Copyright © 2016 John Wiley & Sons, Inc.

Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-1
 SOLUTIONS TO PROBLEMS

PROBLEM 3-1

(a) (Explanations are omitted.) and (d)

Cash Equipment
Sept. 1 20,000 Sept. 4 680 Sept. 2 17,280
8 1,690 5 942
20 980 10 430
18 3,600 Owner’s Capital
19 3,000 Sept. 19 3,000 Sept. 1 20,000
30 1,800 30 6,007
30 85 Bal. 30 23,007
30 Bal 12,133

Accounts Receivable
Sept. 14 5,820 Sept. 20 980
25 2,110 Accounts Payable
Bal. 30 6,950 Sept. 18 3,600 Sept. 2 17,280
Bal. 30 13,680
Rent Expense
Sept. 4 680 Sept. 30 680

Supplies Service Revenue

Sept. 5 942 Sept. 30 330 Sept. 30 9,620 Sept. 8 1,690
Bal. 30 612 14 5,820
25 2,110
9,620 9,620

Office Expense Accumulated Depreciation—Equipment

Sept. 10 430 Sept. 30 515 Sept. 30 288
30 85
515 515

Salaries and Wages Expense

Sept. 30 1,800 Sept. 30 1,800

Supplies Expense
Sept. 30 330 Sept. 30 330

3-2 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-1 (Continued)

Depreciation Expense Income Summary

Sept. 30 288 Sept. 30 288 Sept. 30 680 Sept. 30 9,620
30 515
30 1,800
30 330
30 288
30 Inc. 6,007
9,620 9,620

(b) YASUNARI KAWABATA, D.D.S.

Trial Balance
September 30
Debit Credit
Cash..........................................................................................
$12,133
Accounts Receivable............................................................... 6,950
Supplies....................................................................................
612
Equipment................................................................................
17,280
Accumulated Depreciation—Equipment............................... $ 288
Accounts Payable.................................................................... 13,680
Owner’s Capital........................................................................ 17,000
Service Revenue...................................................................... 9,620
Rent Expense...........................................................................680
Office Expense.........................................................................515
Salaries and Wages Expense................................................. 1,800
Supplies Expense.................................................................... 330
Depreciation Expense............................................................. 288
Totals..............................................................................
$40,588 $40,588

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-3
PROBLEM 3-1 (Continued)

(c) YASUNARI KAWABATA, D.D.S.

Income Statement
For the Month of September
Service revenue................................................................... $9,620
Expenses:
Salaries and wages expense.............................. $1,800
Rent expense....................................................... 680
Supplies expense................................................ 330
Depreciation expense.......................................... 288
Office expense..................................................... 515
Total expenses................................................. 3,613
Net income........................................................................... $6,007

YASUNARI KAWABATA, D.D.S.

Statement of Owners’ Equity
For the Month of September

Owner’s capital September 1......................................................$20,000

Add: Net income........................................................................ 6,007
26,007
Less: Withdrawal by owner........................................................ 3,000
Owner’s capital September 30....................................................$23,007

YASUNARI KAWABATA, D.D.S.

Balance Sheet
As of September 30

Assets Liabilities and Owners’ Equity

Cash.....................................
$12,133 Accounts payable....................
$13,680
Accounts receivable...........6,950 Owner’s capital.........................
23,007
Supplies............................... 612
Equipment........................... 17,280
Accum. depreciation—
equipment........................ (288) Total liabilities and
Total assets................. $36,687 owners’ equity......................
$36,687

3-4 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-1 (Continued)

(d) YASUNARI KAWABATA, D.D.S.

Post-Closing Trial Balance
September 30
Debit Credit
Cash..........................................................................
$12,133
Accounts Receivable..............................................6,950
Supplies.................................................................... 612
Equipment................................................................ 17,280
Accumulated Depreciation—Equipment............... $ 288
Accounts Payable.................................................... 13,680
Owner’s Capital........................................................ 23,007
Totals............................................................. $36,975 $36,975
LO: 2, 4, 5, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-5
 PROBLEM 3-2

(a) Dec. 31 Accounts Receivable ($23,500 − $20,000).........................................

3,500
Service Revenue..........................................................................
3,500

31 Unearned Service Revenue ($7,000 − $5,600)...................................

1,400
Service Revenue..........................................................................
1,400

31 Supplies Expense ($8,400 − $3,000)..................................................

5,400
Supplies........................................................................................
5,400

31 Depreciation Expense ($33,000 − $28,000).......................................

5,000
Accumulated Depreciation—
Equipment.................................................................................
5,000

31 Interest Expense($500 − $350)...........................................................

150
Interest Payable...........................................................................
150

31 Insurance Expense..............................................................................
850
Prepaid Insurance........................................................................
850

31 Salaries and Wages Expense ($11,300 − $10,000).............................

1,300
Salaries and Wages Payable.......................................................
1,300

(b) MASON ADVERTISING

Income Statement
For the Year Ended December 31, 2017
Revenues
Service revenue $63,500
Expenses
Salaries and wages expense $11,300
Supplies expense 5,400
Depreciation expense 5,000
Rent expense 4,000
Insurance expense 850
Interest expense 500
Total expenses 27,050
Net income $36,450

3-6 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-2 (Continued)
MASON ADVERTISING
Statement of Retained Earnings
For the Year Ended December 31, 2017
Retained earnings, January 1..............................................................
$ 3,500
Add: Net income..................................................................................
36,450
Retained earnings, December 31........................................................ $39,950

MASON ADVERTISING
Balance Sheet
December 31, 2017
Assets
Cash.................................................................................... $11,000
Accounts receivable.......................................................... 23,500
Supplies.............................................................................. 3,000
Prepaid insurance.............................................................. 2,500
Equipment........................................................................... $60,000
Less: Accumulated depreciation—equipment...............33,000 27,000
Total assets......................................................... $67,000

Liabilities and Stockholders’ Equity

Liabilities
Notes payable...........................................................$ 5,000
Accounts payable.................................................... 5,000
Unearned service revenue....................................... 5,600
Salaries and wages payable.................................... 1,300
Interest payable........................................................ 150
Total liabilities................................................... $17,050
Stockholders’ equity
Common stock......................................................... $10,000
Retained earnings....................................................39,950 49,950
Total liabilities and stockholders’
equity.............................................................. $67,000

(c) 1. Interest is $50 per month or 1% of the note payable. 1% X 12 = 12%

interest per year.
2. Salaries and Wages Expense, $11,300 less Salaries and Wages
Payable 12/31/17, $1,300 = $10,000. Total Payments, $12,500 –
$10,000 = $2,500 Salaries and Wages Payable 12/31/16.
LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 35-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-7
 PROBLEM 3-3

1. Dec. 31 Salaries and Wages Expense 2,120

Salaries and Wages Payable 2,120
(5 X $700 X 2/5) = $1,400
(3 X $600 X 2/5) = 720
Total accrued salaries $2,120

2. 31 Unearned Rent Revenue 94,000

Rent Revenue 94,000
(5 X $6,000 X 2) = $60,000
(4 X $8,500 X 1) = 34,000
Total rent recognized $94,000

3. 31 Advertising Expense 4,900

Prepaid Advertising 4,900
(A650 – $500 per month
for 8 months) = $4,000
(B974 – $300 per month
for 3 months) = 900
Total advertising expense $4,900

4. 31 Interest Expense 4,200

Interest Payable
($60,000 X 12% X 7/12) 4,200
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 25-30, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

3-8 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 3-4

(a) Nov. 30 Supplies Expense ($5,500 − $1,500).................................................

