Problem 4-5A (90 minutes) Part 1

ADAMS CONSTRUCTION CO.
Work Sheet
For Year Ended June 30, 2005
Unadjusted
Trial Balance /
Adjustments /
Adjusted
Trial Balance /
Income
Statement / Balance Sheet & Statement of Owner’s Equity
No. / Account Title / Dr. / Cr. / Dr. / Cr. / Dr. / Cr. / Dr. / Cr. / Dr. / Cr.
101 / Cash / 17,500 / 17,500 / 17,500
126 / Supplies / 8,900 / (a) / 5,700 / 3,200 / 3,200
128 / Prepaid insurance / 6,200 / (b) / 3,900 / 2,300 / 2,300
167 / Equipment / 131,000 / 131,000 / 131,000
168 / Accumulated depreciation—
Equipment /
25,250 /
(c) /
8,500 /
33,750 /
33,750
201 / Accounts payable / 5,800 / (d) / 550 / 6,350 / 6,350
203 / Interest payable / (h) / 240 / 240 / 240
208 / Rent payable / (f) / 200 / 200 / 200
210 / Wages payable / (e) / 1,600 / 1,600 / 1,600
213 / Property taxes payable / (g) / 900 / 900 / 900
251 / Long-term notes payable / 24,000 / 24,000 / 24,000
301 / S. Adams, Capital / 77,660 / 77,660 / 77,660
302 / S. Adams, Withdrawals / 30,000 / 30,000 / 30,000
401 / Construction fees earned / 134,000 / 134,000 / 134,000
612 / Depreciation expense—
Equipment /
(c) /
8,500 /
8,500 /
8,500
623 / Wages expense / 45,860 / (e) / 1,600 / 47,460 / 47,460
633 / Interest expense / 2,640 / (h) / 240 / 2,880 / 2,880
637 / Insurance expense / (b) / 3,900 / 3,900 / 3,900
640 / Rent expense / 13,200 / (f) / 200 / 13,400 / 13,400
652 / Supplies expense / (a) / 5,700 / 5,700 / 5,700
683 / Property taxes expense / 4,600 / (g) / 900 / 5,500 / 5,500
684 / Repairs expense / 2,810 / 2,810 / 2,810
690 / Utilities expense / 4,000 / ______ / (d) / 550 / _____ / 4,550 / ______ / 4,550 / ______ / ______ / ______
Totals / 266,710 / 266,710 / 21,590 / 21,590 / 278,700 / 278,700 / 94,700 / 134,000 / 184,000 / 144,700
Net Income / 39,300 / ______ / ______ / 39,300
Totals / 134,000 / 134,000 / 184,000 / 184,000

Problem 4-5A (Continued)

Part 2

Adjusting entries (all dated June 30, 2005):

(a) Supplies Expense 5,700

Supplies 5,700

To record consumption of supplies.

(b) Insurance Expense 3,900

Prepaid Insurance 3,900

To record expiration of insurance.

(c) Depreciation Expense, Equipment 8,500

Accumulated Depreciation, Equipment 8,500

To record depreciation.

(d) Utilities Expense 550

Accounts Payable 550

To record accrued utilities costs.

(e) Wages Expense 1,600

Wages Payable 1,600

To record accrued wages.

(f) Rent Expense 200

Rent Payable 200

To record remainder of annual rent.

(g) Property Taxes Expense 900

Property Taxes Payable 900

To record additional property taxes.

(h) Interest Expense (1% x $24,000) 240

Interest Payable 240

To record prior month’s interest expense.


Problem 4-5A (Continued)

Closing entries (all dated June 30, 2005):

(1) Construction Fees Earned 134,000

Income Summary 134,000

To close the revenue account.

(2) Income Summary 94,700

Depreciation Expense, Equipment 8,500

Wages Expense 47,460

Interest Expense 2,880

Insurance Expense 3,900

Rent Expense 13,400

Supplies Expense 5,700

Property Taxes Expense 5,500

Repairs Expense 2,810

Utilities Expense 4,550

To close the expense accounts.

(3) Income Summary 39,300

S. Adams, Capital 39,300

To close the Income Summary account.

(4) S. Adams, Capital 30,000

S. Adams, Withdrawals 30,000

To close the withdrawals account.


Problem 4-5A (Continued)

Part 3

Adams Construction Co.

Income Statement

For Year Ended June 30, 2005

Construction fees earned $134,000

Expenses

Depreciation expense—Equipment $ 8,500

Wages expense 47,460

Interest expense 2,880

Insurance expense 3,900

Rent expense 13,400

Supplies expense 5,700

Property taxes expense 5,500

Repairs expense 2,810

Utilities expense 4,550

Total expenses 94,700

Net income $ 39,300

Adams Construction Co.

