:
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,400
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21,400
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $75,500

Instructions
a. Prepare a corrected set of financial statements dated December 31, 2011. (You may assume
that all of the figures in the company’s adjusted trial balance were reported correctly except
for Interest Payable of $200, which was mistakenly omitted in the financial statements pre-
pared by Jack.)
b. Prepare the necessary year-end closing entries.
c. Using the financial statements prepared in part a, briefly evaluate the company’s profitability
and liquidity.

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 226 Chapter 5 The Accounting Cycle: Reporting Financial Results

LO1 PROBLEM 5.2A

P Lawn Pride, Inc., provides lawn-mowing services to both commercial and residential customers.
Preparing Financial
P The company performs adjusting entries on a monthly basis, whereas closing entries are prepared
Statements and
St annually at December 31. An adjusted trial balance dated December 31, 2011, follows.
LO2 Closing Entries of a
C
Profitable
P r Company
LO4
LAWN PRIDE, INC.
through
h gh
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
LO6
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 58,525
Accounts receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,075
Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150,000
Accumulated depreciation: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . $120,000
Mowing equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Accumulated depreciation: mowing equipment . . . . . . . . . . . . . . . . . . 12,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050
Unearned mowing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Mowing revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,400
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,200
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Depreciation expense: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Depreciation expense: mowing equipment . . . . . . . . . . . . . . . . . . . . . 4,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Fuel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
$406,500 $406,500

Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December
31, 2011. Also prepare the company’s balance sheet dated December 31, 2011.
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company’s profitability
and liquidity.

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 Problem Set A 227

LO1 PROBLEM 5.3A

P Mystic Masters, Inc., provides fortune-telling services over the Internet. In recent years the com-
P
Preparing Financial pany has experienced severe financial difficulty. Its accountant prepares adjusting entries on a
thro
through
rough
gh monthly basis, and closing entries on an annual basis, at December 31. An adjusted trial balance
Statements and
S
Closing Entries of an
C dated December 31, 2011, follows.
LO4 Unprofitable Company
U

LO6
x
e cel

MYSTIC MASTERS, INC.

ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 960
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,400
Accumulated depreciation: furniture and fixtures . . . . . . . . . . . . . . . . . . . $ 5,200
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,540
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Unearned client revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,600
Client revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 440
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Depreciation expense: furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . 1,400
Office and telephone expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Internet service expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,900
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
$96,600 $96,600

Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December
31, 2011. Also prepare the company’s balance sheet dated December 31, 2011. (Hint: The
company incurred no income taxes expense in 2011.)
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company’s
performance.
e. Identify information that the company is apt to disclose in the notes that accompany the finan-
cial statements prepared in part a.

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 228 Chapter 5 The Accounting Cycle: Reporting Financial Results

LO1 PROBLEM 5.4A

P Guardian Insurance Agency adjusts its accounts monthly but closes them only at the end of the cal-
In
IInterim Financial endar year. Below are the adjusted balances of the revenue and expense accounts at September 30
Statements
S of the current year and at the ends of two earlier months:
LO2

LO7 Sept. 30 Aug. 31 June 30

Commissions earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,000 $128,000 $90,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000 23,000 15,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,000 32,000 24,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500 20,000 15,000
Depreciation expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700 2,400 1,800

Instructions
a. Prepare a three-column income statement, showing net income for three separate time peri-
ods, all of which end on September 30. Use the format illustrated below. Show supporting
computations for the amounts of revenue reported in the first two columns.

GUARDIAN INSURANCE AGENCY

INCOME STATEMENT
FOR THE FOLLOWING TIME PERIODS
Month Quarter 9 Months
Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30
Revenue:
Commissions earned . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $
Expenses:

b. Briefly explain how you determined the dollar amounts for each of the three time periods.
Would you apply the same process to the balances in Guardian’s balance sheet accounts?
Explain.
c. Assume that Guardian adjusts and closes its accounts at the end of each month. Briefly
explain how you then would determine the revenue and expenses that would appear in each of
the three columns of the income statement prepared in part a.

LO1 PROBLEM 5.5A

P Silver Lining, Inc., provides investment advisory services. The company adjusts its accounts
S
Short Comprehensive monthly, but performs closing entries annually on December 31. The firm’s unadjusted trial bal-
through
g ance dated December 31, 2011, is shown on the following page.
Problem Including
P
Both Adjusting and
B
LO4 Closing Entries
C

LO6

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 Problem Set A 229

SILVER LINING, INC.

UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debit Credit
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,835
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 205
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 270
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,000
Accumulated depreciation: office equipment . . . . . . . . . . . . . . . . . . . . $ 35,250
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,750
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Unearned consulting services revenue . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,000
Consulting services revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 605
Depreciation expense: office equipment . . . . . . . . . . . . . . . . . . . . . . . 8,250
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,525
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,010
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27,100
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,900
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $149,260 $149,260

Other Data
1. Accrued but unrecorded and uncollected consulting services revenue totals $1,500 at
December 31, 2011.
2. The company determined that $2,500 of previously unearned consulting services revenue had
been earned at December 31, 2011.
3. Office supplies on hand at December 31 total $110.
4. The company purchased all of its equipment when it first began business. At that time, the
estimated useful life of the equipment was six years (72 months).
5. The company prepaid its six-month rent agreement on October 1, 2011.
6. The company prepaid its 12-month insurance policy on March 1, 2011.
7. Accrued but unpaid salaries total $1,900 at December 31, 2011.
8. On June 1, 2011, the company borrowed $9,000 by signing a nine-month, 8 percent note pay-
able. The entire amount, plus interest, is due on March 1, 2012.
9. The company’s CPA estimates that income taxes expense for the entire year is $7,500. The
unpaid portion of this amount is due early in 2012.

Instructions
a. Prepare the necessary adjusting journal entries on December 31, 2011. Prepare also an
adjusted trial balance dated December 31, 2011.

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 230 Chapter 5 The Accounting Cycle: Reporting Financial Results

b. From the adjusted trial balance prepared in part a, prepare an income statement and statement
of retained earnings for the year ended December 31, 2011. Also prepare the company’s bal-
ance sheet dated December 31, 2011.
c. Prepare the necessary year-end closing entries.
d. Prepare an after-closing trial balance.
e. Compute the company’s average monthly insurance expense for January and February of
2011.
f. Compute the company’s average monthly rent expense for January through September of
2011.
g. If the company purchased all of its office equipment when it first incorporated, for how long
has it been in business as of December 31, 2011?

LO1 PROBLEM 5.6A

P Brushstroke Art Studio, Inc., provides quality instruction to aspiring artists. The business adjusts
S
Short Comprehensive its accounts monthly, but performs closing entries annually on December 31. This is the studio’s
through
g unadjusted trial balance dated December 31, 2011.
Problem Including
P
Both Adjusting and
B
LO4 Closing Entries
C

LO6 BRUSHSTROKE ART STUDIO, INC.

UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 22,380
Client fees receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71,250
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Prepaid studio rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500
Studio equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Accumulated depreciation: studio equipment . . . . . . . . . . . . . . . . . . . . $ 52,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,420
Note payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
Unearned client fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Client fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,310
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17,250
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
Studio rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,250
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
Depreciation expense: studio equipment . . . . . . . . . . . . . . . . . . . . . . . 8,800
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,000
$248,210 $248,210

Other Data
1. Supplies on hand at December 31, 2011, total $1,000.
2. The studio pays rent quarterly (every three months). The last payment was made November 1,
2011. The next payment will be made early in February 2012.
3. Studio equipment is being depreciated over 120 months (10 years).

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 Problem Set A 231

4. On October 1, 2011, the studio borrowed $24,000 by signing a 12-month, 12 percent note
payable. The entire amount, plus interest, is due on September 30, 2012.
5. At December 31, 2011, $3,000 of previously unearned client fees had been earned.
6. Accrued, but unrecorded and uncollected client fees earned total $690 at December 31, 2011.
7. Accrued, but unrecorded and unpaid salary expense totals $750 at December 31, 2011.
8. Accrued income taxes expense for the entire year ending December 31, 2011, total $7,000.
The full amount is due early in 2012.

Instructions
a. Prepare the necessary adjusting journal entries on December 31, 2011. Prepare also an
adjusted trial balance dated December 31, 2011.
b. From the adjusted trial balance prepared in part a, prepare an income statement and statement
of retained earnings for the year ended December 31, 2011. Also prepare the company’s bal-
ance sheet dated December 31, 2011.
c. Prepare the necessary year-end closing entries.
d. Prepare an after-closing trial balance.
e. Has the studio’s monthly rent remained the same throughout the year? If not, has it gone up or
down? Explain.

