LESSON 3

LESSON 3Review materialReview questionsQuestion 1Southwest Careers, a school owned by Sheila Carr, provides training to individuals whopay tuition directly to the business. The business also offers extension training to groupsin off-site locations. T he school’s unadjusted trial balance as of December 31, 20X5 follows. Southwest Careers follows the practice of initially recording prepaid expensesand unearned revenues in the statement of financial position accounts. Facts that requireeight adjusting entries on December 31, 20X5 are presented after the trial balance: SOUTHWEST CAREERSUnadjusted Trial BalanceDecember 31, 20X5Account Debit CreditCash ....................................................................................... € 26,000Accounts receivable 0Teaching supplies .................................................................. 10,000Prepaid insurance................................................................... 15,000Prepaid rent............................................................................ 2,000Professional library................................................................ 30,000 Accumulated Depreciation, professional library ................... € 9,000 Equipment.............................................................................. 70,000 Accumulated Depreciation, equipment ................................. 16,000Accounts payable................................................................... 36,000Salaries payable 0Unearned extension fees........................................................ 11,000Sheila Carr, capital ................................................................ 63,600Sheila Carr, withdrawals........................................................ 40,000Tuition fees earned ................................................................ 102,000Extension fees earned ............................................................ 38,000 Depreciation expense, equipment 0Depreciation expense, professional library 0Salaries expense..................................................................... 48,000Insurance expense 0Rent expense.......................................................................... 22,000Teaching supplies expense 0Advertising expense .............................................................. 7,000Utilities expense .................................................................... 5,600Totals ..................................................................................... €275,600 €275,600 Financial Accounting Fundamentals Review material 3 2Additional facts:a. An analysis of the company’s policies shows that €3,000 of insurance coverage has expired.b. An inventory shows that teaching supplies costing €2,600 are on han d at the end of the year.c. The estimated annual depreciation on the equipment is €12,000.d. The estimated annual depreciation on the professional library is €6,000.e. The school offers off-campus services for specific employers. On November 1, the company agreed to do a special six-month course for a client. The contract calls for a monthly fee of €2,200, and the client paid the first five months’ fees in advance. When the cash was received, the Unearned Extension Fees account was credited.f. On October 15, the school agreed to teach a four-month class for an individual for €3,000 tuition per month payable at the end of the class. The services to date have been provided as agreed, but no payment has been received.g. The school’s two employees are paid weekly. As of the end of the year, two days’wages have accrued at the rate of €100 per day for each employee.h. The balance in the Prepaid Rent account represents the rent for December. RequiredPrepare the eight necessary adjusting journal entries.Source: Adapted from Larson, Kermit P., Tilly Jenson and Raymond F. Carroll, Fundamental Accounting Principles, Tenth Canadian Edition (Toronto: McGraw-Hill Ryerson, 2002), Problem 4-6A, page 175Question 2Garza Company’s annual accounting period ends on Dece mber 31, 20X5. Garza followsthe practice of recording prepaid expenses and unearned revenues in statement of financial position accounts. The following information concerns the adjusting entries tobe recorded as of that date:a. The Office Supplies accou nt started the year with a €3,000 balance. During 20X5, thecompany purchased supplies at a cost of €12,400, which was added to the Office Supplies account. The inventory of supplies on hand at December 31 had a cost of€2,640.b. An analysis of the compan y’s insurance policies provided these facts:Policy Date of Purchase Years of Coverage Total Cost1 April 1, 20X42 € 15,8402 April 1, 20X53 13,0683 August 1, 20X5 1 2,700The total premium for each policy was paid in full at the purchase date, and the Prepaid Insurance account was debited for the full cost. Appropriate adjusting entries have been made to December 31, 20X4.Financial Accounting Fundamentals Review material 3 3c. The company has 15 employees who earn a total of €2,100 in salaries for e very working day. They are paid each Monday for their work in the five-day workweek ending on the preceding Friday. December 31, 20X5, falls on Monday, and all 15 employees worked the first day of the week. They will be paid salaries for five full days on Monday, January 7, 20X6.d. The company purchased a building on August 1, 20X5. The building cost €855,000 and is expected to have a €45,000 salvage value at the end of its predicted 30-year life.e. Because the company is not large enough to occupy the entire building, it arranged torent some space to a tenant at €2,400 per month, starting on Novembe r 1, 20X5. The rent