CHAPTER 3: DOUBLE ENTRY ACCOUNTING SYSTEMS
Review Questions
3.1Retained earnings has its beginning of period balance whereas the rest of the permanent accounts have their proper end of period balance in an adjusted trial balance. This is the case because no entries are made directly to retained earnings during the accounting period. Temporary accounts of revenue, expenses, and dividends declared are instead used to keep track of the transactions that effect retained earnings. Closing entries, made after preparing financial statements, bring the retained earnings account to its end of period balance.
3.2a. F
b. T
c.F
d.F
e.F
f.T
g.F
3.3 a. DR
b. CR
c. CR
d.DR
e.CR
f.DR
g.CR
h.DR
i.CR
3.4Chart of accounts
Opening balances
Closing entriesTransactions or events
Preparation ofTransaction analysis
financial statements
Adjusted trial balanceJournal entries
Adjusting entriesPosting
Trial Balance
Journalize transactions (record transactions in a journal), post transactions to the ledger (summarize the effect of transactions on each account), prepare a trial balance (ensure that debits still equal credits), make adjusting entries (correct possible errors from an earlier step and make end of period adjustments for amortization, accruals, etc.), prepare an adjusted trial balance (ensure debits still equal credits), prepare financial statements (present the trial balance accounts on a balance sheet, and income statement, and prepare the statement of cash flows), make closing entries (close the temporary revenue, expense, and dividends accounts to retained earnings), prepare a post-closing trial balance (ensure that debits still equal credits)
3.5 Expense accounts have debit balances and debit entries increase these
accounts. Shareholder’s equity accounts normally have credit balances, and debit entries reduce these accounts. These statements are consistent because expenses, which have debit balances, reduce shareholders’ equity accounts.
3.6 One company might close its books monthly and another might close them
weekly because different companies have different information needs, depending on the users of the financial statements. Some companies require more up-to-date information, because this information is relied upon for internal (management) and external (investor and creditor) decision-making.
3.7The major sections of the income statement are income from continuing operations (sales of goods and services to customers that are expected to continue in the future), income from non-operating sources ( interest income, gain or loss on sale of capital assets, restructuring expenses), income from unusual or infrequent sources (events that do not occur often), provision for income tax (current and future income taxes), income from discontinued operations (business segments that will not continue in the future) and income from extraordinary items ( must be unusual, infrequent, and not resulting from management decisions).
3.8The standard format of the balance sheet presents assets on the left side and liabilities and shareholders’ equity on the right side.
3.9Current items on the balance sheet are those that will be converted into cash (current assets) or require the use of cash (current liabilities) within one year or operating cycle, whichever is longer. Noncurrent items will not be converted into cash or require the use of cash within one year or operating cycle.
3.10Liquidity refers to the ability to convert an asset into cash, or how quickly a liability will require the use of cash.
3.11For discontinued operations, the operating income must be disclosed
separately from other income. Separate disclosure of operating income related to discontinued operations flags this portion of income to users of financial statements, helping them to predict future cash flows. The second disclosure is the gain or loss on disposal of the actual business segment.
3.12An extraordinary item is one that meets three criteria: it is unusual,
infrequent, and not the result of management decisions. Extraordinary items are disclosed separately on the income statement in order to alert users of financial statements to the fact that these items are one-time events, and should be disregarded in the prediction of future income.
Applying Your Knowledge
3.13a.DR
b. CR
c. CR
- CR
- DR
- DR
- DR
3.14a. DR
b. CR
- CR
- CR
- DR
- DR
- CR
3.15
a.A-Inventory1,500
L-Accounts Payable1,500
b. A-Accounts receivable1,800
SE-Sales1,800
SE-Cost of goods sold1,200
A-Inventory1,200
c.A-Cash800
A-Accounts receivable800
d.A-Cash10,000
L-Bank loan10,000
e.A-Cash2,500
SE-Common shares2,500
f.A-Equipment3,500
A-Cash3,500
3.16 a.
1.A-Cash500,000
SE-Common shares500,000
2. A-Inventory760,000
L-Accounts payable760,000
3.A-Accounts receivable920,000
SE-Sales920,000
SE-Cost of goods sold650,000
A-Inventory650,000
4.A-Cash600,000
A-Accounts receivable600,000
5.L-Accounts payable720,000
A-Cash720,000
6.SE-Rent expense60,000
A-Cash60,000
7.SE-Other expenses54,000
A-Cash54,000
8.SE-Wages expense102,000
A-Cash102,000
9.A-Investment100,000
A-Cash100,000
10.SE-Dividend declared20,000
A-Cash20,000
b. Treetop Food Distributors Ltd.: T-Accounts
A-Cash A-Accounts receivable
0 0
(1) 500,000720,000(5)(3)920,000 600,000(4)
(4)600,00060,000(6)
54,000(7)320,000
102,000(8)
100,000(9)
20,000(10)
44,000
A-Inventory A-Investment
00
(2)760,000650,000(3)(9)100,000
110,000100,000
L-Accounts payable SE-Common shares
00
(5)720,000760,000(2)500,000(1)
40,000500,000
SE-Retained earnings SE-Dividends declared
00
(10)20,000
20,000
SE-Sales SE-Cost of goods sold
00
920,000(3)(3)650,000
920,000650,000
SE-Rent expenseSE-Other expenses
00
(6)60,000(7)54,000
60,00054,000
SE-Wages expense
0
(8)102,000
102,000
Treetop Food Distributors Ltd.