LO8 *PROBLEM 5.7A

*P Refer to the Demonstration Problem illustrated in the previous chapter on pages 161–164. Prepare
S
Short Comprehensive a 10-column worksheet for Internet Consulting Service, Inc., dated December 31, 2011. At the bot-
Problem Including
P tom of your worksheet, prepare a brief explanation keyed to each adjusting entry.
Adjusting Entries,
Closing Entries,
and Worksheet
Preparation

LO6 PROBLEM 5.8A

P A recent annual report issued by Best Buy revealed the following data:
E
Evaluating Profitability
and Liquidity

x
e cel End
of Year
Beginning
of Year
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.2 billion $7.3 billion
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.4 billion $6.8 billion
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.6 billion $4.5 billion

The company’s income statement reported total annual revenue of $45.0 billion and net income for
the year of $1.0 billion.

Instructions
a. Evaluate Best Buy’s profitability by computing its net income percentage and its return on
equity for the year.
b. Evaluate Best Buy’s liquidity by computing its working capital and its current ratio at the
beginning of the year and at the end of the year.
c. Does Best Buy appear to be both profitable and liquid? Explain.

*Supplemental Topic, “The Worksheet.”

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 232 Chapter 5 The Accounting Cycle: Reporting Financial Results

Problem Set B
LO1 PROBLEM 5.1B
P Strong Knot, Inc., a service company, performs adjusting entries monthly, but prepares closing
Correcting
C entries annually on December 31. The company recently hired Sally Addsup as its new accountant.
Classification Errors
C Sally’s first assignment was to prepare an income statement, a statement of retained earnings, and
LO2 a balance sheet using an adjusted trial balance given to her by her predecessor, dated December 31,
2011. The statements Sally prepared are as follows:
LO4
STRONG KNOT, INC.
LO6 INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 2011
Revenue:
Service revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000
Unearned revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,500
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,200
Total revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $171,700
Expenses:
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,800
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 96,000
Accumulated depreciation: auto . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . 13,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Travel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,600
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,800 158,200
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,500
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,100

STRONG KNOT, INC.

STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 2011
Retained earnings (per adjusted trial balance) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $17,500
Add: Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,100
Less: Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Retained earnings, Dec. 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $26,600

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 Problem Set B 233

STRONG KNOT, INC.

BALANCE SHEET
DECEMBER 31, 2011
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15,400
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Automobile . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $37,000
Less: Depreciation expense: automobile . . . . . . . . . . . . . . . . . . . . . . . . . 4,000 33,000
Equipment and music . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $39,000
Less: Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . 3,000 36,000
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,300

Liabilities & Stockholders’ Equity

Liabilities:
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,200
Notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,800
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,700
Stockholders’ Equity:
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26,600
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $29,600
Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . $85,300

Instructions
a. Prepare a corrected set of financial statements dated December 31, 2011. (You may assume
that all of the figures in the company’s adjusted trial balance were reported correctly except
for Notes Payable, which is some amount other than $45,800.)
b. Prepare the necessary year-end closing entries.
c. Using the financial statements prepared in part a, briefly evaluate the company’s profitability
and liquidity.

LO1 PROBLEM 5.2B

P Garden Wizards provides gardening services to both commercial and residential customers. The
Preparing Financial
P company performs adjusting entries on a monthly basis, whereas closing entries are prepared
Statements and
St
S annually at December 31. An adjusted trial balance dated December 31, 2011, follows.
LO2 Closing Entries of a
C
Profitable Company
P
LO4

through
g

LO6

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 234 Chapter 5 The Accounting Cycle: Reporting Financial Results

GARDEN WIZARDS
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,800
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,700
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400
Trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000
Accumulated depreciation: trucks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,000
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Accumulated depreciation: equipment . . . . . . . . . . . . . . . . . . . . . . . . . 14,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,700
Unearned service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,000
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,300
Service revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194,000
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,600
Salary expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
Depreciation expense: trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16,000
Depreciation expense: equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Repair and maintenance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,300
Fuel expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,800
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
$367,100 $367,100

Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December
31, 2011. Also prepare the company’s balance sheet dated December 31, 2011.
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company’s profitability
and liquidity.

wil11048_ch05_190-243.indd 234 11/3/10 1:44 PM

 Problem Set B 235

LO1 PROBLEM 5.3B

P Debit Doctors, Inc., provides accounting advice over the Internet. In recent years the company has
Preparing Financial
P experienced severe financial difficulty. Its accountant prepares adjusting entries on a monthly basis
Statements and
St and closing entries on an annual basis at December 31. An adjusted trial balance dated December
LO4 31, 2011, follows.
Closing Entries of an
C
through
thro
hrough
ugh
g
Unprofitable Company
U

DEBIT DOCTORS, INC.