was paid on time on November 1, and the amount received was credited to the Rent Earned account. However, the tenant has not paid the December rent. The company has worked out an agreement with the tenant, who has promised to pay both D ecember’s and January’s rent in full on January 15. The tenant has agreed not to fall behind again.f. On November 1, the company also rented space to another tenant for €2,175 per month. The tenant paid five months’ rent, in advance, on that date. The payment was recorded with a credit to the Unearned Rent account.Required1. Use the information to prepare adjusting entries as of December 31, 20X5.2. Prepare journal entries to record the subsequent cash transactions in January 20X6 described in parts (c) and (e).Source: Adapted from Larson 10e, Problem 4-14A, pages 179-180Question 3Calculate Tucker Company’s current ratio, given the following information about its assets and liabilities.Accounts receivable..........................................................................................€ 15,000 Accounts payable.............................................................................................. 10,000 Buildings........................................................................................................... 42,000 Cash .................................................................................................................. 6,000 Long-term notes payable .................................................................................. 20,000 Office supplies.................................................................................................. 1,800 Prepaid insurance.............................................................................................. 2,500 Unearned services revenue ............................................................................... 4,000 Source: Adapted from Larson 10e, QS 5-8, page 225Financial Accounting Fundamentals Review material 3 4Question 4Following is the adjusted trial balance, with accounts in alphabetical order, for eSOFT asat September 30, 20X7:ESOFTAdjusted Trial BalanceSeptember 30, 20X7Account Debit CreditAccounts payable.................................................................. € 9,000Accumulated Depreciation, office equipment ...................... 21,000Depreciation expense, office equipment .............................. € 7,000Cash ...................................................................................... 49,000Consulting fees earned.......................................................... 136,000Office equipment .................................................................. 63,000Prepaid rent........................................................................... 28,000Sandra Sloley, capital ........................................................... 46,000Sandra Sloley, withdrawals .................................................. 38,000Unearned consulting fees...................................................... 3,500Rent expense......................................................................... 3,500Wages expense...................................................................... 27,000 ________ Totals .................................................................................... €215,500 €215,500 RequiredPrepare the closing entries.Source: Adapted from Larson 10e, Exercise 5-11, page 230Question 5The following two conditions existed for Maxit Co. on October 31, 20X6, the end of itsfiscal year:a. Maxit rents a building from its owner for €3,200 per month. By a prearrangement, thecompany delayed paying October’s rent until November 5. On this date, the company paid the rent for both October and November.b. Maxit rents space in a building it owns to a tenant for €750 per month. B y prearrangement, the tenant delayed paying the October rent until November 8. On this date, the tenant paid the rent for both October and November.Financial Accounting Fundamentals Review material 3 5Required1. Prepare the adjusting entries that Maxit should record for these situations as of October 31.2. Assuming that Maxit does not use reversing entries, prepare journal entries to recordMaxit’s payment of rent on November 5 and the collection of rent on November 8 from Maxit’s tenant.3. Assuming that Maxit does use reversing entries, prepare those entries and the journalentries to record Maxit’s payment of rent on November 5 and the collection of rent on November 8 from Maxit’s tenant.Source: Adapted from Larson 10e, Exercise 5-16, page 232Question 6The following closing entries were prepared for Superior Architectural Designsregardingits year just ended June 30, 20X7:Jun 30 Design Fees Earned............................................... 248,000Income Summary ............................................ 248,000To close the revenue account.30 Income Summary .................................................. 146,040Depreciation Expense, Office Equipment....... 3,500Depreciation Expense, Office Furniture.......... 1,900Insurance Expense........................................... 1,200Interest Expense .............................................. 1,440Supplies Expense............................................. 4,300Telephone Expense ......................................... 3,200Utilities Expense ............................................. 1,500Salaries Expense.............................................. 129,000To close expense accounts.30 Income Summary .................................................. 101,960Al Rusnak, Capital .......................................... 