ACO 201 Problems Chapter 4 Solutions, Spring 2013

Brief Exercises B. Ex. 4.1 B. Ex. 4.2 B. Ex. 4.3 B. Ex. 4.4 Analysis B. Ex. 4.5 B. Ex. 4.6 B. Ex. 4.7 B. Ex. 4.8 B. Ex. 4.9 B. Ex. 4.10 Learning Objectives 4.1 1–9 4.2 1–6, 9 4.3 1-7 4.4 Deferred expenses and revenue 1-7 Analysis 4.5 Accrued revenue 1-7 Analysis 4.6 1, 2, 4 Analysis 4.7 Accruals and deferrals 1-6, 9 Analysis 4.8 Notes payable and interest 1, 2, 5 Analysis 4.9 1–7, 9 4.10 1, 3–5, 7 4.11 1, 4, 7 Deferred revenue 4.12 1–7, 9 4.13 Effects of adjusting entries 1–6 Analysis 4.14 1–8 4.15 1, 2 CHAPTER 4 THE ACCOUNTING CYCLE: ACCRUALS AND DEFERRALS Analysis, judgment Real World: Home Depot Using an annual report Analyzing the adjusted trial balance Analysis Communication, analysis, judgment Communication, analysis Analysis Accounting terminology Analysis Skills Topic Deferred revenue Exercises Effects of adjusting entries Adjustments and the balance sheet Communication, analysis Interpreting business transactions Analysis, judgment Real World: Various firms Accounting principles Analysis Analysis Topic Objectives Deferred expenses and revenue 3, 4 Analysis Deferred expenses and revenue 3, 4 Accounting for supplies Analysis Accounting for depreciation 3 Accrued revenue 6 Analysis Analysis Accrued taxes 5 Analysis Analysis OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS, AND CRITICAL THINKING CASES Learning Skills Accrued interest 5 Unearned revenue 4 Accrued salaries 5 3 Judgment, communication, analysis Real World: American Airlines Concept of materiality 8 Deferred expenses and revenue Analysis © The McGraw-Hill Companies, Inc., 2010 Overview Problems Learning Sets A, B Objectives 4.1 A,B 1-7 4.2 A,B 1–6, 9 4.3 A,B Analysis of adjusted data 1–7, 9 4.4 A,B 1–7, 9 4.5 A,B 1–7, 9 4.6 A,B Preparing and analyzing adjusting entries 1–7, 9 4.7 A,B Preparing and analyzing adjusting entries 1–7, 9 4.8 A,B 1–7, 9 4.1 1–7 4.2 Real World: Avis 8 The concept of materiality 4.3 3, 7, 8 4.4 1, 4, 7 (Business Week) 4.5 accounts involved in adjusting 1–6 Analysis, communication Analysis Analysis, communication Topic Skills process (Internet) Deferring expenses (Ethics, fraud & corporate governance) Real World: Hershey Identifying Critical Thinking Cases Preparing and analyzing adjusting entries Preparing and analyzing adjusting entries Preparing and analyzing adjusting entries Preparing and analyzing adjusting entries Communication, technology, judgment, research Analysis, communication Analysis, communication Determining whether adjusting entries are required Analysis, judgment, communication Analyzing the effects of errors Communication, judgment, analysis Analysis, communication Real World: Jet Blue and Others Analysis, judgment, communication, research Analysis, communication Analysis, judgment, communication Analysis © The McGraw-Hill Companies, Inc., 2010 Overview DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES Problems (Sets A and B) 4.1 A,B 20 Easy 4.2 A,B 40 Medium 4.3 A,B 25 Strong 4.4 A,B 4.5 A,B 30 Medium 4.6 A,B 30 Medium Requires students to prepare adjusting entries and interpret financial information. Below are brief descriptions of each problem and case. These descriptions are accompanied by the estimated time (in minutes) required for completion and by a difficulty rating. The time estimates assume use of the partially filled-in working papers. 30 Medium Campus Theater/Off-Campus Playhouse Requires students to prepare adjusting entries, analyze financial information, and interpret differences between income taxes expense and income taxes payable. Gunflint Adventures/River Rat Requires students to prepare adjusting entries, classify them as accruals or deferrals, and discuss the difference between the book value of an asset and its fair market value. Requires students to prepare adjusting entries, classify them as accruals or deferrals, analyze their effects on the financial statements, and report assets at book value in the balance sheet. Florida Palms Country Club/Georgia Gun Club Enchanted Forest/Big Oaks Alpine Expeditions/Mate Ease Requires students to prepare adjusting entries, determine amounts reported in the financial statements, and interpret certain deferrals. Terrific Temps/Marvelous Music Requires students to