ACO 201 Problems Chapter 5 Solutions, Spring 2013

Brief Exercises B. Ex. 5.1 B. Ex. 5.2 B. Ex. 5.3 B. Ex. 5.4 Analysis B. Ex. 5.5 B. Ex. 5.6 B. Ex. 5.7 B. Ex. 5.8 B. Ex. 5.9 B. Ex. *5.10 Learning Objectives 5.1 1-7 5.2 1, 2, 6 5.3 1, 2, 6 5.4 2, 4, 5 5.5 2, 4, 5 5.6 3 5.7 2, 4 5.8 2, 4 5.9 2, 4 5.10 6 Analysis 5.11 6 Analysis 5.12 Interim results 1, 2, 7 Analysis 5.13 Interim results 1, 2, 7 Analysis 5.14 Effects of accounting errors 2, 3 Analysis 5.15 3, 6 *Supplemental Topic, " The Worksheet." Closing and after-closing trial balance Closing and after-closing trial balance Real World: Circuit City Adequate Disclosure Real World: Home Depot, Inc. Using an annual report Closing entries of unprofitable firms Profitability and liquidity measures Analysis, communication OVERVIEW OF BRIEF EXERCISES, EXERCISES, PROBLEMS AND CRITICAL THINKING CASES Communication, analysis Measuring interim revenue 7 Analysis The worksheet 8 Judgment, communication, analysis After-closing trial balance 5 Analysis Profitability and liquidity 6 Analysis Analysis 4 Analysis Closing entries of unprofitable firms Closing temporary accounts 4 Classifying balance sheet accounts Closing entries of profitable firms 4 Financial statement relationships 1, 2 Analysis 1, 2 Analysis Objectives Skills Balancing the accounting equation 1, 2 Analysis CHAPTER 5 THE ACCOUNTING CYCLE: REPORTING FINANCIAL RESULTS Analysis, communication Analysis Analysis, communication Analysis Learning Topic Analysis, communication Analysis Financial statement preparation Analysis Skills Accounting terminology Analysis Topic Exercises Financial statement preparation Closing entries of profitable firms Adjusting versus closing entries Profitability and liquidity measures © The McGraw-Hill Companies, Inc., 2010 Overview Problems Learning Sets A, B Objectives Skills 5.1 A,B 1, 2, 4, 6 Analysis, communication 5.2 A,B 1, 2, 4-6 Analysis, communication 5.3 A,B 1-4, 6 Analysis, communication 5.4 A,B 1, 2, 7 Analysis, communication 5.5 A,B 1–4, 6 Analysis, communication 5.6 A,B 1–4, 6 Analysis, communication *5.7 A,B 8 Analysis, communication 5.8 A,B 6 Analysis, communication Critical Thinking Cases 5.1 3 5.2 1 5.3 3 5.4 3 5.5 3 (Internet) *Supplemental Topic, "The Worksheet." Real World: Best Buy/The Gap Evaluating profitability and liquidity Comprehensive problem combining Chapter 4 and Chapter 5 Comprehensive problem combining Chapter 4 and Chapter 5 Comprehensive problem combining Chapter 4 and Chapter 5 Annual report disclosures Real World: Ford Motor Company Sarbanes-Oxley Act: CEO and CFO (Business Week) Analysis, communication Correcting classification errors Adequate disclosure Statement preparation and closing process of an unprofitable firm Interim financial statements Statement preparation and closing process of a profitable firm Topic Communication, technology, research Analysis, judgment, communication Analysis, judgment, communication, research Conflicts of interest Communication, judgment, analysis, research (Ethics, fraud & corporate governance) Sarbanes-Oxley Act: CEO and CFO personal certifications © The McGraw-Hill Companies, Inc., 2010 Overview (p.2) DESCRIPTIONS OF PROBLEMS AND CRITICAL THINKING CASES Problems (Sets A and B) 20 Easy 5.2 A,B 30 Medium 5.3 A,B 45 Strong 5.4 A,B 5.5 A,B 70 Strong 5.6 A,B 70 Strong *5.7 A,B 50 Strong *Supplemental Topic, " The Worksheet." 15 Medium Brushstroke Art Studio/Touchtone Talent Agency This is a comprehensive problem that requires students to combine Chapter 4 material with that of Chapter 5. From an unadjusted trial balance, students are asked to complete a 10-column worksheet. Best Buy/The Gap, Inc. Information from an actual annual report is used to evaluate profitability and solvency. This is a comprehensive problem combining elements of Chapter 4 and Chapter 5. It is similar in format to Problem 5.5 A,B. Internet Consulting Service, Inc./Campus Theater 25 Easy Interim financial statements are required for a company that adjusts monthly, but closes at year-end. This problem generates good class discussion. Mystic Masters, Inc./Debit Doctors, Inc. Silver Lining, Inc./Next Job, Inc. Students are required to correct errors in a set of financial statements. Upon completion of the corrected financial statements, closing entries and a brief financial analysis are required. 