Statement of Owner's Equity

For Year Ended June 30, 2005

S. Adams, Capital, June 30, 2004 $ 52,660

Add: Investment by owner $25,000

Net income 39,300 64,300

116,960

Less: Withdrawals by owner (30,000)

S. Adams, Capital, June 30, 2005 $ 86,960


Problem 4-5A (Continued)

Adams Construction Co.

Balance Sheet

June 30, 2005

Assets

Current assets

Cash $ 17,500

Supplies 3,200

Prepaid insurance 2,300

Total current assets $ 23,000

Plant assets

Equipment 131,000

Accumulated depreciation—Equipment (33,750) 97,250

Total assets $120,250

Liabilities

Current liabilities

Accounts payable $ 6,350

Interest payable 240

Rent payable 200

Wages payable 1,600

Property taxes payable 900

Current portion of long-term note payable 5,000

Total current liabilities $ 14,290

Noncurrent liabilities

Long-term note payable (less current portion) 19,000

Total liabilities 33,290

Equity

S. Adams, Capital 86,960

Total liabilities and equity $120,250


Problem 4-5A (Continued)

Part 4

(a) This error enters the wrong amount in the correct accounts. The ending balance of the Supplies account should be $3,200, but the entry reduces Supplies by $3,200. Because its unadjusted balance was $8,900, the adjusted balance will be $5,700 ($8,900 - $3,200), which is $2,500 greater than the correct $3,200 balance. In addition, the Supplies Expense account balance will be only $3,200 instead of $5,700.

The adjusted trial balance columns in the work sheet will be equal, but the error will cause the work sheet’s net income to be overstated by $2,500 because of the understatement of the expense. In addition, the balance sheet columns will include the overstated balance for the Supplies account.

This error is not likely to be detected as a result of completing the work sheet. If it is not, the income statement will overstate net income by $2,500, and the balance sheet will overstate the cost of the supplies available and the total equity by $2,500.

(b) This error inserts a credit in the adjusted trial balance when a debit should have been inserted. As a result, the trial balance will not balance (the credit column will be greater than the debit column by $35,000), and the error will be tracked down and corrected before going on with the next step in the work sheet.

Because the error will be detected and corrected before preparing the financial statements, the statements will not be affected.


Problem 4-6AA (40 minutes)

Part 1

bullseye RANGES
For Year Ended December 31, 2005
Unadjusted
Trial Balance /
Adjustments / Adjusted
Trial Balance
Account Title / Dr. / Cr. / Dr. / Cr. / Dr. / Cr.
Cash / 13,000 / 13,000
Accounts receivable / (e) / 9,100 / 9,100
Supplies / 5,500 / (b) / 2,800 / 2,700
Equipment / 130,000 / 130,000
Accumulated depreciation--Equipment /
25,000 /
(f) /
12,500 /
37,500
Interest payable / (c) / 1,250 / 1,250
Salaries payable / (a) / 900 / 900
Unearned member fees / 14,000 / (d) / 8,400 / 5,600
Notes payable / 50,000 / 50,000
T. Allen, Capital / 58,250 / 58,250
T. Allen, Withdrawals / 20,000 / 20,000
Member fees earned / 53,000 / (d)
(e) / 8,400
9,100 / 70,500
Depreciation expense—
Equipment / (f) / 12,500 / 12,500
Salaries expense / 28,000 / (a) / 900 / 28,900
Interest expense / 3,750 / (c) / 1,250 / 5,000
Supplies expense / ______ / ______ / (b) / 2,800 / _____ / 2,800 / ______
Totals / 200,250 / 200,250 / 34,950 / 34,950 / 224,000 / 224,000


Problem 4-6AA (Continued)

Part 2 (all adjusting entries dated December 31, 2005)

(a) Salaries Expense 900

Salaries Payable 900

To record accrued salaries.

(b) Supplies Expense 2,800

Supplies 2,800

To record cost of consumed supplies.

(c) Interest Expense 1,250

Interest Payable 1,250

To record accrued interest expense.

(d) Unearned Member Fees 8,400

Member Fees Earned 8,400

To record earned fees.

(e) Accounts Receivable 9,100

Membership Fees Earned 9,100

To record accrued revenues.

(f) Depreciation Expense, Equipment 12,500

Accumulated Depreciation, Equipment 12,500

To record depreciation.

Part 3 (all reversing entries dated January 1, 2006)

(a) Salaries Payable 900

Salaries Expense 900

To reverse accrued salaries.

(c) Interest Payable 1,250

Interest Expense 1,250

To reverse accrued interest expense.

(e) Member Fees Earned 9,100

Accounts Receivable 9,100

To reverse accrued revenues.


Problem 4-6AA (Concluded)

Part 4

2006

Jan. 4 Salaries Expense 1,600

Cash 1,600

To record payroll.

15 Interest Expense 1,500

Cash 1,500

To record interest payment.

31 Cash ($9,100 + $8,000) 17,100

Member Fees Earned 17,100

To record collection of membership fees.