prepare adjusting entries and determine amounts reported in the financial statements. © The McGraw-Hill Companies, Inc., 2010 Overview and Desc. of Cases Problems (continued) Ken Hensley Enterprises, Inc./Stillmore Investigations 60 Strong Requires students to journalize adjusting entries, prepare an adjusted trial balance, and understand various relationships among financial statement elements. Coyne Corporation/Stephen Corporation Requires students to analyze the effects of errors on financial statement elements. Critical Thinking Cases Judgments and Year-End Adjustments The Concept of Materiality Expense Manipulation Ethics, Fraud & Corporate Governance Deferred Revenue 15 Medium Business Week Identifying Accounts Internet 4.4 4.3 Students are required to perform an adjusting entry for JetBlue Corporation and determine from financial data the estimated number of days that passengers purchase their tickets in advance. 30 Medium 4.2 25 Medium 4.1 4.7 A,B 4.8 A,B 20 Strong Students are asked to identify accounts in Hershey’s balance sheet that were most likely to have been involved in the company’s year-end adjusting entry process. 4.5 10 Easy Requires students to exercise judgment regarding the need for adjusting entries. Discusses the concept of materiality. The purchase of automobiles by Avis for its rental fleet is used to illustrate how the cumulative effect of many immaterial transactions can become material. Students must determine whether the capitalization of advertising expenditures was in compliance with generally accepted accounting principles, and whether the decision to do so was ethical. 10 Easy © The McGraw-Hill Companies, Inc., 2010 Desc. of Prob & Cases SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. 7. The purpose of making adjusting entries is to recognize certain revenue and expenses that are not properly measured in the course of recording daily business transactions. These entries help achieve the goals of accrual accounting by recognizing revenue when it is earned and recognizing expenses when the related goods or services are used. The only transactions that require end-of-period adjusting entries are those that affect the revenue or expenses of more than one accounting period. Adjusting entries then are needed to apportion the revenue or expense among the affected accounting periods. All adjusting entries affect both an income statement account and a balance sheet account. Every adjusting entry involves the recognition of either revenue or expense. Revenue and expenses represent changes in owners’ equity, which appears in the balance sheet. However, owners’ equity cannot change by itself; there must also be a corresponding change in either assets or liabilities. Making adjusting entries requires a better understanding of accrual accounting than does the recording of routine business transactions because there is no "external evidence" (such as bills or invoices) indicating the need for adjusting entries. Adjusting entries are necessary to reflect recorded costs that have expired and recorded revenue that has been earned or to recognize previously unrecorded business activities. Thus, the need for adjusting entries is determined by the accountant’s understanding of the concepts of accrual accounting, not by external source documents. Under accrual accounting, an expense is defined as the cost of goods and services used in the effort to generate revenue. Thus, an expense is incurred when the related goods and services are used, not when the expense is paid. A 12-month insurance policy represents insurance coverage that is used up over a 12-month period. The cost of such a policy should be debited to an asset account and gradually recognized as an expense over the 12 months that the policy is in force. Accrual accounting requires that revenue be recognized in the accounting records when it is earned. If revenue has been earned, but not yet recorded in the accounts, an adjusting entry should be made to include this revenue in the income of the current period. This entry will credit a revenue account; as the revenue has not yet been collected, the debit will be to an account receivable. The term, unearned revenue, describes amounts that have been collected from customers in advance and that have not yet been earned. As the company has an obligation to render services to these customers or to refund their advance payments, unearned revenue appears in the liability section of the balance sheet. As services are performed for these customers, the liability is reduced. Therefore, an adjusting entry is made transferring the balance of the unearned revenue account into a revenue account. © The McGraw-Hill Companies, Inc., 2010 Q1-7 8. 