5.8 A,B 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. Students are required to prepare a set of financial statements for a profitable company from an adjusted trial balance. Closing entries, an after-closing trial balance, and a brief financial analysis are also required. Students are required to prepare a set of financial statements for an unprofitable company from an adjusted trial balance. Closing entries, an after-closing trial balance, and a brief financial analysis are also required. This is a comprehensive problem that requires students to combine Chapter 4 material with that of Chapter 5. An unadjusted trial balance is presented. Students are required to prepare adjusting entries and an adjusted trial balance. From their adjusted trial balance they are asked to prepare a set of financial statements, closing entries, an after-closing trial balance, and a brief financial analysis. 5.1 A,B Party Wagon, Inc./Strong Knot, Inc. Lawn Pride, Inc./Garden Wizards Guardian Insurance Agency/Silver Real Estate © The McGraw-Hill Companies, Inc., 2010 Overview Desc. Critical Thinking Cases Adequate Disclosure 5.2 Ethics, Fraud & Corporate Governance 5.3 Sarbanes-Oxley Act and CEO/CFO Certifications 5 Easy 5.4 10 Medium Business Week Annual Report Disclosures Internet 5.5 5.1 Students are asked to analyze five items that may (or may not) require disclosure in the notes accompanying the financial statements. Students must defend their position. This is a group assignment focusing on the following issues: "Is it ethical for a CPA to provide accounting services to companies that compete with each other?" Interviews are required. Students are asked to discuss whether it is ethical for a CFO to transfer personal assets out of his or her name due to being held personally liable for financial irregularities reported by the company for which he or she works. Working in groups, students are required to discuss the meaning, purpose, and impact of CEO/CFO personal certifications required under the Sarbanes-Oxley Act. Sarbanes-Oxley Act Students must identify and discuss topics disclosed in the company's financial statements. This is a good problem to assign in conjunction with Case 5.1. No time estimate Working for the Competition 25 Strong 15 Easy © The McGraw-Hill Companies, Inc., 2010 Desc. of Prob & Cases SUGGESTED ANSWERS TO DISCUSSION QUESTIONS 1. 2. 3. 4. 5. 6. An annual report generally includes comparative financial statements, supporting information about the company’s financial position, its business operations, and a discussion by management concerning the company’s future prospects. Before the annual report is issued, the financial statements must be audited by a firm of Certified Public Accountants (CPAs). Publicly owned companies must file their financial statements and detailed supporting schedules with the Securities and Exchange Commission (SEC). The income statement’s measurement of net income is not absolutely accurate or precise due to various assumptions and estimates involved in the accounting process. For instance, the amounts shown for depreciation expense are based upon estimates of the useful lives of the company’s depreciable assets. Also, the income statement includes only those events that have been evidenced by actual business transactions. For instance, a strong customer base is an important step toward profitable operations; however the development of a customer base is not reflected in the income statement because its value cannot be measured objectively until actual sales transactions take place. The income statement, statement of retained earnings, and balance sheet are prepared directly from the amounts shown in the adjusted trial balance. The income statement reports revenue earned during the period less expenses incurred in generating that revenue. When revenue exceeds expenses, net income is reported, and an increase in stockholders’ equity results. When expenses exceed revenue, a net loss is reported, and a decrease in stockholders’ equity results. The net income (or net loss) from the income statement is added to the beginning Retained Earnings