LO6
ADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Debits Credits
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 450
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 220
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,600
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,000
Accumulated depreciation: furniture and fixtures . . . . . . . . . . . . . . . . . $ 6,600
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,100
Notes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,000
Salaries payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,100
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 170
Unearned client revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000
Client revenue earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,700
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,200
Office rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,000
Supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300
Salary expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,000
Depreciation expense: furniture and fixtures . . . . . . . . . . . . . . . . . . . . 1,200
Office and telephone expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,600
Internet service expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,200
Legal expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,800
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,700
Miscellaneous expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,300
$103,270 $103,270

Instructions
a. Prepare an income statement and statement of retained earnings for the year ended December
31, 2011. Also prepare the company’s balance sheet dated December 31, 2011. (Hint: The
company incurred no income taxes expense in 2011.)
b. Prepare the necessary year-end closing entries.
c. Prepare an after-closing trial balance.
d. Using the financial statements prepared in part a, briefly evaluate the company’s performance.
e. Identify information that the company is apt to disclose in the notes that accompany the finan-
cial statements prepared in part a.

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 236 Chapter 5 The Accounting Cycle: Reporting Financial Results

LO1 PROBLEM 5.4B

P Silver Real Estate adjusts its accounts monthly but closes them only at the end of the calendar year.
Interim Financial
In Below are the adjusted balances of the revenue and expense accounts at September 30 of the cur-
Statements
St
S rent year and at the ends of two earlier months:
LO2
Sept. 30 Aug. 31 June 30
LO7 Commissions earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000 $145,000 $100,000
Advertising expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,000 28,000 18,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38,000 35,000 28,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000 18,000 14,000
Depreciation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200 2,100 1,500

Instructions
a. Prepare a three-column income statement, showing net income for three separate time peri-
ods, all of which end on September 30. Use the format illustrated below. Show supporting
computations for the amounts of revenue in the first two columns.

SILVER REAL ESTATE

INCOME STATEMENT
FOR THE FOLLOWING TIME PERIODS
Month Quarter Nine Months
Ended Ended Ended
Sept. 30 Sept. 30 Sept. 30
Revenue:
Commissions earned . . . . . . . . . . . . . . . . . . . . . . . . $ $ $
Expenses:

b. Briefly explain how you determined the dollar amounts for each of the three time periods.
Would you apply the same process to the balances in Silver’s balance sheet accounts? Explain.
c. Assume that Silver adjusts and closes its accounts at the end of each month. Briefly explain
how you then would determine the revenue and expenses that would appear in each of the
three columns of the income statement prepared in part a.

LO1 PROBLEM 5.5B

P Next Job, Inc., provides employment consulting services. The company adjusts its accounts
S
Short Comprehensive monthly but performs closing entries annually on December 31. The firm’s unadjusted trial bal-
through
g ance dated December 31, 2011, is shown on the following page.
Problem Including
P
Both Adjusting and
B
LO4 Closing Entries
C Other Data
1. Accrued but unrecorded and uncollected consulting fees earned total $25,000 at December 31,
LO6 2011.
2. The company determined that $15,000 of previously unearned consulting services fees had
been earned at December 31, 2011.
3. Office supplies on hand at December 31 total $300.
4. The company purchased all of its equipment when it first began business. At that time, the
estimated useful life of the equipment was six years (72 months).
5. The company prepaid its nine-month rent agreement on June 1, 2011.
6. The company prepaid its six-month insurance policy on December 1, 2011.
7. Accrued but unpaid salaries total $12,000 at December 31, 2011.
8. On September 1, 2011, the company borrowed $60,000 by signing an eight-month, 4 percent
note payable. The entire amount, plus interest, is due on March 1, 2012.
9. The company’s accounting firm estimates that income taxes expense for the entire year is
$50,000. The unpaid portion of this amount is due early in 2012.

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 Problem Set B 237

NEXT JOB, INC.

UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $276,500
Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90,000
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,600
Unexpired insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72,000
Accumulated depreciation: office equipment . . . . . . . . . . . . . . . . . . . . $ 24,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000
Notes payable (due 3/1/12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60,000
Interest payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600
Income taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,000
Dividends payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Unearned consulting fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Consulting fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500,000
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,200
Office supplies expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,500
Depreciation expense: office equipment . . . . . . . . . . . . . . . . . . . . . . . 11,000
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 330,000
Utilities expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,800
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,000
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $862,600 $862,600

Instructions
a. Prepare the necessary adjusting journal entries on December 31, 2011. Also prepare an
adjusted trial balance dated December 31, 2011.
b. From the adjusted trial balance prepared in part a, prepare an income statement and statement
of retained earnings for the year ended December 31, 2011. Also prepare the company’s bal-
ance sheet dated December 31, 2011.
c. Prepare the necessary year-end closing entries.
d. Prepare an after-closing trial balance.
e. Compute the company’s average monthly insurance expense for January through November of
2011.
f. Compute the company’s average monthly rent expense for January through May of 2011.
g. If the company purchased all of its office equipment when it first incorporated, for how long
has it been in business as of December 31, 2011?
h. Assume that the company had a note payable outstanding on January 1, 2011, that it paid off
on April 1, 2011. How much interest expense accrued on this note in 2011?
LO1 PROBLEM 5.6B
P Tammy Touchtone operates a talent agency called Touchtone Talent Agency. Some clients pay
S
Short Comprehensive in advance for services; others are billed after services have been performed. Advance payments
through
g are credited to an account entitled Unearned Agency Fees. Adjusting entries are performed on a
Problem Including
P
Both Adjusting and
B monthly basis. Closing entries are performed annually on December 31. An unadjusted trial bal-
LO4 Closing Entries
C ance dated December 31, 2011, follows. (Bear in mind that adjusting entries have already been
made for the first 11 months of 2011, but not for December.)
LO6

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 238 Chapter 5 The Accounting Cycle: Reporting Financial Results

TOUCHTONE TALENT AGENCY

UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2011
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,950
Fees receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,300
Prepaid rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,200
Unexpired insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 375
Office supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 900
Office equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000
Accumulated depreciation: office equipment . . . . . . . . . . . . . . . . . . . . $ 12,000
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500
Note payable (due 3/1/12) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000
Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
Unearned agency fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000
Capital stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,000
Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,800
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 800
Agency fees earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46,500
Telephone expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 480
Office supply expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,130
Depreciation expense: office equipment . . . . . . . . . . . . . . . . . . . . . . . 2,750
Rent expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,100
Insurance expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,175
Salaries expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24,640
Income taxes expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,200
$108,000 $108,000

Other Data
1. Office equipment is being depreciated over 60 months (5 years).
2. At December 31, 2011, $2,500 of previously unearned agency fees had been earned.
3. Accrued but unrecorded and unpaid salary expense totals $1,360 at December 31, 2011.
4. The agency pays rent quarterly (every three months). The most recent advance payment of $1,800
was made November 1, 2011. The next payment of $1,800 will be made on February 1, 2012.
5. Accrued but unrecorded and uncollected agency fees earned total $3,000 at December 31, 2011.
6. Office supplies on hand at December 31, 2011, total $530.
7. On September 1, 2011, the agency purchased a six-month insurance policy for $750.
8. On December 1, 2011, the agency borrowed $6,000 by signing a three-month, 9 percent note
payable. The entire amount borrowed, plus interest, is due March 1, 2012.
9. Accrued income taxes payable for the entire year ending December 31, 2011, total $3,900.
The full amount is due early in 2012.

Instructions
a. Prepare the necessary adjusting journal entries on December 31, 2011. Also prepare an
adjusted trial balance dated December 31, 2011.
b. From the adjusted trial balance prepared in part a, prepare an income statement and statement
of retained earnings for the year ended December 31, 2011. Also prepare the company’s bal-
ance sheet dated December 31, 2011.
c. Prepare the necessary year-end closing entries.
d. Prepare an after-closing trial balance.
e. Assume that the agency purchased all of its office equipment when it first began business
activities. For how many months has the agency been in operation?

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 Confirming Pages

Critical Thinking Cases 239

f. Has the agency’s monthly office rent remained the same throughout the year? If not, has it
gone up or down? Explain.
g. Has the agency’s monthly insurance expense remained the same throughout the year? If not,
has it gone up or down? Explain.