16,000 16,000 9. 10. 11. 12. 13. 14. 16. The realization principle governs the timing of revenue recognition. The principle states that revenue should be recognized (reported in the income statement) in the period in which it is earned . This does not necessarily coincide with cash flow, however. Cash can be received from customers in a period before revenue is earned or in a period after revenue is earned. A $1,000 expenditure is not considered material to all businesses. Most large enterprises round the dollar amounts shown in their financial statements to the nearest $1 thousand or nearest $1 million dollars. Deferred expenses are those assets reported in the balance sheet that will later become expenses reported in the income statement. They include, but are not limited to, office supplies, prepared rent, prepaid insurance, buildings, equipment, etc. 15. The matching principle governs the manner in which revenue is offset by the expenses incurred in producing that revenue. Generally, expenses are matched to revenue in the periods that resources are consumed in generating revenue earned. Expense recognition does not necessarily coincide with the payment of cash. Unprofitable companies recognize a "negative amount" of income tax expense. The adjusting entry to record income tax expense for a period in which a net loss is incurred requires a debit to Income Taxes Payable and a credit to Income Taxes Expense. Salaries Payable …………………………. Salaries Expense …………………………………………… To record salaries expense and related liability to employees for the last four days of the year (4/5 week x $20,000 = $16,000). The concept of materiality permits accountants to handle items that are unlikely to influence the decisions of users of the accounting information in the most convenient and economical manner. Charging the costs of low-priced and short-lived assets immediately to an expense is not likely to affect the decisions of users of the financial statements. On the other hand, accounting for these items as assets and recording periodic depreciation would require time, effort, and cost. Thus, low-priced and short-lived assets are routinely charged to an expense, because charging them to asset accounts simply is “not worth the bother.” In the income statement, the Insurance Expense account will be understated; hence total expenses will be understated, and net income will be overstated. In the balance sheet, the asset account, Unexpired Insurance, will be overstated, as will the amount for total assets. Offsetting this overstatement of assets will be an overstatement of retained earnings; hence owners’ equity will be overstated. Materiality refers to the relative importance of an item or an event to the users of financial statements. An item is “material” if knowledge of it might reasonably influence the decisions of financial statement users. If an item is not material, by definition it is not relevant to decision makers. Therefore, the item may be treated in the most convenient and economical manner by the preparer of the financial statements. Thus, the concept of materiality permits departures from other generally accepted accounting principles in accounting for items that are not material. © The McGraw-Hill Companies, Inc., 2010 Q8-16 18. 19. 17. Accrued but uncollected revenue is reported in the balance sheet as accounts receivable. 20. Carnival Corporation accounts for customer deposits as deferred, or unearned, revenue. As travelers pay for their cruises in advance, Carnival debits Cash and credits Customer Deposits (a liability account). As cruises take place, Carnival debits Customer Deposits and credits Cruise Revenue Earned. Deferred revenue (also referred to as unearned revenue or customer deposits) is reported in the balance sheet as a liability. Accrued but unpaid expenses are reported in the balance sheet as liabilities. They include items such as salaries payable, interest payable, and taxes payable. © The McGraw-Hill Companies, Inc., 2010 Q17-20 B. Ex. 4.1 a. Nov. 30 500 Unexpired Insurance ……………………. 