4,000
Supplies.......................................................................................
4,000

30 Depreciation Expense........................................................................
15,000
Accumulated Depreciation—
Equipment...............................................................................
15,000

30 Interest Expense.................................................................................
11,000
Interest Payable..........................................................................
11,000

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-9
PROBLEM 3-4 (Continued)

(b) BELLEMY FASHION CENTER

Adjusted Trial Balance
November 30, 2017

Dr. Cr.
Cash...............................................................................
$ 28,700
Accounts Receivable.................................................... 33,700
Inventory........................................................................
45,000
Supplies.........................................................................
1,500
Equipment......................................................................
133,000
Accumulated Depr.— Equipment............................... $ 39,000
Notes Payable................................................................ 51,000
Accounts Payable......................................................... 48,500
Common Stock.............................................................. 90,000
Retained Earnings......................................................... 8,000
Sales Revenue............................................................... 757,200
Sales Returns and Allowances.................................... 4,200
Cost of Goods Sold....................................................... 495,400
Salaries and Wages Expense....................................... 140,000
Advertising Expense..................................................... 26,400
Utilities Expenses......................................................... 14,000
Maintenance and Repairs Expense............................. 12,100
Delivery Expense.......................................................... 16,700
Rent Expense................................................................ 24,000
Supplies Expense......................................................... 4,000
Depreciation Expense................................................... 15,000
Interest Expense........................................................... 11,000
Interest Payable............................................................. 11,000
Totals........................................................................
$1,004,700 $1,004,700

3-10 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-4 (Continued)

(c) BELLEMY FASHION CENTER

Income Statement
For the Year Ended November 30, 2017

Sales revenue
Sales......................................................................... $757,200
Less: Sales returns and
allowances.................................................... 4,200
Net sales................................................................... 753,000
Cost of goods sold............................................................. 495,400
Gross profit......................................................................... 257,600
Operating expenses
Selling expenses
Salaries and wages expense
($140,000 X 70%)........................................
$98,000
Advertising expense......................................
26,400
Rent expense
($24,000 X 80%)..........................................
19,200
Delivery expense............................................
16,700
Utilities expenses
($14,000 X 80%)........................ 11,200
Depreciation Expense....................................15,000
Supplies expense...........................................
4,000
Total selling expenses............................ $190,500
Administrative expenses
Salaries and wages expense
($140,000 X 30%)........................................
42,000
Maintenance and Repairs
Expense........................................................
12,100
Rent expense
($24,000 X 20%)..........................................
4,800
Utilities expenses
($14,000 X 20%)..........................................
2,800
Total admin. expenses............................61,700
Total oper. expenses......................... 252,200
Income from operations................................................... 5,400
Other expenses and losses
Interest expense...................................................... 11,000
Net loss.............................................................................. ($ 5,600)

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-11
PROBLEM 3-4 (Continued)

BELLEMY FASHION CENTER

Retained Earnings Statement
For the Year Ended November 30, 2017

Retained earnings, December 1, 2016 $8,000

Less: Net loss 5,600
Retained earnings, November 30, 2017 $2,400

BELLEMY FASHION CENTER

Balance Sheet
November 30, 2017

Assets
Current assets
Cash..........................................................................
$28,700
Accounts receivable................................................ 33,700
Inventory..................................................................
45,000
Supplies....................................................................1,500
Total current assets....................................... $108,900
Property, plant, and equipment
Equipment................................................................
133,000
Accumulated depreciation—
equipment....................................................... 39,000 94,000
Total assets..................................................... $202,900
Liabilities and Stockholders’ Equity
Current liabilities
Notes payable due next year.................................. $30,000
Accounts payable.................................................... 48,500
Interest payable.......................................................11,000
Total current liabilities................................... $ 89,500
Long-term liabilities
Notes payable.......................................................... 21,000
Total liabilities................................................ 110,500
Stockholders’ equity
Common stock......................................................... 90,000
Retained earnings................................................... 2,400 92,400
Total liabilities and stockholders’
equity........................................................... $202,900

3-12 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-4 (Continued)

(d) Nov. 30 Sales Revenue....................................................................................

757,200
Income Summary........................................................................
757,200

30 Income Summary...............................................................................
762,800
Sales Returns and Allowances..................................................
4,200
Cost of Goods Sold....................................................................
495,400
Salaries and Wages Expense....................................................
140,000
Advertising Expense..................................................................
26,400
Utilities Expenses.......................................................................
14,000
Maintenance and Repair Expense.............................................
12,100
Delivery Expense........................................................................
16,700
Rent Expense..............................................................................
24,000
Supplies Expense.......................................................................
4,000
Depreciation Expense................................................................
15,000
Interest Expense.........................................................................
11,000

30 Retained Earnings..............................................................................
5,600
Income Summary........................................................................
5,600

(e) BELLEMY FASHION CENTER

Post-Closing Trial Balance
November 30, 2017
Debit Credit
Cash....................................................................................
$ 28,700
Accounts Receivable......................................................... 33,700
Inventory.............................................................................
45,000
Supplies..............................................................................
1,500
Equipment...........................................................................
133,000
Accumulated Depreciation—Equipment.......................... $ 39,000
Notes Payable..................................................................... 51,000
Accounts Payable.............................................................. 48,500
Interest Payable.................................................................. 11,000
Common Stock................................................................... 90,000
Retained Earnings.............................................................. 2,400
$241,900 $241,900
LO: 3, 4, 5, 6, Bloom: AP, Difficulty: Moderate, Time: 40-50, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-13
 PROBLEM 3-5

(a) -1-
Depreciation Expense............................................... 10,500
Accumulated Depreciation—Equipment
(1/16 X [$192,000 − $24,000])......................... 10,500

-2-
Interest Expense......................................................... 1,440*
Interest Payable
($90,000 X 8% X 72/360).................................. 1,440*

-3-
Admissions Revenue.................................................. 60,000
Unearned Admissions Revenue
(2,000 X $30)..................................................... 60,000

-4-
Prepaid Advertising.................................................... 1,100
Advertising Expense........................................... 1,100

-5-
Salaries and Wages Expense..................................... 4,700
Salaries and Wages Payable.............................. 4,700

(b) 1. Interest expense, $2,840 ($1,400 + $1,440).

