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 RANGESFor 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.