500 b. Nov. 30 500 Premium Revenue Earned………………… 500 B. Ex. 4.2 a. Feb. 28 175 Prepaid Rent ………………………………… 175 To record February rent of $175. b. Feb. 28 175 Rent Revenue Earned ……………………… 175 B. Ex. 4.3 Mar. 31 1,100 Office Supplies………….…………………. 1,100 B. Ex. 4.4 a. Dec. 31 750 Accumulated Depreciation: Equipment …… 750 b. B. Ex. 4.5 3,340 Client Service Revenue ……………………… 3,340 #4067 10 $85 $ 850 #3940 14 $75 1,050 #1852 16 $90 1,440 $ 3,340 The equipment's accumulated depreciation reported in the balance sheet on December 31, 2009, is $54,000 ($72,000 ÷ 8- year life x 6 years of depreciation = $54,000). Billable Account Hours Rate Amount Office Supplies Expense ……………………………… Depreciation Expense: Equipment…………………… To record earned but unbilled and unrecorded client service revenue: Accounts Receivable …………………………………… To record December depreciation expense $72,000 ÷ 8 years x 1/12 = $750). Insurance Expense …………………………………… To convert previously unearned premiums to premium revenue earned ($3,000 ÷ 6 months = $500). To record expired portion of insurance premium ($3,000 ÷ 6 months = $500) Unearned Insurance Premiums……………………… Rent Expense ………………………………………… Unearned Rent Revenue……………………………… To convert previously unearned rent revenue to earned revenue. To record March office supplies expense ($900 + $600 - $400 = $1,100). © The McGraw-Hill Companies, Inc., 2010 BE4.1,5 B. Ex. 4.6 a. 2,800 Client Revenue Earned ………………… 2,800 B. Ex. 4.7 a. Dec. 31 175,000 Salaries Payable …………………………… 175,000 To record accrued but unpaid salaries. b. Jan. 15 180,000 175,000 Cash………………………………………… 355,000 B. Ex. 4.8 a. Dec. 31 160 Interest Payable………….…………………. 160 b. Feb. 1 160 Interest Payable……………………………………. 160 Notes Payable………………………………………. 24,000 Cash…...……………………………………. 24,320 B. Ex. 4.9 a. Dec. 31 5,600 Income Taxes Payable……………………… 5,600 b. b. Salaries Payable……………………………………… Income taxes payable reported in the company's balance sheet dated December 31, 2009, total $19,900 ($14,300 + $5,600 = $19,900). Salaries Expense ……………………………………… Salaries Expense……………………………………… To record payment of salaries. To record December interest expense ($24,000 x 8% x 1/12 = $160). Interest Expense……...……………………………. To accrue December income taxes expense ($62,800 - $57,200 = $5,600). Income Taxes Expense ………………………………… To record January interest expense and repay the bank the entire amount owed. Unearned Client Revenue …………………………… To convert previously unearned client revenue to client revenue earned. Client Revenue earned will be reported in the company's income statement at $31,800 ($29,000 + $2,800 = $31,800). Interest Expense ……………………………………… © The McGraw-Hill Companies, Inc., 2010 BE4.6,9 B. Ex. 4.10 a. b. c. 1. 2. Adjusting entries need not be made to accrue immaterial amounts of unrecorded expenses or unrecorded revenue. For example, no adjusting entries normally are made to record utility expense payable at year-end. In addition to considering the size of a dollar amount, accountants must also consider the nature of the item. The nature of an item may make the item “material” to users of the financial statements regardless of its dollar amount. Examples might include bribes paid to government officials, or theft of company assets or other illegal acts committed by management. In summary, one cannot say whether $2,500 is a material amount. The answer depends upon the related circumstances. Two ways in which the concept of materiality may save time and effort for accountants are: Adjusting entries may be based upon estimated amounts if there is little or no possibility that the use of an estimate will result in material error. For example, an adjusting entry to reflect the amount of supplies used may be based on an estimate of the cost of supplies remaining on hand. Materiality refers to the relative importance of an item. An item is material if knowledge of it might reasonably influence the decisions of users of financial statements. If an item is immaterial, by definition it is not relevant