ACCT1101 – Introduction to Financial Accounting

Assignment and Discussion Questions – Suggested Solution to Chapter 4

Assignment and Discussion Questions - Suggested Solution

(E4-8, E4-19, P4-2, P4-7)
E4–8.
Computations
a. Wages expense (+E, SE) ................................. 2,700 Given
Wages payable (+L).................................. 2,700

b. Office supplies expense (+E, SE) ..................... 675 $450 + $500

Office supplies (A)................................... 675 - $275 = $675 used

c. Rent receivable (+A) ........................................... 1,120 $560 x 2 months

Rent revenue (+R, +SE) ........................... 1,120 = $1,120 earned

d. Depreciation expense (+E, SE) ........................ 12,100 Given

Accumulated depreciation (+XA, A) 12,100

e. Insurance expense (+E, SE) ............................. 600 $2,400 x 6/24 =

Prepaid insurance (A) ............................. 600 $600 used

f. Unearned rent revenue (L) ............................... 3,200 $9,600 x 2/6 =

Rent revenue (+R, +SE) ........................... 3,200 $3,200 earned

g. Repair accounts receivable (+A)......................... 800 Given

Repair shop revenue (+R, +SE) ............... 800

E4–19.

Req. 1

a. Salaries and wages expense (+E, SE) ....................... 730

Salaries and wages payable (+L)........................... 730

b. Utilities expense (+E, SE) ........................................... 440

Utilities payable (+L) .............................................. 440

c. Depreciation expense (+E, SE)................................... 24,000

Accumulated depreciation (+XA, A) ..................... 24,000

d. Interest expense (+E, SE) ........................................... 300

Interest payable (+L) .............................................. 300
($15,000 x .08 x 3/12)

e. Maintenance expense (+E, SE) .................................. 1,100

Maintenance supplies (A) .................................... 1,100

f. No adjustment is needed because the revenue will not

be earned until January (next year).
ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 4

g. Income tax expense (+E, SE) ..................................... 5,800

Income tax payable (+L) ........................................ 5,800

Req. 2
JAY, INC.
Income Statement
For the Current Year Ended December 31

Operating Revenue:
Rent revenue $109,000
Operating Expenses:
Salaries and wages ($26,500 + $730) 27,230
Maintenance expense ($12,000 + $1,100) 13,100
Rent expense 8,800
Utilities expense ($4,300 + $440) 4,740
Gas and oil expense 3,000
Depreciation expense 24,000
Miscellaneous expenses 1,000
Total expenses 81,870
Income from Operations 27,130
Other Item:
Interest expense ($15,000 x .08 x 3/12) 300
Pretax income 26,830
Income tax expense 5,800
Net income $ 21,030

Earnings per share: $21,030 ÷ 7,000 shares $3.00

Req. 3

Total asset turnover ratio = Net Sales (or Operating Revenues)  Average Total Assets
= $109,000  [($58,020 + $65,180)/2]
= $109,000  $61,600 = 1.77

The total asset turnover ratio indicates that, for every $1 of assets, Jay earns $1.77 in rental
revenue. This ratio is lower than the industry average total asset turnover of 2.31, implying that Jay
is less effective at utilizing assets to generate revenue than the average company in the industry.
ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 4

P4–2.
Req. 1

a. Deferred revenue e. Deferred expense

b. Accrued expense f. Accrued revenue
c. Deferred expense g. Accrued expense
d. Deferred revenue h. Accrued expense

Req. 2

a. Unearned rent revenue (L) ................................................ 6,400

Rent revenue (+R, +SE) .............................................. 6,400
($9,600 ÷ 6 months = $1,600 per month x 4 months)

b. Interest expense (+E, SE) ................................................. 540

Interest payable (+L).................................................... 540
($18,000 x 0.12 x 3/12)

c. Depreciation expense (+E, SE) ......................................... 4,400

Accumulated depreciation (+XA, A) .......................... 4,400

d. Unearned service revenue (L) ........................................... 500

Service revenue (+R, +SE) .......................................... 500
($3,000 x 2/12)

e. Insurance expense (+E, SE) .............................................. 1,400

Prepaid insurance (A) ................................................ 1,400
($8,400 ÷ 12 months = $700 per month x 2 months of coverage)

f. Accounts receivable (+A)..................................................... 4,000

Service revenue (+R, +SE) .......................................... 4,000

g. Wages expense (+E, SE) .................................................. 14,000

Wages payable (+L) .................................................... 14,000

h. Property tax expense (+E, SE) .......................................... 400

Property tax payable (+L) ............................................ 400
ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 4

P4–7.
Req. 1
December 31 Adjusting Entries:
(a) Supplies expense (+E, SE) .............................................. 600
Supplies (A) .......................................................... 600
(b) Insurance expense (+E, SE) ............................................ 800
Prepaid insurance (A) .......................................... 800
(c) Depreciation expense (+E, SE) ....................................... 3,700
Accumulated depreciation (+XA, A) ..................... 3,700
(d) Wages expense (+E, SE) ................................................. 640
Wages payable (+L) ............................................... 640
(e) Interest expense (+E, SE)................................................ 425
Interest payable (+L) .............................................. 425
$17,000 principal x 0.10 annual rate x 3/12 of a year
(f) Income tax expense (+E, SE) .......................................... 5,540
Income taxes payable (+L) ..................................... 5,540

Req. 2
TUNSTALL, INC.
Income Statement
For the Current Year Ended December 31

Operating Revenue:
Service revenue $61,360
Operating Expenses:
Supplies expense ($900 - $300) 600
Insurance expense 800
Depreciation expense 3,700
Wages expense ($16,200 + $640) 16,840
Remaining expenses (not detailed) 17,160
Total expenses 39,100
Operating Income 22,260
Other Item:
Interest expense 425
Income before taxes 21,835
Income tax expense 5,540
Net Income $16,295

Earnings per share ($16,295 ÷ 5,000 shares) $3.26

ACCT1101 – Introduction to Financial Accounting
Assignment and Discussion Questions – Suggested Solution to Chapter 4

P4–7. (continued)

Req. 2 (continued)
TUNSTALL, INC.
Balance Sheet
At December 31 of the Current Year

Assets Liabilities and Stockholders’ Equity

Current Assets: Current Liabilities:
Cash $42,000 Accounts payable $ 3,000
Accounts receivable 11,600 Wages payable 640
Supplies 300 Interest payable 425
Total current assets 53,900 Income taxes payable 5,540
Service trucks 19,000 Total current liabilities 9,605
Accumulated depreciation (12,900) Note payable, long term 17,000
Other assets (not detailed) 8,300 Total liabilities 26,605
Stockholders' Equity
Common stock 400
Additional paid-in capital 19,000
Retained earnings* 22,295
Total stockholders' equity 41,695
Total liabilities and
Total assets $68,300 stockholders' equity $68,300

*Unadjusted balance, $6,000 + Net income, $16,295 = Ending balance, $22,295.

Req. 3

December 31 Closing Entry:

Service revenue (R, SE) ................................................. 61,360

Supplies expense (E, +SE) .................................. 600
Insurance expense (E, +SE) ................................ 800
Depreciation expense (E, +SE) ............................ 3,700
Wages expense (E, +SE) ..................................... 16,840
Remaining expenses (not detailed) (E, +SE) ........ 17,160
Interest expense (E, +SE) ..................................... 425
Income tax expense (E, +SE) .............................. 5,540
Retained earnings (+SE) ........................................ 16,295