2. Admissions revenue, $320,000 ($380,000 – $60,000).
3. Advertising expense, $12,580 ($13,680 – $1,100).
4. Salaries and wages expense, $62,300 ($57,600 + $4,700).

*Note to instructor: If 30-day months are assumed, interest expense =

$1,400 ($90,000 X 8% X 70/360).
LO: 3, Bloom: AP, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

3-14 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 3-6

(a) -1-
Service Revenue..................................................................................
6,000
Unearned Service Revenue.........................................................6,000

-2-
Accounts Receivable..........................................................................
4,900
Service Revenue..........................................................................4,900

-3-
Bad Debt Expense...............................................................................
1,430
Allowance for Doubtful Accounts..............................................1,430

-4-
Insurance Expense..............................................................................
480
Prepaid Insurance........................................................................ 480

-5-
Depreciation Expense.........................................................................
2,500
Accumulated Depreciation—Equipment
($25,000 X 0.10)........................................................................2,500

-6-
Interest Expense..................................................................................
60
Interest Payable
($7,200 X 0.10 X 30/360)........................................................... 60

-7-
Prepaid Rent........................................................................................
750
Rent Expense............................................................................... 750

-8-
Salaries and Wages Expense.............................................................
2,510
Salaries and Wages Payable.......................................................2,510

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-15
PROBLEM 3-6 (Continued)

(b) YORKIS PEREZ, CONSULTING ENGINEER

Income Statement
For the Year Ended December 31, 2017

Service revenue ($100,000 – $6,000 + $4,900)..................... $98,900

Expenses
Salaries and wages expense
($30,500+$2,510)........................................................ $33,010
Rent expense ($9,750 – $750).......................................9,000
Depreciation expense...................................................2,500
Bad debt expense..........................................................1,430
Utilities expenses..........................................................1,080
Office expense............................................................... 720
Insurance expense........................................................ 480
Interest expense............................................................ 60
Total expenses......................................................... 48,280
Net income............................................................................. $50,620

YORKIS PEREZ, CONSULTING ENGINEER

Statement of Owners’ Capital
For the Year Ended December 31, 2017

Onwer’s Capital, January 1 $ 52,010a

Add: Net income 50,620
Less: Withdrawals (17,000)
Owner’s capital, December 31 $ 85,630

(a)
Owner’s capital—trial balance............................... $ 35,010
Withdrawals during the year.................................. 17,000
Owner’s capital, as of January 1, 2017................... $ 52,010

3-16 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-6 (Continued)

YORKIS PEREZ, CONSULTING ENGINEER

Balance Sheet
December 31, 2017

Assets
Current assets
Cash......................................................................
$29,500
Accounts receivable
($49,600 + $4,900)............................................
$54,500
Less: Allowance for
doubtful accounts....................................
2,180* 52,320
Supplies...............................................................1,960
Prepaid insurance
($1,100 – $480).................................................620
Prepaid rent.........................................................750
Total current assets..................................... $ 85,150
Equipment...................................................................
25,000
Less: Accumulated depreciation............................. 8,750** 16,250
Total assets................................................... $101,400

Liabilities and owners’ equity

Current liabilities
Notes payable......................................................
$7,200
Unearned service revenue.................................. 6,000
Salaries and wages payable............................... 2,510
Interest payable................................................... 60 $ 15,770

Owner’s Capital
($35,010 + $50,620)................................................. 85,630
Total liabilities and
owners’ equity.......................................... $101,400

*($750 + $1,430)
**($6,250 + $2,500)
LO: 3, 4, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-17
 PROBLEM 3-7

(a)
Sep. 30 Accounts Receivable 600
Service Revenue 600

30 Rent Expense 900

Prepaid Rent 900

30 Supplies Expense 1,020

Supplies 1,020

30 Depreciation Expense 350

Accumulated Depreciation—Equipment 350

30 Interest Expense 50
Interest Payable 50

30 Unearned Rent Revenue 200

Rent Revenue 200

30 Salaries and Wages Expense 600

Salaries and Wages Payable 600

(b) ROLLING HILLS GOLF INC.

Income Statement
For the Quarter Ended September 30, 2017

Revenues
Service revenue.............................................................$14,700
Rent revenue.................................................................. 900
Total revenue.......................................................... $15,600
Expenses
Salaries and wages expense........................................ $9,400
Rent expense................................................................. 1,800
Supplies expense.......................................................... 1,020
Utilities expenses.......................................................... 470
Depreciation expense................................................... 350
Interest expense............................................................ 50
Total expenses......................................................... 13,090
Net income............................................................................. $ 2,510

3-18 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-7 (Continued)

ROLLING HILLS GOLF INC.

Retained Earnings Statement
For the Quarter Ended September 30, 2017

Retained earnings, July 1, 2017.......................................................... $ 0

Add: Net income...................................................................................2,510
Less: Dividends.................................................................................... 600
Retained earnings, September 30, 2017............................................. $1,910

ROLLING HILLS GOLF INC.

Balance Sheet
September 30, 2017

Assets
Current assets
Cash......................................................................
$ 6,700
Accounts receivable............................................ 1,000
Supplies...............................................................180
Prepaid rent expense..........................................900
Total current assets..................................... $ 8,780
Equipment...................................................................
15,000
Less: Accumulated depreciation.............................350 14,650
Total assets................................................... $23,430

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable......................................................
$ 5,000
Accounts payable...............................................1,070
Unearned rent revenue.......................................800
Salaries and wages payable...............................600
Interest payable................................................... 50 $ 7,520

Stockholders’ Equity
Common stock...........................................................
14,000
Retained earnings......................................................
1,910
Total stockholders’ equity 15,910
Total liabilities and
stockholders’ equity.................................. $23,430

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-19
PROBLEM 3-7 (Continued)

(c) The following accounts would be closed: Service Revenue, Rent Revenue,
Salaries and Wages Expense, Rent Expense, Utilities Expenses,
Depreciation Expense, Supplies Expense, Interest Expense, Dividends.