to decision makers. Accountants must account for material items in the manner required by generally accepted accounting principles. However, immaterial items may be accounted for in the most convenient and economical manner. Whether a specific dollar amount is “material” depends upon the (1) size of the amount and (2) nature of the item. In evaluating the size of a dollar amount, accountants consider the amount in relation to the size of the organization. Based solely upon dollar amount, $2,500 is not material in relation to the financial statements of a large, publicly owned corporation. For a small business however, this amount could be material. © The McGraw-Hill Companies, Inc., 2010 BE4.10 Ex 4.1 a. b. c. d. e. f. g. h. Ex. 4.2 Revenue  Expenses = Assets  Liabilities = NE I D D NE D NE I D NE I D I NE I I NE I NE I D NE I D NE I D D NE D I NE I NE D I Ex. 4.3 1. 240,000 240,000 2. 148,800 148,800 Adjusting Entry Book value Matching principle Net Income Owners' Equity Income Statement Balance Sheet f. d. e. a. b. c. Ticket Revenue Earned ……………………………… To record earned portion of season ticket revenue relating to May home games. SOLUTIONS TO EXERCISES Materiality Unrecorded revenue Adjusting entries Unearned revenue Prepaid expenses None (This is an example of “depreciation expense.”) Rent Expense …………………………………………………… Prepaid Rent …………………………………………… To record rent expense for May ($1,200,000  5 months = $240,000 per month). Unearned Ticket Revenue …………………………………… © The McGraw-Hill Companies, Inc., 2010 E4.1,2,3 Ex. 4.4 a. b. 18,000,000 18,000,000 c. 90,000,000 90,000,000 d. Ex. 4.5 a. (1) 375 375 (2) 10,000 10,000 b. c. Ex. 4.6 a. b. c. 200,000 200,000 Customer Deposits …………………………………………… Cruise Revenue ………………………………………… Prepaid Advertising is reported in the balance sheet as an asset. Customer Deposits are reported in the balance sheet as liabilities. Advertising Expense ………………………………………… Prepaid Advertising ……………………………………… To record the mailing of brochures costing $18 million to print. Air Traffic Liability ………………………………………… To record passenger revenue earned from advance ticket sales for flights completed. Passenger Revenue Earned ……………………………… $50,000 x 9% annual rate x 1/12 = $375. Accounts Receivable …………………………………… $15,000 ($25,000 - $10,000 earned in December) At the time cash is collected by American Airlines for advance ticket sales, the entire amount is accounted for as unearned revenue. The liability created represents the deferral (or the postponement) of earned revenue until flight services are actually provided to passengers. Airlines normally reduce the balance of this liability account by converting it to passenger revenue as flight services are provided. On some occasions, however, the liability may be reduced as a result of making cash refunds to customers due to cancellations. $2,250 ($50,000 x 9% x 6/12 = $2,250) To record ten days of unbilled consulting fees at $1,000 per day. To record revenue earned for voyages completed. Note to the instructor: In a recent income statement the company reported depreciation expense of $1.1 billion. Interest Expense ………………………………………… Interest Payable ………………………………… Consulting Fees Earned ………………………… The adjusting entry that results in the most significant expense in the company’s income statement is the recording of depreciation expense on its cruise ships. © The McGraw-Hill Companies, Inc., 2010 E4.4,5,6 Ex. 4.7 1,200 1,200 1,100 1,100 64,000 64,000 150 150 3,500 3,500 2,400 2,400 Ex. 4.8 a. b. c. 120,000 Notes Payable …………………………………… 120,000 d. 900 Interest Payable ……………………………. 900 e. 3. Accounts Receivable ……………………………………………… Marketing Revenue Earned ………………………………… To record accrued marketing revenue earned in December. 2. Depreciation Expense: Office Building ………………………… a. 1. Interest Expense ………………………………………………… Interest Payable ……………………………………………… To record interest accrued on bank loan during December. Accumulated Depreciation: Office Building ………………… To record depreciation on office building ($330,000/25 years) x 1/12 = $1,100). 5. Unearned Revenue ……………………………………………… 4. Insurance Expense ……………………………………………… Prepaid Insurance …………………………………………… To record insurance expense ($1,800/12 months = $150). Marketing Revenue Earned ………………………………… To record portion of unearned revenue that had become earned in December. 