101,960To close the Income Summary to capital.30 Al Rusnak, Capital ................................................ 70,000Al Rusnak, Withdrawals ................................. 70,000To close withdrawals to capital.Required1. Prepare a statement of comprehensive income based on the information provided.2. Calculate the post-closing balance in the capital account at June 30, 20X7 given thatthe adjusted balance on June 30, 20X6 was €86,000.Source: Adapted from Larson 10e, Problem 5-8A, page 236Financial Accounting Fundamentals Review material 3 6Question 7The unadjusted trial balance for Prestige Rentals after its first year of operations is shownbelow:PRESTIGE RENTALSWork Sheetfor year ended March 31, 20X7Unadjusted TrialBalanceNo. Account Debit Credit101 Cash .............................................................................. 34,000110 Rent receivable ............................................................. 126,000124 Office supplies .............................................................. 13,600141 Investment in ClubLink shares ..................................... 286,000161 Furniture........................................................................ 92,000173 Building ........................................................................ 1,250,000183 Land .............................................................................. 220,000201 Accounts payable.......................................................... 11,600252 Long-term notes payable .............................................. 750,000301 Chris Jenson, capital ..................................................... 999,050302 Chris Jenson, withdrawals ............................................ 56,000406 Rent earned ................................................................... 812,400620 Office salaries expense ................................................. 248,000633 Interest expense............................................................. 41,250655 Advertising expense...................................................... 56,000673 Janitorial expense.......................................................... 82,000690 Utilities expense............................................................ 68,200Totals ............................................................................ €2,573,050 €2,573,050 Required1. Enter the unadjusted trial balance onto a worksheet.2. Using the following additional information, enter the adjustments into the worksheet(the Chart of Accounts at the back of the text may be useful when additional accounts are required):a. It was determined that the balance in the Rent Receivable account at March 31 should be €142,000.b. A count of the office supplies showed €12,200 of the balance had been used.c. Annual Depreciation on the building is €50,000 and €7,000 on the furniture.d. The five office staff members each get paid €2,100 bi-weekly. The last bi-weekly pay peri od ended Friday, March 23. At March 31, five days’ salary had accrued.e. A review of the balance in Advertising Expense showed that €800 was for advertisements to appear in the April issue of Khalij Times magazine.f. Accrued utilities at March 31 totalle d €5,240.g. March interest of €3,750 on the long-term note payable is unrecorded as unpaid as of March 31.Financial Accounting Fundamentals Review material 3 73. Complete the worksheet.Source: Adapted from Larson 10e, Problem 5-12A, page 239Question 8Ethics ChallengeOn January 20, 20X7, Jennifer Nelson, the staff accountant, for Newby Enterprises is feeling pressure to complete the preparation of the annual financial statements. The president of the company has said he needs up-to-date financial statements to share withseveral bankers on January 21 at a dinner meeting that has been called to discuss the possibility of Newby obtaining loan financing for a special building project. Jennifer knows that she won't be able to gather all the needed information in the next 24 hours toprepare the entire set of adjusting entries that must be posted before the financial statements will accurately portray the company's performance and financial positionforthe fiscal period just ended December 31, 20X6. Jennifer ultimately decides to estimateseveral expense accruals at the last minute. When deciding on estimates for the expenses,Jennifer uses low estimates as she doesn't want to make the financial statements look worse than they possibly are in reality. Jennifer finishes the financial statements beforethe deadline and gives them to the president without mentioning that several accounts could only be estimated as to their balance on December 31, 20X6.Required1. Identify and list the parties (or stakeholders) who should be considered because theycould be affected by whatever decisions are made.2. Identify several courses of action that Jennifer could have taken instead of the one sheultimately decided on.3. If you were in Jennifer's situation what would you have done? Briefly justify your response.Financial Accounting Fundamentals Review material 3 8Review solutionsQuestion 120X5a. Dec. 31 Insurance Expense ................................................ 3,000Prepaid Insurance............................................ 3,000To record the cost of insurance expiredduring the yearb. 31 Teaching Supplies Expense .................................. 7,400Teaching Supplies........................................... 7,400To record the cost of supplies used duringthe year; 10,000 – 2,600.c. 31 Depreciation Expense, Equipment........................ 12,000Accumulated Depreciation, Equipment.......... 12,000To record equipment Depreciation expense.d. 31 Depreciation Expense, Prof. Library .................... 