balance in the statement of retained earnings. Any dividends declared during the period are subtracted in arriving at the ending Retained Earnings balance to be reported in the balance sheet at the end of the period. Items that may require disclosure include, but are not limited to: pending lawsuits, scheduled plant closings, certain governmental investigations, significant events occurring after the balance sheet date but before the statements are issued, specific customers that account for a large portion of the company’s business, names of stockholders that own large amounts of the company’s stock, any changes in accounting principles having a significant impact on the company’s financial position, and any unusual conflicts between the company and its officers. Retained earnings is that portion of stockholders’ equity created by earning income and retaining all or part of the resources created in the business. Income is a function of revenue less expenses. We have learned that cash is not always received at the exact time that revenue is earned, nor is cash necessarily disbursed at the exact time that an expense is incurred. Thus, the income retained by a company is not in the form of cash. Even if a company’s income did equal its net cash inflow, the amount retained would not be kept in the form of cash. As the company grew, the cash would be converted into property, plant, equipment, and other assets. Dividends are not part of income. As such, the dividends paid to stockholders are never reported in the income statement as an expense. Dividends represent a policy decision by a corporation’s directors to distribute a portion of income to stockholders. © The McGraw-Hill Companies, Inc., 2010 Q1-6 7. 8. 9. 10. 11. 12. 13. 14. 15. Unlike most other operating expenses, depreciation does not require regular periodic outlays of cash. Depreciation is merely an estimate of that portion of a depreciable asset’s cost which is to be matched against revenue earned during the current accounting period. Permanent (or real) accounts include assets, liability, and stockholders’ equity accounts. These accounts are not involved in the closing process at the end of the year. Generally speaking, all accounts reported in the balance sheet (and in the after-closing trial balance) are considered permanent. Dividends paid to stockholders are not considered an expense of the business and, therefore, are not taken into account in determining net income for the period. Since dividends are not an expense, the Dividends account is not closed to the Income Summary account. Instead, it is closed directly to the Retained Earnings account. After all revenue, expense, and dividend accounts have been closed, the only accounts that remain are the permanent (or real) accounts appearing in the balance sheet. In comparison to the adjusted trial balance, the after-closing trial balance contains only balance sheet accounts. Also, the Retained Earnings account is no longer reported at its beginning balance. A company can be both profitable and insolvent. For instance, the company’s sales might be made only on account. If customers delay in paying what they owe, the average number of days that accounts receivable remain outstanding could be very high (say, 120 days). At the same time, the company’s creditors may require payment at a much faster rate, say, 30 days. Thus even though this business might be profitable (i.e., its revenue exceed its expenses), it may not be able to remain solvent if its accounts receivable fail to convert to cash in time to settle its accounts payable. Temporary (or nominal) accounts include revenue, expenses, and dividend accounts. These are the accounts involved in the closing process at the end of the year. Generally speaking, all income statement accounts (and dividends reported in the statement of retained earnings) are considered temporary. A company may close its accounts annually, but prepare financial reports monthly or quarterly. These monthly (or quarterly) statements are referred to as interim financial statements. General ledger accounts to be reported in the interim income statement require certain computations in order to determine their correct monthly or quarterly