6. Salaries Expense ………………………………………………… Salaries Payable ……………………………………………… To record accrued salaries in December. b. $62,650 Increase ($64,000 + $3,500  $1,200  $1,100  $150  $2,400). The monthly interest expense is $900 ($5,400/6 = $900). The total interest expense over the life of the note is $5,400 ($120,000 x .09 x 6/12 = $5,400). The liability to the bank at December 31, 2009, is $121,800 (Principal, $120,000 + $1,800 accrued interest). 2009 Obtain from bank six-month loan with interest at 9% a year. Oct. 31 Cash ……………………………………………………… Dec. 31 The liability to the bank at March 31, 2010, is $124,500, consisting of $120,000 principal plus $4,500 accrued interest for five months. To accrue interest expense for December on note payable ($120,000 x 9% x 1/12). Interest Expense ………………………………………… © The McGraw-Hill Companies, Inc., 2010 E4.7,8 Ex. 4.9 a. May 1 300,000 Notes Payable ……………………………. 300,000 May 31 3,000 Interest Payable …………………………… 3,000 b. May 1 180,000 Cash ………………………………………… 180,000 Paid rent for six months at $30,000 per month. May 31 30,000 Prepaid Rent ………………………………… 30,000 c. May 2 910,000 Unearned Admissions Revenue …………… 910,000 May 31 260,000 Admissions Revenue ………………………… 260,000 d. May 4 To record admissions revenue from the 20 racing days in May ($910,000 x 20/70 = $260,000). Unearned Admissions Revenue ……………………… No entry required. Cash …………………………………………………… To record interest expense for May on note payable to National Bank ($300,000 x 12% x 1/12 = $3,000). Obtained a three-month loan from National Bank at 12% interest per year. Interest Expense ……………………………………… Prepaid Rent …………………………………………… Rent Expense ………………………………………… To record rent expense for the month of May. Sold season tickets to the 70-day racing season. Cash ………………………………………………….… © The McGraw-Hill Companies, Inc., 2010 E4.9 b. c. b. America West Corporation: As passengers complete their flights. The New York Times Company: As newspapers are delivered. Carnival Corporation: As passengers complete their cruises. AFLAC Incorporated: Unearned Premiums Bally Total Fitness Corporation: Deferred Membership Dues $8.37 billion ($3.35 book value + $5.02 accumulated depreciation) Carnival Corporation: Customer Deposits Devry, Inc.: Deferred Tuition Revenue Clear Channel Communications, Inc.: Deferred Advertising Income Ex. 4.10 Ex. 4.11 a. The New York Times Company: Unexpired Subscriptions Type III (Accrued compensation is a liability arising from the accrual of unpaid salaries and wages expense) When the company receives cash from its customer prior to earning any revenue it debits Cash and credits either Short-Term Unearned Revenue or Long-Term Unearned Revenue. As goods are delivered to customers, the company debits the appropriate unearned revenue account and credits Sales (revenue earned). If the unearned revenue is expected to convert to earned revenue in the near future America West Corporation: Air Traffic Liability a. Devry, Inc.: As students complete their courses. Clear Channel Communications, Inc.: As advertisements are aired. AFLAC Incorporated: As policies expire. Bally Total Fitness Corporation: As members use the facilities. © The McGraw-Hill Companies, Inc., 2010 E4.10,11 Ex. 4.12 5,000 Fees Earned……………………………… 5,000 600 Unexpired Insurance…………………….. 600 To record expired portion of insurance policies. 1,800 Prepaid Rent ………………………………… 1,800 300 Office Supplies…………………………….. 300 1,000 Accumulated Depreciation: Equip……….. 1,000 2,100 Salaries Payable………………………….. 2,100 50 Interest Payable………………………….. 50 600 Income Taxes Payable……………………. 600 3,000 Fees Earned…………..……………………. 