6,000Accumulated Depreciation,Professional Library.....................................6,000To record professional library Depreciationexpense.e. 31 Unearned Extension Fees...................................... 4,400Extension Fees Earned.................................... 4,400To record extension fees earned that werecollected in advance.f. 31 Accounts Receivable............................................. 7,500 Tuition Fees Earned ........................................ 7,500To record the amount of tuition fees earned.g. 31 Salaries Expense (400)Salaries Payable (400)To record accrued salaries expense.h. 31 Rent Expense ........................................................ 2,000 Prepaid Rent.................................................... 2,000To record the expiration of prepaid rent.Financial Accounting Fundamentals Review material 3 9Question 2Part 120X5Dec. 31 Office Supplies Expense......................................... 12,760 Office Supplies ................................................. 12,760To record the cost of supplies used duringthe year; €3,000 + €12,400 –€2,640.31 Insurance Expense .................................................. 12,312 Prepaid Insurance.............................................. 12,312To record the cost of insurance coveragethat expired during the year.Policy Cost per No. ofCost Month Months 20X51 €660 12 € 7,9202 363 9 3,2673 225 5 1,125Total €12,31231 Salaries Expense ..................................................... 2,100 Salaries Payable................................................ 2,100To record accrued but unpaid wages.31 Depreciation Expense, Building ............................. 11,250 Accumulated Depreciation, Building ............... 11,250To record Depreciation expense. AnnualDepreciation = (€855,000 –€45,000)/30 = €27,000; Depreciation for five months = €27,000 × 5/12.31 Rent Receivable...................................................... 2,400Rent Earned ...................................................... 2,400To record earned but unpaid rent.31 Unearned Rent ........................................................ 4,350 Rent Earned ...................................................... 4,350To record the amount of rent earned; 2 × €2,175.Financial Accounting Fundamentals Review material 3 10Part 220X6Jan. 7 Salaries Payable...................................................... 2,100 Salaries Expense ..................................................... 8,400Cash .................................................................. 10,500To record payment of accrued and currentsalaries; 4 × €2,100 = 8,400.15 Cash ..................................................................... 4,800Rent Receivable............................................. 2,400Rent Earned ................................................... 2,400To record past due rent for two months.Question 3Current assets:Accounts receivable ...................................... €15,000Cash .............................................................. 6,000Office supplies .............................................. 1,800Prepaid insurance .......................................... 2,500Total .............................................................. €25,300Current liabilities:Accounts payable .......................................... €10,000Unearned services revenue ........................... 4,000Total .............................................................. €14,000Current ratio = €25,300 €14,000 = 1.8Financial Accounting Fundamentals Review material 3 11Question 420X7ESOFTClosing entriesSept. 30 Consulting Fees Earned......................................... 136,000 Income Summary ............................................ 136,000To close revenues to the income summary.30 Income Summary .................................................. 37,500 Depreciation Expense, Office Equipment ....... 7,000Rent Expense................................................... 3,500Wages Expense................................................ 27,000To close expense accounts to income summary.30 Income Summary .................................................. 98,500 Sandra Sloley, Capital ..................................... 98,500To close income summary to capital.30 Sandra Sloley, Capital ........................................... 38,000 Sandra Sloley, Withdrawals ............................ 38,000To close withdrawals to capital.Question 51. Adjusting entries:20X6Oct. 31 Rent Expense ....................................................... 3,200Rent Payable .................................................. 3,200To record accrued rent expense.31 Rent Receivable (750)Rent Earned (750)To record accrued rent income.2. Subsequent entries without reversing:Nov. 5 Rent Payable ........................................................ 3,200 Rent Expense ....................................................... 3,200Cash ............................................................... 6,400To record payment of two months’ rent.8 Cash ..................................................................... 1,500Rent Receivable (750)Rent Earned (750)To record collection of two months’ rent.Financial Accounting Fundamentals Review material 3 123. Reversing entries and subsequent entries:Nov. 1 Rent Payable ........................................................ 3,200 Rent Expense ................................................. 3,200To reverse the accrual of rent expense.1 Rent Earned (750)Rent Receivable (750)To reverse the accrual of rent income.5 Rent Expense ....................................................... 6,400Cash ............................................................... 