amounts. Computations are not required to ascertain interim balance sheet amounts because the balance is always based on the account balances at the balance sheet date. Adequate disclosure means that financial statements should include whatever supplemental information is necessary for an intelligent user to interpret the statements properly. The notes accompanying financial statements include whatever disclosures are necessary for users to interpret the statements properly. Among the facts disclosed in notes are the accounting methods in use, due dates of major liabilities, significant events occurring after the balance sheet date, and litigation pending against the company. The notes do not include disclosure of items that are immaterial, or which do not directly affect the financial position of the business. © The McGraw-Hill Companies, Inc., 2010 Q7-15 16. 17. 18. 19. *20.      *Supplemental Topic, " The Worksheet." Income statements report business activity for a period of time (e.g., a month, quarter, year, etc.). Balance sheets report financial position at a specific point in time. Thus, the balance sheet always is based on account balances at the balance sheet date. A March 31 balance sheet, for example, looks exactly the same regardless of the time period covered by the other financial statements (i.e., the income statement, statement of retained earnings, and statement of cash flows). Return on equity is a measure of net income relative to a company's average stockholders' equity throughout the year. Thus, it conveys the amount of income generated for every dollar of equity capital. A high return on equity indicates that management efficiently used resources provided through owners' equity to generate income. A low return on equity indicates that management was not efficient in using resources provided through owners' equity to generate income. Without affecting the account balances, provides both accountants and management with a “preview” of the effects of proposed entries upon the financial statements. Revenue, expense, and dividend accounts are called temporary accounts, or nominal accounts, because they accumulate the transactions of only one accounting period. At the end of the period, the changes in owners’ equity accumulated in these temporary accounts need to be transferred to the Retained Earnings account, and the temporary accounts need to have zero balances in order to be ready to measure the revenue, expenses, and dividends of the next accounting period. The closing process serves these purposes. Revenue and expense accounts are first closed to the Income Summary account which, in turn, is closed to the Retained Earnings account. Any dividends declared during the period are then closed directly to the Retained Earnings account. A worksheet (or spreadsheet software): Provides a “scratch pad” for working out adjusting entries prior to actually entering these items in the accounts. Enables accountants to prepare interim financial statements without formally adjusting and closing the accounts. Virtually every accounting software package performs the year-end closing process automatically without having to perform manually the series of journal entries illustrated in the text. When a business first purchases a software package accountants prepare a chart of accounts specifically tailored for the reporting needs of the company. During this process, revenue and expense accounts are identified as candidates for closing at year-end. The software is written such that those accounts identified as revenues are closed with debits, and those identified as expenses are closed with credits. © The McGraw-Hill Companies, Inc., 2010 Q16-20 SOLUTIONS TO BRIEF EXERCISES B. Ex. 5.1 Decrease in assets during the year………………….. (60,000) $ Decrease in liabilities during the year………………. (300,000) Increase in stockholders' equity during the year…… 240,000 $ (100,000) (250,000) (110,000) $ B. Ex. 5.2 200,000 $ 60,000 260,000 $ 90,000 350,000 $ B. Ex. 5.3 a. b. c. d. e. f. g. h. i. NCA j. CA B. Ex. 5.4 a. b. c. d. e. f. g. h. i. C j. N k. D l. C Capital stock issued during the year……………… Capital stock (December 31, 2009)……………….. Add: Retained earnings (December 31, 2009)…… Total