(d) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $50 ($5,000 X 1%). Since total interest expense is $50, the note has
been outstanding one month.
LO: 3, 4, 5, 6, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

3-20 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 PROBLEM 3-8

(a)
Dec. 31 Accounts Receivable ($19,500 − $16,000).........................................
3,500
Service Revenue..........................................................................
3,500

31 Supplies Expense ($9,400 − $6,500)..................................................

2,900
Supplies........................................................................................
2,900

31 Insurance Expense ($3,350 − $1,790)................................................

1,560
Prepaid Insurance........................................................................
1,560

31 Depreciation Expense.........................................................................
5,000
Accumulated Depreciation—Equipment................................... 5,000

31 Interest Expense..................................................................................
560
Interest Payable...........................................................................
560

31 Unearned Service Revenue ($5,000 − $3,100)...................................

1,900
Service Revenue..........................................................................
1,900

31 Salaries and Wages Expense.............................................................

820
Salaries and Wages Payable.......................................................
820

(b) VEDULA ADVERTISING

Income Statement
For the Year Ended December 31, 2017

Revenues
Service revenue............................................................. $63,000
Expenses
Salaries and wages expense........................................ $9,820
Depreciation expense................................................... 5,000
Rent expense................................................................. 4,350
Supplies expense.......................................................... 2,900
Insurance expense........................................................ 1,560
Interest expense............................................................ 560
Total expenses......................................................... 24,190
Net income............................................................................. $38,810

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-21
PROBLEM 3-8 (Continued)

VEDULA ADVERTISING
Retained Earnings Statement
For the Year Ended December 31, 2017

Retained earnings, January 1 $ 5,500

Add: Net income 38,810
Less: Dividends 10,000
Retained earnings, December 31 $34,310

VEDULA ADVERTISING
Balance Sheet
December 31, 2017

Assets
Current assets
Cash......................................................................
$11,000
Accounts receivable............................................ 19,500
Supplies................................................................
6,500
Prepaid insurance............................................... 1,790
Total current assets...................................... $38,790
Equipment...................................................................
60,000
Less: Accumulated depreciation.............................. 30,000 30,000
Total assets................................................... $68,790

Liabilities and Stockholders’ Equity

Current liabilities
Notes payable.............................................................
$ 8,000
Accounts payable......................................................2,000
Unearned service revenue........................................ 3,100
Salaries and wages payable.....................................820
Interest payable..........................................................560 $ 14,480

Stockholders’ Equity
Common stock...........................................................
20,000
Retained earnings......................................................
34,310
Total stockholders’ equity.................................. 54,310
Total liabilities and
stockholders’ equity................................. $68,790

3-22 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-8 (Continued)

(c) Service Revenue, Salaries and Wages Expense, Depreciation Expense,

Rent Expense, Supplies Expense, Insurance Expense, Interest Expense,
Dividends.

(d) Interest is $56 per month or 0.7% of the note payable ($56 ÷ $8,000).
0.7% X 12 = 8.4% interest per year.

(e) Salaries and Wages Expense, $9,820, less Salaries and Wages Payable
12/31/17, $820 = $9,000. Total payments, $10,500 – $9,000 = $1,500
Salaries and Wages Payable 12/31/16.
LO: 3, 4, 5, 6, Bloom: AP, Difficulty: Moderate, Time: 25-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-23
 PROBLEM 3-9

(a), (b), (d)

Cash Prepaid Insurance Salaries and Wages Expense

Bal. 15,000 Bal. 9,000 Adj. 3,500 Bal. 80,000 Close 83,600
5,500 Adj. 3,600
83,600 83,600
Common Stock
Bal. 400,000

Maintenance and Repairs

Accounts Receivable Retained Earnings Expense
Bal. 13,000 Bal. 82,000 Bal. 24,000 Close 24,000
Inc. 31,640
113,640

Allow. for Doubtful Accts. Dues Revenue Depr. Expense

Bal. 1,100 Adj. 8,900 Bal. 200,000 Adj. 4,000 Close 19,000
Adj. 460 Cls. 191,100 Adj. 15,000
1,560 200,000 200,000 19,000

Land Green Fees Revenue Equipment

Bal. 350,000 Close 5,900 Bal. 5,900 Bal. 150,000

Buildings Rent Revenue Accum. Depr.—Equipment

Bal. 120,000 Close 19,200 Bal. 17,600 Bal. 70,000
Adj. 1,600 Adj. 15,000
19,200 19,200 85,000

Accum. Depr.—Buildings Utilities Expenses Insurance Expense

Bal. 38,400 Bal. 54,000 Close 54,000 Adj. 3,500 Close 3,500
Adj. 4,000
42,400

Rent Receivable Bad Debt Expense Income Summary

Adj. $1,600 Adj. 460 Close 460 Exp. 184,560 216,200
Inc. 31,640
216,200 216,200

3-24 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-9 (Continued)

Salaries and Wages

Payable Unearned Dues Revenue
Adj. 3,600 Adj. 8,900

(b) -1-
Depreciation Expense.........................................................................
4,000
Accumulated Depreciation—Buildings
(1/30 X $120,000)...................................................................... 4,000

-2-
Depreciation Expense.........................................................................
15,000
Accumulated Depreciation—Equipment
(10% X $150,000)......................................................................15,000

-3-
Insurance Expense..............................................................................
3,500
Prepaid Insurance........................................................................ 3,500

-4-
Rent Receivable...................................................................................
1,600
Rent Revenue
(1/11 X $17,600)........................................................................ 1,600

-5-
Bad Debt Expense...............................................................................
460
Allowance for Doubtful Accounts
[($13,000 X 12%) – $1,100]....................................................... 460

-6-
Salaries and Wages Expense.............................................................
3,600
Salaries and Wages Payable....................................................... 3,600

-7-
Dues Revenue......................................................................................
8,900
Unearned Dues Revenue............................................................. 8,900

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-25
PROBLEM 3-9 (Continued)

(c) CRESTWOOD GOLF CLUB, INC.

Adjusted Trial Balance
December 31, XXXX
Dr. Cr.
Cash................................................................................
$ 15,000
Accounts Receivable.................................................... 13,000
Allowance for Doubtful Accounts................................ $ 1,560
Prepaid Insurance......................................................... 5,500
Land................................................................................
350,000
Buildings........................................................................
120,000
Accum. Depreciation—Buildings................................. 42,400
Equipment......................................................................
150,000
Accum. Depreciation—Equipment............................... 85,000
Salaries and Wages Payable........................................ 3,600
Common Stock.............................................................. 400,000
Retained Earnings......................................................... 82,000
Dues Revenue................................................................ 191,100
Green Fees Revenue..................................................... 5,900
Rent Revenue................................................................ 19,200
Utilities Expenses.......................................................... 54,000
Salaries and Wages Expense....................................... 83,600
Maintenance and Repairs Expense............................. 24,000
Bad Debt Expense.........................................................460
Unearned Dues Revenue.............................................. 8,900
Rent Receivable............................................................. 1,600
Depreciation Expense ($15,000 + $4,000)................... 19,000
Insurance Expense........................................................ 3,500
Totals...................................................................
$839,660 $839,660