6,400To rec ord payment of two months’ rent.8 Cash ..................................................................... 1,500Rent Earned ................................................... 1,500To record collection of two months’ rent.Question 61.SUPERIOR ARCHITECTURAL DESIGNSStatement of Comprehensive Incomefor year ended June 30, 20X7Revenues:Design fees earned .............................................................. €248,000 Operating expenses:Depreciation expense, office equipment............................. € 3,500 Depreciation expense, office furniture................................ 1,900 Insurance expense ............................................................... 1,200 Interest expense................................................................... 1,440 Supplies expense................................................................. 4,300 Telephone expense.............................................................. 3,200 Utilities expense.................................................................. 1,500 Salaries expense.................................................................. 129,000Total operating expenses .............................................. 146,040Income ...................................................................................... €101,960Al Rusnak, Capital86,000(Beg. bal.)2. €86,000 + €101,960 –€70,000 = €117,960 OR (With.) 70,000 101,960 (Income) 117,960(End. bal.)Question 7PRESTIGE RENTALSWorksheetfor year ended March 31, 20X7Unadjusted TrialBalanceAdjustmentsAdjusted TrialBalanceStatement ofComprehensiveIncomeStatement ofFinancial Position &Statement ofChanges inOwner’s EquityAccountNumberAccount Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit101 Cash ....................................... 34,000 34,000 34,000110 Rent receivable....................... 126,000 a) 16,000 142,000 142,000124 Office supplies ....................... 13,600 b) 12,200 1,400 1,400141 Investment in ClubLink shares.. 286,000 286,000 286,000161 Furniture................................. 92,000 92,000 92,000173 Building.................................. 1,250,000 1,250,000 1,250,000183 Land ......................................... 220,000 220,000 220,000201 Accounts payable ................... 11,600 f) 5,240 16,840 16,840252 Long-term note payable ......... 750,000 750,000 750,000301 Chris Jensen, capital............... 999,050 999,050 999,050302 Chris Jensen, withdrawals...... 56,000 56,000 56,000406 Rent earned ............................ 812,400 a) 16,000 828,400 828,400620 Office salaries expense........... 248,000 d) 5,250 253,250 253,250633 Interest expense...................... 41,250 g) 3,750 45,000 45,000655 Advertising expense............... 56,000 e) 800 55,200 55,200673 Janitorial expense................... 82,000 82,000 82,000690 Utilities expense..................... 68,200 f) 5,240 73,440 73,440 Totals.............................. 2,573,050 2,573,050650 Office supplies expense ......... b) 12,200 12,200 12,200601 Depreciation expense, furniture. c) 7,000 7,000 7,000162 Accumulated dep., furniture... c) 7,000 7,000 7,000606 Depreciation expense,building ..................................c) 50,000 50,000 50,000174 Accumulated dep., building ... c) 50,000 50,000 50,000209 Salaries payable ..................... d) 5,250 5,250 5,250131 Prepaid advertising................. e) 800 800 800203 Interest payable ...................... g) 3,750 3,750 3,750 Totals.............................. 100,240 100,240 2,660,290 2,660,290 578,090 828,400 2,082,2001,831,890 Income.................................... 250,310 250,310 Totals.............................. 828,400 828,400 2,082,200 2,082,200Financial Accounting Fundamentals Review material 3 13Financial Accounting Fundamentals Review material 3 14Question 8Ethics Challenge1. Jennifer should recognize that the bank is an interested party, as is the president. Sheherself might be affected by this decision. For instance, if the president believes that Jennifer can prepare a year-end in a very short time, this could generate future requests from the president to close in even shorter times. Furthermore, by not telling the president that the statements are based on estimates, she will have to explain the reason for any differences when the final numbers come in. What effect, if any, will this have on her relationship with the president? There is a similar consideration regarding the firm’s bankers. Jennifer should consider whether Newby’s bu siness relationship with the bank would be affected after the bank learns the statements were based on estimates and they had not been advised that this was the case.2. There are several courses of action that Jennifer could have taken:a. Probably, she should have consulted with the president and told him that the finalized financial statements would not be ready by the time of the meeting. She should explain that delay in final statement preparation is a normal event giventhe need to wait for final information to prepare accurate adjustments. Themeeting could possibly be rescheduled, or Jennifer could have asked the president how he preferred her to proceed.b. The estimation route was not a bad choice in itself. Jennifer probably should have used worst-case estimates instead of recording expenses on the low side. Users of financial statements usually prefer knowing worst-case scenarios over best case outcomes.The use of estimates gets the financial statements closer to their final form than ignoring the adjustments completely.3. Students may offer one of the above alternatives or another response they may think。