stockholders' equity (December 31, 2009)…. Less: New stock issued during the year…………… Income for the year…………………………….. Decrease to equity attributed to dividends…………. Capital stock (January 1, 2009)……………………. D N D C C N CA * Accumulated depreciation is a contra asset classified in the non current asset section of the balance sheet. C N NCA* SHE LTL CL Note: The depreciation of the truck is included in the net income which is included in the ending retained earnings given. Likewise, the dividend is also included in the ending retained earnings figure given. CA CL CL © The McGraw-Hill Companies, Inc., 2010 BE5.1-4 B. Ex. 5.5 19,800 Income Summary ………………………… 19,800 18,700 Supplies Expense…………………………… 525 Rent Expense……………………………… 3,660 Depreciation Expense: Equipment……… 1,200 Salaries Expense………………………….. 12,700 Income Taxes Expense………………….. 615 1,100 Retained Earnings………………………… 1,100 To transfer net income to retained earnings. 600 Dividends………………………………….. 600 B. Ex. 5.6 26,000 Interest Revenue…………………………………………… 300 Income Summary………………………….. 26,300 34,700 Insurance Expense……………………….. 1,900 Rent Expense…………………………….. 10,800 Depreciation Expense: Office Equip. ….. 5,600 Salaries Expense………………………….. 16,400 8,400 Income Summary………………………….. 8,400 400 Dividends………………………………….. 400 To close dividends to retained earnings. To close revenue to income summary. To close expense accounts to income summary. Income Summary……………………………………………. Retained Earnings…………………………………………… Consulting Fees Earned……………………………………. To close dividends to retained earnings. Service Revenue ………………………………………………… Income Summary……………………….…………………….. Income Summary…………………………………………….. To close revenue to income summary. To close expense accounts to income summary. Retained Earnings………………………………………….. Retained Earnings……………………………………………. To transfer net loss to income summary. © The McGraw-Hill Companies, Inc., 2010 BE5.5-6 B. Ex. 5.7 a. b. c. d. e. f. g. h. i. D j. N k. C l. C B. Ex. 5.8 a. Net Income ($15,000) ÷ Total Revenue ($60,000)…. 25% b. Net Income ($15,000) ÷ Average Equity ($37,500)…. 40% c. 4-to-1 Computations: Total revenue………………………………… 60,000 Total expenses………………………………. $ (45,000) Net income…………………………………… 15,000 37,000 $ 38,000 75,000 ÷ 2 Average stockholders' equity in 2009 37,500 B. Ex. 5.9 a. April through September ($450,000 - $140,000)…. 310,000 $ b. October through December ($680,000 - $450,000).. 230,000 $ c. April through December ($680,000 - $140,000)…… 540,000 $ *B. Ex.5.10a. Net income ($540,000 - $410,000)………………… 130,000 $ 1 b. Income statement debits ($380,000 - $130,000)…. 250,000 $ 2 1 2 *Supplemental Topic, " The Worksheet." Current Assets ($16,000) ÷ Current Liab. ($4,000) Stockholders' equity (January 1, 2009)…………… Stockholders' equity (December 31, 2009)………. The credit column of the income statement represents total revenue whereas the debit column amount represents total expenses. Thus, total revenue ($380,000 credit column amount) minus net income ($130,000 computed in part a.), equals total expenses (i.e., the income statement debit column total). The amount needed to make the columns of the balance sheet equal is net income for the period. C C D N C N N C © The McGraw-Hill Companies, Inc., 2010 BE5.7-10 Ex 5.1 a. b. c. d. e. f. g. h. Ex. 5.2 a. 96,000 $ $ 52,000 1,200 300 1,000 54,500 $ 41,500 11,600 $ 29,900 45,000 $ 29,900 2,000 72,900 $ Adequate disclosure Liquidity Retained earnings (1/1/09) Net income Supply expense Depreciation expense: equipment Closing entries Add: Net Income SOLUTIONS TO EXERCISES TUTORS FOR RENT, INC. For the Year Ended December 31, 2009 Salary expense Income Statement None (This is an example of a "correcting entry.") Revenues: Tutoring revenue earned Expenses: Advertising expense Income before taxes Income taxes expense Less: Dividends TUTORS FOR RENT, INC. Statement of Retained Earnings For the Year Ended December 31, 2009 Retained earnings (12/31/09) Nominal accounts Real accounts After-closing trial balance Dividends © The McGraw-Hill Companies, Inc., 2010 E5.1,2 Ex. 5.2 (concluded) Cash $ 91,100 4,500 300 $ 12,000 5,000 7,000 $ 102,900 $ 1,500 3,500 $ 5,000 $ 25,000 72,900 $ 97,900 $ 102,900 Assets Accounts receivable TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Less: Accumulated depreciation: equipment TOTAL ASSETS Liabilities Accounts payable Retained earnings Income taxes payable TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES Stockholders' Equity Capital stock TUTORS FOR RENT, INC. December 31, 2009 Equipment Balance Sheet Supplies The $45,000 credit Retained Earnings balance reported in the company’s adjusted trial balance is its beginning balance. In order to have retained $45,000 in earnings, the company must have been profitable in the past. b. c. The company appears to be extremely liquid. Cash and accounts receivable comprise 93% of total assets. Together, these highly liquid assets total $95,600, compared to only $5,000 in liabilities coming due. In other words, the combined total of cash and accounts receivable are 19 times the obligations coming due in the near future. © The McGraw-Hill Companies, Inc., 2010 E5.2 (p.2) Ex. 5.3 a. $ 102,000 $ 87,500 1,200 9,600 5,000 1,700 105,000 $ (3,000) $ 15,000 3,000 1,000 $ 11,000 For the Year Ended December 31, 2009 Depreciation expense: equipment Retained earnings (12/31/09) Less: Net loss Camping supply expense Interest expense Insurance expense Net Loss Less: Dividends WILDERNESS GUIDE SERVICES, INC. Statement of Retained Earnings Retained earnings (1/1/09) WILDERNESS GUIDE SERVICES, INC. For the Year Ended December 31, 2009 Salary expense Income Statement Revenues: Guide revenue earned Expenses: © The McGraw-Hill Companies, Inc., 2010 E5.3 Ex. 5.3 (Concluded) Assets $ 12,200 31,000 7,900 2,400 $ 70,000 60,000 10,000 $ 63,500 $ 18,000 9,500 $ 27,500 $ 25,000 11,000 $ 36,000 $ 63,500 WILDERNESS GUIDE SERVICES, INC. December 31, 2009 Equipment Balance Sheet Accounts receivable Camping supplies Unexpired insurance policies Cash b. Retained earnings Accounts payable c. TOTAL STOCKHOLDERS' EQUITY TOTAL LIABILITIES The company was not profitable in the current period as evidenced by the $3,000 net loss reported in the income statement. However, the $15,000 credit Retained Earnings balance reported in the company’s adjusted trial balance is the balance carried forward from prior years. In order to have retained $15,000 in earnings, the company must have been profitable in the past. TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Stockholders' Equity Capital stock The company appears to be liquid. Cash and accounts receivable comprise 68% of the company’s total assets. These highly liquid assets total $43,200, in comparison to $27,500 in liabilities coming due in the near future. However, given that its equipment is nearly fully depreciated, it may have to invest in new equipment shortly. Less: Accumulated depreciation: equipment TOTAL ASSETS Liabilities Notes payable (due 4/1/10) © The McGraw-Hill Companies, Inc., 2010 E5.3 (p.2) Ex. 5.4 a. Dec. 31 96,000 Income Summary 96,000 31 66,100 Salary Expense 52,000 Supply Expense 1,200 Advertising Expense 300 Depreciation Expense: Equipment 1,000 Income Taxes Expense 11,600 31 29,900 Retained Earnings 29,900 31 2,000 Dividends 2,000 Retained Earnings account. $29,900). TUTORS FOR RENT December 31, 2009 (1) (2) (3) General Journal Income Summary To transfer net income earned in 2009 to the Retained Earnings Retained Earnings account ($96,000-$66,100 = To transfer dividends declared in 2009 to the Tutoring Revenue earned To close Tutoring Revenue Earned Income Summary To close all expense accounts. (4) © The McGraw-Hill Companies, Inc., 2010 E5.4 Ex. 5.4 (Concluded) b. $ 91,100 4,500 300 12,000 $ 5,000 1,500 3,500 25,000 $ 72,900 $ 107,900 $ 107,900 Capital stock Cash Supplies Equipment Less: Accumulated depreciation: equipment Accounts receivable c. The $72,900 Retained Earnings balance reported in the after-closing trial balance is $27,900 more than the $45,000 balance reported in the unadjusted trial balance. By adding net income to the Retained Earnings balance in the unadjusted trial balance, and subtracting dividends, one arrives at the $72,900 reported in the after-closing trial balance ($45,000 + $29,900 - $2,000 = $72,900). TUTORS FOR RENT, INC. December 31, 2009 Accounts payable After-Closing Trial Balance Retained earnings Totals Income taxes payable © The McGraw-Hill Companies, Inc., 2010 E5.4 (p.2) Ex. 