3-26 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-9 (Continued)

(d) -Dec. 31-

Dues Revenue......................................................................................
191,100
Green Fees Revenue...........................................................................
5,900
Rent Revenue......................................................................................
19,200
Income Summary......................................................................... 216,200

-31-
Income Summary................................................................................
184,560
Utilities Expenses........................................................................
54,000
Bad Debt Expense....................................................................... 460
Salaries and Wages Expense..................................................... 83,600
Maintenance and Repairs Expense............................................ 24,000
Depreciation Expense................................................................. 19,000
Insurance Expense......................................................................3,500

-31-
Income Summary................................................................................
31,640
Retained Earnings.......................................................................31,640
LO: 3, 5, Bloom: AP, Difficulty: Moderate, Time: 30-40, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-27
 PROBLEM 3-10

(a), (b), (c)

Cash Accounts Receivable Allow. for Doubtful Accts.
Bal. 18,500 Bal. 32,000 Bal. 700
Adj. 1,400
2,100

Inventory Equipment Accum. Depr.—Equipment

Bal. 80,000 Bal. 84,000 Bal. 35,000
Adj. 12,000
47,000

Prepaid Insurance Notes Payable Interest Expense

Bal. 5,100 Adj. 2,550 Bal. 28,000 Adj. 3,360 Cls. 3,360
2,550

Common Stock Sales Revenue Insurance Expense

Bal. 80,600 Cls. 600,000 Bal. 600,000 Adj. 2,550 Cls. 2,550

Salaries and Wages Salaries and Wages Expense

Expense (Sales) Advertising Expense (Administrative)
Bal. 50,000 Cls. 52,400 Bal. 6,700 Adj. 700 Adj. 65,000 Cls. 65,000
Adj. 2,400 Cls. 6,000
52,400 52,400 6,700 6,700

Bad Debt Expense Supplies Expense Prepaid Advertising

Adj. 1,400 Cls. 1,400 Bal. 5,000 Adj. 1,500 Adj. 700
Cls. 3,500
5,000 5,000

Interest Payable Depr. Exp. Income Summary

Adj. 3,360 Adj. 12,000 Cls. 12,000 Exp. 554,210 Sales 600,000
Inc. 45,790
600,000 600,000

Supplies Salaries and Wages Payable

Adj. 1,500 Adj. 2,400

Retained Earnings Cost of Goods Sold

Bal. 10,000 Bal. 408,000 Cls. 408,000
Inc. 45,790
Bal. 55,790

3-28 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
PROBLEM 3-10 (Continued)

(b) -1-
Bad Debt Expense...............................................................................
1,400
Allowance for Doubtful Accounts..............................................1,400

-2-
Depreciation Expense ($84,000 ÷ 7)..................................................
12,000
Accumulated Depreciation—Equipment................................... 12,000

-3-
Insurance Expense..............................................................................
2,550
Prepaid Insurance........................................................................2,550

-4-
Interest Expense..................................................................................
3,360
Interest Payable...........................................................................3,360

-5-
Salaries and Wages Expense (Sales)................................................
2,400
Salaries and Wages Payable.......................................................2,400

-6-
Prepaid Advertising............................................................................
700
Advertising Expense................................................................... 700

-7-
Supplies...............................................................................................
1,500
Supplies Expense........................................................................1,500

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-29
PROBLEM 3-10 (Continued)

(c) Dec. 31
Sales Revenue 600,000
Income Summary 600,000

Dec. 31
Income Summary 554,210
Cost of Goods Sold 408,000
Advertising Expense 6,000
Salaries and Wages Expense (Admin.) 65,000
Salaries and Wages Expense (Sales) 52,400
Supplies Expense 3,500
Insurance Expense 2,550
Bad Debt Expense 1,400
Depreciation Expense 12,000
Interest Expense 3,360

Dec. 31
Income Summary 45,790
Retained Earnings 45,790

LO: 3, 5, Bloom: AP, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

3-30 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 *PROBLEM 3-11

(a) ARKANSAS SALES AND SERVICE

Income Statement
For the Month Ended January 31, 2017

(1) (2)
Cash Basis Accrual Basis
Revenues...................................................................
$ 75,000 $98,400*

Expenses
Cost of computers & printers:
Purchased and paid................................. 82,500**
Cost of goods sold................................... 59,500***
Salaries and wages........................................ 9,600 12,600
Rent.................................................................
6,000 2,000
Other operating expenses............................. 8,400 10,400
Total expenses....................................... 106,500 84,500
Net income (loss)......................................................
$(31,500) $13,900

*($2,550 X 30) + ($3,600 X 4) + ($500 X 15)

**($1,500 X 40) + ($2,500 X 6) + ($300 X 25)
***($1,500 X 30) + ($2,500 X 4) + ($300 X 15)

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-31
*PROBLEM 3-11 (Continued)

(b) ARKANSAS SALES AND SERVICE

Balance Sheet
As of January 31, 2017
(1) (2)
Cash Basis Accrual
Basis
Assets
$58,500a
Cash................................................................. $ 58,500a
Accounts receivable...................................... 23,400
Inventory......................................................... 23,000b
Prepaid rent.................................................... 4,000
Total assets...............................................
$58,500 $108,900

Liabilities and owners’ Equity

Salaries and wages payable.......................... $ 3,000
Accounts payable........................................... 2,000
$58,500c
Owner’s capital............................................... 103,900d
Total liabilities and owner’s
equity......................................................
$58,500 $108,900

a
Original investment $ 90,000
Cash sales 75,000
Cash purchases (82,500)
Rent paid (6,000)
Salaries paid (9,600)
Other operating expenses (8,400)
Cash balance Jan. 31 $ 58,500

b
(10 @ $1,500) + (2 @ $2,500) + (10 @ $300).

c
Initial investment minus net loss: $90,000 – $31,500.

d
Initial investment plus net income: $90,000 + $13,900.

3-32 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 3-11 (Continued)

(c) 1. The $23,400 in receivables from customers is an asset and a future

cash flow resulting from sales that is ignored. The cash basis
understates the amount of revenues and inflow of assets in
January from the sale of computers and printers by $23,400.

2. The cost of computers and printers sold in January is overstated

by $23,000. The unsold computers and printers are an asset of
$23,000 in the form of inventory.

3. The cash basis ignores $3,000 of the salaries that have been
earned by the employees in January and will be paid in February.

4. Rent expense on the cash basis is overstated by $4,000. This

prepayment is an asset in the form of two months’ future right to
the use of office, showroom, and repair space and should appear
on the balance sheet.