3,000 Accounts Receivable…………………………………… To record accrued but uncollected revenue. To record December office supplies expense. To record accrued but unpaid interest expense. Interest Expense…………………………………… To record depreciation of equipment. Depreciation Expense: Equip…………………….. Salaries Expense……………………………………. To record accrued but unpaid salaries. Office Supplies Expense…………………………… To convert previously unearned revenue to earned revenue. To record accrued but unpaid income taxes. Income Taxes Expense……………………………. Insurance Expense………………………………… Rent Expense ………………………………………… To record rent expense for December. Unearned Revenue…………………………………… © The McGraw-Hill Companies, Inc., 2010 E4.12 Ex. 4.13 Adjustment Net Owners' Type Revenue Expenses Income Assets Liabilities Equity Type I NE I D D NE D Type II I NE I NE D I Type III NE I D NE I D Type IV I NE I I NE I Ex. 4.14 a. b. Matching. c. Realization. Ex. 4.15 • • • • • • • • • • • • • • • • Deferred income taxes Note to the instructor: The adjustments required for many of the accounts listed above are discussed in subsequent chapters. Some are beyond the scope of an introductory text. Deferred revenue Income taxes payable Current installments of long-term debt Other accrued expenses Construction in progress Capital leases Accrued salaries and related expenses Sales taxes payable None (or Materiality). Accounting for immaterial items is not "wrong" or a "violation" of generally accepted accounting principles; it is merely a waste of time. The bookkeeper is failing to take advantage of the concept of materiality, which permits charging immaterial costs directly to expense, thus eliminating the need to record depreciation in the later periods. Accounts requiring adjusting entries may include: Short-term investments Receivables Furniture, fixtures and equipment Leasehold improvements Merchandise inventories Other current assets Buildings © The McGraw-Hill Companies, Inc., 2010 E4.13,14,15 20 Minutes, Easy a. Dec. 31 9,600 Salaries Payable 9,600 31 1,800 Green Fee Revenue 1,800 31 106,000 Membership Dues Earned 106,000 31 1,000 Accumulated Depreciation: Carts 1,000 31 300 Interest Payable 300 31 650 Unexpired Insurance 650 31 31 19,000 Income Taxes Payable 19,000 (6) (7) when it is earned. Entering into a contract does not (8) To record December insurance expense ($45,000 x 8% x 1/12). 20__ Insurance Expense To record December depreciation expense To record accrued interest expense in December Salaries Expense To record accrued salaries at December 31. Accounts Receivable To record green fees owed by the Tampa Univ. golf (4) FLORIDA PALMS COUNTRY CLUB Interest Expense Unearned Membership Dues To record the portion of annual membership dues Depreciation Expense: Carts earned in December. ($180,000 ÷ 15 years x 1/12). (5) golf team. Income Taxes Expense constitute the earning of revenue. No adjusting entry required. Revenue is recognized ($7,800 x 1/12). PROBLEM 4.1A To record income taxes accrued in December. SOLUTIONS TO PROBLEMS SET A FLORIDA PALMS COUNTRY CLUB (Adjusting Entries) (1) (2) (3) General Journal © The McGraw-Hill Companies, Inc., 2010 P4.1A b. 1. 2. 3. 4. 5. 6. 7. 8. c. Accruing unpaid expenses. Accruing uncollected revenue. PROBLEM 4.1A FLORIDA PALMS COUNTRY CLUB (concluded) Converting liabilities to revenue. Converting assets to expenses. Accruing unpaid expenses. Converting assets to expenses. No adjusting entry required. Accruing unpaid expenses. The clubhouse was built in 1925 and has been fully depreciated for financial accounting purposes. The net book value of an asset reported in the balance sheet does not reflect the asset’s fair market value. Likewise, depreciation expense reported in the income statement does not reflect a decline in fair market value, physical obsolescence, or wear-and-tear. © The McGraw-Hill Companies, Inc., 2010 P4.1A(p.2) 40 Minutes, Medium Dec. 31 400 Interest Revenue 400 31 85 Interest Payable 85 31 2,000 Accumulated Depreciation: Buildings 2,000 31 31 1,250 Salaries Payable 1,250 31 2,400 Camper Revenue 2,400 31 900 Camper Revenue 900 31 1,000 Accounts Payable 1,000 31 8,400 Income Taxes Payable 8,400 ($40 per day x 25 days). (9) Income Taxes Expense To record accrued bus rental expense in December To record income taxes accrued in December. a. (Adjusting Entries) (1) (2) (3) General Journal No adjusting entry required. Revenue is recognized ($600,000 ÷ 25 years x 1/12). (5) Bus Rental Expense To record revenue earned from campers that paid in Unearned Camper Revenue advance ($5,400 ÷ 6 months). (8) Camper Revenue Receivable constitute the earning of revenue. To record accrued salary expense in December. Interest Receivable To record accrued interest revenue on CDs at Interest Expense To record accrued interest expense in December December 31. Salaries Expense PROBLEM 4.2A (4) (6) (7) ENCHANTED FO