5.5 a. Dec. 31 102,000 Income Summary 102,000 31 105,000 Salary Expense 87,500 Camping Supply Expense 1,200 Insurance Expense 9,600 Depreciation Expense: Equipment 5,000 Interest Expense 1,700 31 3,000 Income Summary 3,000 31 1,000 Dividends 1,000 To transfer dividends declared in 2009 to the Guide Revenue Earned To close Guide Revenue Earned. Income Summary To close all expense accounts. (4) Retained Earnings To transfer net loss incurred in 2009 to the Retained Earnings Retained Earnings account ($102,000 - $105,000 = Retained Earnings account. $3,000 loss). WILDERNESS GUIDE SERVICES, INC. December 31, 2009 (1) (2) (3) General Journal © The McGraw-Hill Companies, Inc., 2010 E5.5 Ex. 5.5 (Concluded) b. $ 12,200 31,000 7,900 2,400 70,000 $ 60,000 18,000 9,500 25,000 11,000 $ 123,500 $ 123,500 c. The $11,000 Retained Earnings balance reported in the after-closing trial balance is $4,000 less than the $15,000 balance reported in the unadjusted trial balance. By subtracting both the net loss and dividends from the Retained Earnings balance in the unadjusted trial balance, one arrives at the $11,000 reported in the after-closing trial balance ($15,000 - $3,000 - $1,000 = $11,000). WILDERNESS GUIDE SERVICES, INC. December 31, 2009 Accumulated depreciation: equipment After-Closing Trial Balance Retained earnings Totals Notes payable (due 4/1/10) Accounts payable Capital stock Cash Camping supplies Unexpired insurance policies Equipment Accounts receivable © The McGraw-Hill Companies, Inc., 2010 E5.5 (p.2) Ex. 5.6 a. 1. 2. 3. 4. b. 1. Cash………………………………………………… 500 Unearned Revenue…………………… 500 To record the sale of a $500 gift card. 2. Unearned Revenue………………………… 500 Sales (Revenue)……………………… 500 c. Circuit City matches advertising expense to revenue in the period that it pays for advertising. The alternative would be to debit Prepaid Advertising when payment is made, and later debit Advertising Expense and credit Prepaid Advertising when the ads are aired or appear in print. Differences in these two alternatives are not considered material, so Circuit City takes the simpler approach of expensing advertising costs immediately. The company matches the cost of property and equipment to the periods in which it contributes to generating revenue. It does so by dividing the cost of property and equipment by its estimated life and charging the result to depreciation expense each period. Circuit City recognizes revenue when the earnings process is complete. This means that revenue is recorded at the time customers receive their products. The earnings process is not complete when the company first receives cash for gift cards. This is because no products have been delivered. Thus, as gift cards are sold, the company debits Cash and credits Unearned Revenue. As gift card recipients use their cards to purchase products, the company debits Unearned Revenue and credits Revenue Earned (Sales). The company records advertising expense in the period that it purchases advertisements in various media (e.g., radio, newspaper, etc.). Thus, when it pays for advertising it debits Advertising Expense and credits Cash. To record the redemption of a $500 gift card. © The McGraw-Hill Companies, Inc., 2010 E5.6 Ex. 5.7 a. 225,000 225,000 170,400 1,800 94,000 1,200 850 6,000 24,000 2,650 4,500 6,000 29,400 54,600 54,600 6,000 6,000 b. 92,000 $ 54,600 146,600 $ (6,000) 140,600 $ Office Rent Expense………………………………… Continuing Education Expense…………………… Salaries Expense……………………………………… Office Supplies Expense…………………………… Utilities Expense……………………………………… Malpractice Insurance Expense…………………… Income Summary…………………………………… Counseling Revenue………………………………………… To close counseling revenue earned. Advertising Expense………………………………… Close all expenses to the Income summary account: Income Summary…………………………………………… Retained Earnings, December 31, 2009 Income Summary…………………………………………… Retained Earnings…………………………………… Retained Earnings…………………………………………… Dividends…………………………………………… Retained Earnings, January 1, 2009 Plus: Net Income To transfer net income earned in 2009 ($225,000 - $170,400) to Retained Earnings. To close dividends declared in 2009 to Retained Earnings. Less: Dividends Declared in 2009 Depreciation Expense: Fixtures……………