5. Other operating expenses on a cash basis are understated by

$2,000 as is the liability for the unpaid portion of these expenses
incurred in January.
LO: 7, Bloom: AP, Difficulty: Moderate, Time: 35-40, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-33
 (a) COOKE COMPANY

3-34
Worksheet
For the Year Ended September 30, 2017

Adjusted Trial Balance Income Statement Balance Sheet

Account Titles Trial Balance Adjustments

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash 37,400 37,400 37,400
Supplies 18,600 (b) 14,400 4,200 4,200
Prepaid Insurance 31,900 (a) 28,000 3,900 3,900
Land 80,000 80,000 80,000
Equipment 120,000 120,000 120,000
Accum. Depr.-Equip. 36,200 (c) 5,800 42,000 42,000
Accounts Payable 14,600 14,600 14,600

Copyright © 2016 John Wiley & Sons, Inc.

Unearned Service Rev. 2,700 (d) 2,000 700 700
Mortgage Payable 50,000 50,000 50,000
Common Stock 107,700 107,700 107,700
Dividends 14,000 14,000 14,000
Retained Earnings 2,000 2,000 2,000
Service Revenue 278,500 (d) 2,000 280,500 280,500
Sal. and Wages Exp. 109,000 109,000 109,000
Maintenance and
Repairs Expense 30,500 30,500 30,500
Advertising Expense 9,400 9,400 9,400
Utilities Expenses 16,900 16,900 16,900
*PROBLEM 3-12

Prop. Tax Expense 18,000 (e) 3,000 21,000 21,000

Interest Expense 6,000 (f) 6,000 12,000 12,000
Totals 491,700 491,700
Insurance Expense (a) 28,000 28,000 28,000
Supplies Expense (b) 14,400 14,400 14,400
Interest Payable (f) 6,000 6,000 6,000
Depreciation Expense (c) 5,800 5,800 5,800

Kieso, Intermediate Accounting, 16/e, Solutions Manual

Prop. Taxes Payable (e) 3,000 3,000 3,000
Totals 59,200 59,200 506,500 506,500 247,000 280,500 259,500 226,000
Net Income 33,500 33,500
Totals 280,500 280,500 259,500 259,500

Key: (a) Expired Insurance; (b) Supplies Used; (c) Depreciation Expensed; (d) Service Revenue Recognized; (e) Accrued Property
Taxes; (f) Accrued Interest Payable.

(For Instructor Use Only)

*PROBLEM 3-12 (Continued)

(b) COOKE COMPANY

Balance Sheet
September 30, 2017

Assets
Current assets
Cash..........................................................................
$37,400
Supplies.................................................................... 4,200
Prepaid insurance................................................... 3,900
Total current assets....................................... $ 45,500
Property, plant, and equipment
Land..........................................................................80,000
Equipment................................................................
$120,000
Less: Accum. depreciation –
equipment..............................................................
42,000 78,000 158,000
Total assets..................................................... $203,500

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable....................................................$14,600
Current maturity of long-term debt........................10,000
Interest payable.................................................. 6,000
Property taxes payable........................................... 3,000
Unearned service revenue...................................... 700
Total current liabilities................................... $ 34,300
Long-term liabilities
Mortgage payable.................................................... 40,000
Total liabilities................................................ 74,300
Stockholders’ equity
Common stock 107,700
Retained earnings
($2,000 + $33,500 – $14,000)................................. 21,500 129,200
Total liabilities and owners’ equity............... $203,500

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-35
*PROBLEM 3-12 (Continued)

(c) Sep. 30 Insurance Expense 28,000

Prepaid Insurance 28,000

30 Supplies Expense 14,400

Supplies 14,400

30 Depreciation Expense 5,800

Accum. Depreciation—
Equipment 5,800

30 Unearned Service Revenue 2,000

Service Revenue 2,000

30 Property Tax Expense 3,000

Property Taxes Payable 3,000

30 Interest Expense 6,000

Interest Payable 6,000

(d) Sep. 30 Service Revenue 280,500

Income Summary 280,500

30 Income Summary 247,000

Salaries and Wages Expense 109,000
Maintenance and Repairs
Expense 30,500
Insurance Expense 28,000
Property Tax Expense 21,000
Supplies Expense 14,400
Utilities Expenses 16,900
Interest Expense 12,000
Advertising Expense 9,400
Depreciation Expense 5,800

30 Income Summary 33,500

Retained Earnings 33,500

30 Retained Earnings 14,000

Dividends 14,000

3-36 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
*PROBLEM 3-12 (Continued)

(e) COOKE COMPANY

Post-Closing Trial Balance
September 30, 2017
Debit Credit
Cash....................................................................................
$ 37,400
Supplies..............................................................................
4,200
Prepaid Insurance..............................................................
3,900
Land.....................................................................................
80,000
Equipment...........................................................................
120,000
Accumulated Depreciation – Equipment......................... $ 42,000
Accounts Payable.............................................................. 14,600
Unearned Service Revenue............................................... 700
Interest Payable.................................................................. 6,000
Property Tax Payable......................................................... 3,000
Mortgage Payable.............................................................. 50,000
Common Stock................................................................... 107,700
Retained Earnings.............................................................. 21,500
$245,500 $245,500
LO: 3, 4, 5, 9, Bloom: AP, Difficulty: Complex, Time: 40-50, AACSB: Analytic, AICPA BB: None, AICPA FC: Reporting, AICPA PC: None

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-37
 FINANCIAL REPORTING PROBLEM

(a) June 30, 2014 total assets: $144,266 million.

June 30, 2013 total assets: $139,263 million.

(b) June 30, 2014 cash and cash equivalents: $8,558 million.

(c) 2014 research and development costs: $2,023 million.

2013 research and development costs: $1,980 million.

(d) 2014 net sales: $83,062 million.

2013 net sales: $82,581 million.

(e) An adjusting entry for deferrals is necessary when the receipt/disburse-

ment precedes the recognition in the financial statements. Accounts
such as prepaid insurance and prepaid rent may be included in the
Prepaid Expenses and Other Current Assets ($3,845 million at June 30,
2014). Both of these accounts would require an adjusting entry to
recognize the proper amount of expense incurred during the period.
In addition, depreciation expense is an adjusting entry related to a
deferral.

An adjusting entry for an accrual is necessary when recognition in the

financial statements precedes the cash receipt/disbursement, such as
interest or taxes payable. Other adjusting entries probably made by
P&G include interest revenue and expense and interest receivable and
interest payable. P&G reports $8,999 million of Accrued and Other
Liabilities at June 30, 2014.