LO8 *PROBLEM 5.7B

*P Refer to Problem 4.4A on pages 174–175 in the previous chapter. Prepare a 10-column worksheet
S
Short Comprehensive for Campus Theater dated August 31, 2011. At the bottom of your worksheet, prepare a brief
Problem Including
P explanation keyed to each adjusting entry.
Adjusting Entries,
Closing Entries,
and Worksheet
Preparation

LO6 PROBLEM 5.8B

P A recent annual report issued by The Gap, Inc., revealed the following data:
Ev
Evaluating Profitability
and Liquidity End Beginning
of Year of Year
Current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.0 billion $4.1 billion
Current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2.2 billion $2.4 billion
Stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4.4 billion $4.3 billion

The company’s income statement reported total annual revenue of $14.5 billion and net income for
the year of $967 million.

Instructions
a. Evaluate The Gap’s profitability by computing its net income percentage and its return on
equity for the year.
b. Evaluate The Gap’s liquidity by computing its working capital and its current ratio at the
beginning of the year and at the end of the year.
c. Does The Gap, Inc., appear to be both profitable and liquid? Explain.

*Supplemental Topic, “The Worksheet.”

Critical Thinking Cases

LO3 CASE 5.1
C Listed below are five items that may—or may not—require disclosure in the notes that accompany
financial statements.
Adequate Disclosure
Ad
a. Mandella Construction Co. uses the percentage-of-completion method to recognize revenue
on long-term construction contracts. This is one of two acceptable methods of accounting for
such projects. Over the life of the project, both methods produce the same overall results, but
the annual results may differ substantially.
b. One of the most popular artists at Spectacular Comics is leaving the company and going to
work for a competitor.
c. Shortly after the balance sheet date, but before the financial statements are issued, one of
Coast Foods’s two processing plants was damaged by a tornado. The plant will be out of ser-
vice for at least three months.
d. The management of Soft Systems believes that the company has developed systems software
that will make Windows® virtually obsolete. If they are correct, the company’s profits could
increase by 10-fold or more.
e. College Property Management (CPM) withheld a $500 security deposit from students who,
in violation of their lease, kept a dog in their apartment. The students have sued CPM for this
amount in small claims court.

Instructions
For each case, explain what, if any, disclosure is required under generally accepted accounting
principles. Explain your reasoning.

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 Confirming Pages

240 Chapter 5 The Accounting Cycle: Reporting Financial Results

LO1 CASE 5.2

C This problem focuses on the following question: Is it ethical for a CPA (or CPA firm) to provide
W
Working for the similar services to companies that compete directly with one another? These services may include
Competition
C assistance in the preparation of financial statements, income tax services, consulting engagements,
and audit work.

Instructions
a. Before doing any research, discuss this question as a group. Identify potential arguments on
each side of the issue.
b. Arrange an interview with a practicing (or retired) public accountant. Learn the accounting
profession’s position on this issue, and discuss the various arguments developed in part a.
c. Develop your group’s position on this issue and be prepared to explain it in class. Explain why
you have chosen to overlook the conflicting arguments developed in part a. (If your group is
not in agreement, dissenting members may draft a dissenting opinion.)

LO3 CASE 5.3

C The Sarbanes-Oxley Act requires that the CEO (chief executive officer) and CFO (chief financial
C
Certifications by CEOs officer) of publicly traded corporations include statements of personal certification in the disclo-
and CFOs sures accompanying the financial reports filed with the SEC. In essence, these statements hold the
CEO and CFO personally liable for their company’s annual report content. The personal certifica-
tions must be signed by both the CEO and the CFO. Each certification requires that the CEO and
CFO commit to the following statements:
1. I have reviewed this annual report.
2. On the basis of my knowledge, this report does not contain any untrue statements of material
facts or omissions of material facts.
3. On the basis of my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial condition, results of
operations, and cash flows of the business.
4. I am responsible for establishing and maintaining disclosure controls and procedures.
5. I have disclosed any fraud, whether or not material, and have disclosed all significant control
deficiencies and material weaknesses involving the company’s financial reporting.

Instructions
As a group, discuss the meaning and purpose of the personal certification requirement. How might
this requirement contribute to improved investor confidence?

LO3 IN
INTERNET Visit the home page of the Ford Motor Company at:
CASE 5.4
C
www.ford.com
A
Annual Report
Disclosures From Ford’s home page, access the company’s most recent annual report (select the “About
Ford” menu item). Locate the notes to the financial statements and identify the information topics
disclosed in these footnotes.
Internet sites are time and date sensitive. It is the purpose of these exercises to have you explore
the Internet. You may need to use the Yahoo! search engine http://www.yahoo.com (or another
favorite search engine) to find a company’s current Web address.

Answers to Self-Test Questions

1. a, b, c, d 2. a 3. d 4. b, d 5. a 6. a, b 7. c 8. b, c

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