(f) 2014 Depreciation and amortization expense: $3,141 million

2013 Depreciation and amortization expense: $2,982 million
2012 Depreciation and amortization expense: $3,204 million

(From the Statement of Cash Flows)

LO: 3, 4, Bloom: AN, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, Research, AICPA PC:
Communication

3-38 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 COMPARATIVE ANALYSIS CASE

(a) The Coca-Cola Company percentage increase is computed as follows:

Total assets (December 31, 2014)...................................................... $92,023

Total assets (December 31, 2013)...................................................... (90,055)
Difference.............................................................................................
$ 1,968

$1,968 ÷ $90,055 = 2.2%

PepsiCo, Inc.’s percentage increase is computed as follows:

Total assets (December 27, 2014)...................................................... $70,509

Total assets (December 28, 2013)...................................................... (77,478)
Difference.............................................................................................
$(6,969)

$(6,969) ÷ $77,478 = $(8.99)%

Coca-Cola Company had the larger increase; PepsiCo had a decrease.

(b)
5-Year Growth Rate
The Coca-Cola Company PepsiCo, Inc.
Net sales 7.86% 3.82%
Income from continuing
4.04% 3.86%
operations

(c) The Coca-Cola Company had depreciation and amortization expense

of $1,976 million; PepsiCo, Inc. had depreciation and amortization
expense of $2,625 million.

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-39
COMPARATIVE ANALYSIS CASE (Continued)

PepsiCo has substantially more property, plant, and equipment than

does Coca-Cola. PepsiCo is engaged in three different types of
businesses: soft drinks, snack-food, and juices. As a result, it has more
tangible fixed assets. PepsiCo also has substantially more amortizable
intangible assets. Amortizable intangible assets for Coke and Pepsi
increase the amount of amortization expense recorded in income. The
amount of property, plant, and equipment and amortizable intangible
assets reported for these two companies is as follows: (000,000)

The Coca-Cola Company PepsiCo, Inc.

Property, plant, and
equipment (net) $ 14,633 $17,244
Amortizable intangible
assets (net) 1,050 1,449
$15,683 $18,693
LO: 3, 4, Bloom: AN, Difficulty: Moderate, Time: 30-35, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, Research, AICPA PC:
Communication

3-40 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
 FINANCIAL STATEMENT ANALYSIS

(a) % %
Change Change
2014 2013 2012 2014 2013
Sales $14,580 $14,792 $14,197 -1.43% 4.19
Operating Profit 1,024 2,837 1,562 -63.91% 81.63%
Net Cash Flow less
Capital Expenditures 1,211 1,170 1,225 3.50% -4.49%
Net Earnings 633 1,808 961 -64.99% 88.14%

(b) Kellogg experienced slight decrease in sales in the current year which
followed an increase in the previous year. The gross-profit percentage
decreased after an increase in the prior year. This coincides with
declining operating profit but a solid increase in cash flows,
compared to prior years, suggest it faces a challenging period and
might be starting to recover. This may bode well for the strength and
flexibility of its business model.
LO: 4, Bloom: AN, Difficulty: Moderate, Time: 15-20, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, Research, AICPA PC:
Communication

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-41
 ACCOUNTING, ANALYSIS, AND PRINCIPLES

Accounting

Depreciation Expense 9,500

Accumulated Depreciation—Equipment 9,500
($9,500 = ($192,000 – $40,000) ÷ 16)

Interest Expense 8,250

Interest Payable 8,250
$8,250 = ($90,000 X 0.10) X 11/12)

Unearned Service Revenue 10,000

Service Revenue 10,000
($10,000 = ($50 X 200))

Advertising Expense 2,500

Prepaid Advertising 2,500

Salaries and Wages Expense 3,500

Salaries and Wages Payable 3,500

3-42 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
ACCOUNTING, ANALYSIS, AND PRINCIPLES (Continued)

Analysis

Income before Income after

Adjustments Adjustments Adjustments
Service revenue $360,000 $10,000 $370,000
Less:
Depreciation expense (9,500) (9,500)
Advertising expense (18,680) (2,500) (21,180)
Salaries and wages
expense (67,600) (3,500) (71,100)
Interest expense (1,400) (8,250) (9,650)
Net income $272,320 $258,570

Without recording the adjusting entries, Amato’s income is overstated.

In addition, without the adjustments, Amato’s current liabilities and
current assets are misstated, which could affect evaluation of Amato's
liquidity.

Principles

The tradeoffs are between the timeliness of the reports, which

contributes to relevance, and verifiability, the lack of which detracts
from faithful representation. That is, by preparing reports more
frequently, the company provides more timely information, which can
make a difference to a statement reader who needs to make a decision.
However, preparing statements more frequently requires more subjective
estimates, which reduces faithful representation.
LO: 3, 4, Bloom: AN, Difficulty: Moderate, Time: 20-25, AACSB: Analytic, Communication, AICPA BB: None, AICPA FC: Reporting, AICPA PC:
Communication

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-43
 CODIFICATION RESEARCH CASE

(a) The three essential characteristics of assets.

Search String: asset and characteristics.

CON6, Par26. An asset has three essential characteristics: (a) it

embodies a probable future benefit that involves a capacity, singly or in
combination with other assets, to contribute directly or indirectly to
future net cash inflows, (b) a particular entity can obtain the benefit and
control others’ access to it, and (c) the transaction or other event giving
rise to the entity’s right to or control of the benefit has already occurred.

(b) Three essential characteristics of liabilities.

Search String: liability and characteristic.

CON6, Par36. A liability has three essential characteristics: (a) it

embodies a present duty or responsibility to one or more other entities
that entails settlement by probable future transfer or use of assets at a
specified or determinable date, on occurrence of a specified event, or
on demand, (b) the duty or responsibility obligates a particular entity,
leaving it little or no discretion to avoid the future sacrifice, and (c) the
transaction or other event obligating the entity has already happened.

(c) Uncertainty, and its effects on financial statements.

Search Strings: “uncertainty”, effect of uncertainty.

CON6, Par44. Uncertainty about economic and business activities and

results is pervasive, and it often clouds whether a particular item
qualifies as an asset or a liability of a particular entity at the time the
definitions are applied. The presence or absence of future economic
benefit that can be obtained and controlled by the entity or of the
entity’s legal, equitable, or constructive obligation to sacrifice assets in
the future can often be discerned reliably only with hindsight. As a
result, some items that with hindsight actually qualified as assets or
liabilities of the entity under the definitions may, as a practical matter,
have been recognized as expenses, losses, revenues, or gains or

3-44 Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only)
CODIFICATION RESEARCH CASE (Continued)

remained unrecognized in its financial statements because of uncertainty

about whether they qualified as assets or liabilities of the entity or
because of recognition and measurement considerations stemming
from uncertainty at the time of assessment. Conversely, some items that
with hindsight did not qualify under the definitions may have been
included as assets or liabilities because of judgments made in the face
of uncertainty at the time of assessment.

CON6, Par45. An effect of uncertainty is to increase the costs of finan-

cial reporting in general and the costs of recognition and measurement
in particular. Some items that qualify as assets or liabilities under the
definitions may therefore be recognized as expenses, losses, revenues,
or gains or remain unrecognized as a result of cost and benefit analyses
indicating that their formal incorporation in financial statements is not
useful enough to justify the time and effort needed to do it. It may be
possible, for example, to make the information more reliable in the face
of uncertainty by exerting greater effort or by spending more money,
but it also may not be worth the added cost.

Note to instructors: The FASB codification does not contain the

Concepts Statements. However, the Concepts Statements can be
accessed at another link on the FASB website.

(d) The difference between realization and recognition

Search String: realization, recognition.

CON6, Par143. Realization in the most precise sense means the

process of converting noncash resources and rights into money and is
most precisely used in accounting and financial reporting to refer to
sales of assets for cash or claims to cash. The related terms realized
and unrealized therefore identify revenues or gains or losses on assets
sold and unsold, respectively. Those are the meanings of realization
and related terms in the Board’s conceptual framework. Recognition is
the process of formally recording or incorporating an item in the
financial statements of an entity. Thus, an asset, liability, revenue,
expense, gain, or loss may be recognized (recorded) or unrecognized
(unrecorded). Realization and recognition are not used as synonyms,
as they sometimes are in accounting and financial literature.
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 IFRS CONCEPTS AND APPLICATION

IFRS3-1
The date of transition is the beginning of the earliest period for which full
comparative IFRS information is provided. The date of reporting is the closing
balance sheet date for the first IFRS financial statements.
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IFRS3-2
When countries accept IFRS for use as accepted accounting policies,
companies need guidance to ensure that their first IFRS financial statements
contain high quality information. Specifically, IFRS 1 requires that
information in a company’s first IFRS statements (1) be transparent, (2)
provide a suitable starting point, and (3) have a cost that does not exceed
the benefits.
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IFRS3-3
A company follows these steps:
1. Identify the timing of its first IFRS statements.
2. Prepare an opening balance sheet at the date of transition to IFRS.
3. Select accounting principles that comply with IFRS, and apply these
principles retrospectively.
4. Make extensive disclosures to explain the transition to IFRS
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IFRS3-4
The date of the opening balance sheet is January 1, 2017. The IFRS financial
statements will include years ended December 31, 2018 and 2017.
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IFRS3-5
(a) Assets
53 The future economic benefit embodied in an asset is the potential
to contribute, directly or indirectly, to the flow of cash and cash
equivalents to the entity. The potential may be a productive one
that is part of the operating activities of the entity. It may also
take the form of convertibility into cash or cash equivalents or a
capability to reduce cash outflows, such as when an alternative
manufacturing process lowers the costs of production.

54 An entity usually employs its assets to produce goods or services

capable of satisfying the wants or needs of customers; because
these goods or services can satisfy these wants or needs,
customers are prepared to pay for them and hence contribute to
the cash flow of the entity. Cash itself renders a service to the
entity because of its command over other resources.
55 The future economic benefits embodied in an asset may flow to
the entity in a number of ways. For example, an asset may be:
a. used singly or in combination with other assets in the
production of goods or services to be sold by the entity;
b. exchanged for other assets;
c. used to settle a liability; or
d. distributed to the owners of the entity.
(b) Liabilities
60 An essential characteristic of a liability is that the entity has a
present obligation. An obligation is a duty or responsibility to act
or perform in a certain way. Obligations may be legally enforce-
able as a consequence of a binding contract or statutory require-
ment. This is normally the case, for example, with amounts
payable for goods and services received. Obligations also arise,
however, from normal business practice, custom and a desire to
maintain good business relations or act in an equitable manner.
If, for example, an entity decides as a matter of policy to rectify
faults in its products even when these become apparent after
the warranty period has expired, the amounts that are expected
to be expended in respect of goods already sold are liabilities.

Copyright © 2016 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 16/e, Solutions Manual (For Instructor Use Only) 3-47
IFRS3-5 (Continued)
61 A distinction needs to be drawn between a present obligation
and a future commitment. A decision by the management of an
entity to acquire assets in the future does not, of itself, give rise
to a present obligation. An obligation normally arises only when
the asset is delivered or the entity enters into an irrevocable
agreement to acquire the asset. In the latter case, the irrevocable
nature of the agreement means that the economic consequences
of failing to honour the obligation, for example, because of the
existence of a substantial penalty, leave the entity with little, if any,
discretion to avoid the outflow of resources to another party.

62 The settlement of a present obligation usually involves the entity

giving up resources embodying economic benefits in order to
satisfy the claim of the other party. Settlement of a present
obligation may occur in a number of ways, for example, by:

a. payment of cash;
b. transfer of other assets;
c. provision of services;
d. replacement of that obligation with another obligation; or
e. conversion of the obligation to equity.

(c) Accrual basis

22 In order to meet their objectives, financial statements are prepared

on the accrual basis of accounting. Under this basis, the effects of
transactions and other events are recognised when they occur
(and not as cash or its equivalent is received or paid) and they
are recorded in the accounting records and reported in the
financial statements of the periods to which they relate. Financial
statements prepared on the accrual basis inform users not only
of past transactions involving the payment and receipt of cash
but also of obligations to pay cash in the future and of resources
that represent cash to be received in the future. Hence, they
provide the type of information about past transactions and
other events that is most useful to users in making economic
decisions.
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IFRS3-6

(a) March 28, 2015 total assets: £8,196.1 million.

March 29, 2014 total assets: £7,903.0 million.

(b) March 28, 2015 cash and cash equivalents: £205.1 million.

(c) 2015 selling and marketing expense: £3,304.8 million.

2014 selling and marketing expense: £3,224.3 million.

(d) 2015 revenue: £10,311.4 million.

2014 revenue: £10,309.7 million.

(e) An adjusting entry for deferrals is necessary when the receipt/disburse-

ment precedes the recognition in the financial statements. Accounts
such as prepaid pension contributions and prepaid leasehold premiums
are included in the Trade and other receivables section. Both of these
accounts would require an adjusting entry to recognize the proper
amount of expense incurred during the period. In addition,
depreciation expense is an adjusting entry related to a deferral.

An adjusting entry for an accrual is necessary when recognition in the

financial statements precedes the cash receipt/disbursement, such as
interest or taxes payable. Other adjusting entries probably made by
M&S include finance income and finance costs and bank and other
interest receivable and interest payable.

(f) 2015 Depreciation and amortization expense: £550.1 million

2014 Depreciation and amortization expense: £504.7 million
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