Trial Balance
December 31, 20X1
DebitCredit
Cash$44,000
Accounts receivable320,000
Inventory110,000
Investment100,000
Accounts payable$40,000
Common shares500,000
Retained earnings-0-
Dividends declared20,000
Sales920,000
Cost of goods sold650,000
Rent expense60,000
Other expenses54,000
Wages expense 102,000
$1,460,000 $1,460,000
3.17
March1A-Cash80,000
SE-Common shares80,000
2SE-Rent expense1,800
A-Cash1,800
5A-Parts inventory21,000
L-Accounts payable21,000
7A-Shop supplies on hand9,100
A-Cash9,100
9A-Accounts receivable490
SE-Sale of parts310
SE-Service revenue180
SE-Cost of parts sold155
A-Parts inventory155
11A-Parts inventory560
A-Cash560
12L-Accounts payable21,000
A-Cash21,000
15A-Cash468
SE-Sale of parts218
SE-Service revenue250
SE-Cost of parts sold109
A-Parts inventory109
15SE-Wages expense800
A-Cash800
16A-Cash600
L-Advances from customers600
L-Advances from customers100
SE-Service revenue100
20A-Prepaid insurance540
A-Cash540
22A-Cash2,146
SE-Sale of parts946
SE-Service revenue1,200
SE-Cost of parts sold473
A-Parts inventory473
25A-Accounts receivable490
SE-Sale of parts490
SE-Cost of parts sold245
A-Parts inventory245
March28A-Cash490
A-Accounts receivable490
31SE-Wages expense825
A-Cash825
b. The Rider Shop Ltd.: T-Accounts
A-Cash A-Accounts receivable
00
(1) 80,0001,800(2)(9)490490(28)
(15)4689,100(7)(25)490
(16)600 560(11)
(22)2,14621,000(12)490
(28) 490800(15)
540(20)
825(31)
49,079
A-Parts Inventory A-Shop supplies on hand
00
(5)21,000155(9)(7)9,100
(11)560109(15)
473(22)9,100
245(25)
20,578
A-Prepaid insurance A-Equipment
0 0
(20)540
0
540
XA-Accum. amort. – eq. L-Accounts payable
00
(12)21,00021,000(5)
0
0
L-Advances from customers SE-Common shares
00
(16)100600(16)80,000(1)
50080,000
SE-Retained earnings SE-Sale of parts
00
310(9)
0218(15)
946(22)
490(25)
1,964
SE-Sales revenue SE-Cost of goods sold
00
180(9)(9)155
250(15)(15)109
100(16)(22)473
1,200(22)(25)245
1,730982
SE-Wages expense SE-Rent expense
00
(15)800(2)1,800
(31)825
1,6251,800
SE-Other expenses
0
0
c.
Riders Shop Ltd.
Trial Balance
March 31, 20x1
DebitCredit
Cash$ 49,079
Accounts receivable490
Parts inventory20,578
Shop supplies on hand9,100
Prepaid insurance540
Advances from customers $ 500
Common shares80,000
Retained earnings-0-
Sales of parts1,964
Sales revenue1,730
Cost of parts sold982
Wages expense1,625
Rent expense 1,800
$84,194$84,194
d.
Riders Shop Ltd.
Income Statement
For the month ending March 31, 20x1
Sales of parts$1,964
Sales revenue1,730
Total revenue3,694
Expenses
Cost of parts sold$ 982
Wages expense1,625
Rent expense1,800
Total expenses4,407
Net loss$(713)
Riders Shop Ltd.
Balance Sheet
As at March 31, 20x1
Assets
Cash$49,079
Accounts receivable490
Parts inventory20,578
Shop supplies on hand9,100
Prepaid insurance 540
Total assets$79,787
Liabilities
Advances from customers $ 500
Shareholders’ equity
Common shares80,000
Retained earnings (713)
Total shareholders’ equity79,287
Total liabilities and shareholders’
Equity$79,787
3.18 1. T. George Company: Journal entries
1.A–Cash175,000
SE–Common shares175,000
2.A–Cash125,000
L–Bank loan125,000
3.A–Land60,000
A–Building140,000
A–Cash200,000
4.A–Inventory100,000
L–Accounts payable100,000
- A–Investment in Calhoun
Company75,000
A–Cash75,000
6.A–Cash30,000
A–Accounts receivable160,000
SE–Sales revenue190,000
7.A–Cash135,000
A–Accounts receivable135,000
8.L–Accounts payable92,000
A–Cash92,000
9.SE–Salary expense44,000
A–Cash44,000
10.SE–Cost of goods sold90,000
A–Inventory90,000
11.SE–Amortization expense6,000
XA–Accumulated amort.6,000
($140,00 – 20,000) ÷ 20 = $6,000
12.SE–Interest expense11,250*
A–Cash10,313**
L–Interest payable937
* $125,000 x 9% x 12/12 = $11,250
**$125,000 x 9% x 11/12 = $10,313
13.A–Cash5,000
SE–Dividend revenue5,000
14.SE–Dividends declared15,000
L–Dividends payable5,000
2. T. George Company: T-Accounts
A-Cash A-Accounts receivable
00
(1) 175,000200,000(3)(6)160,00135,000(7)
(2)125,00075,000(5)
(6)30,00092,000(8)25,000
(7)135,00044,000(9)
(13)5,00010,313(12)
48,687
A-InventoryA-Investments
00
(4)100,00090,000(10)(5)75,000
10,00075,000
A-LandA-Building
00
(3)60,000(3)140,000
60,000140,000
XA-Accum. amort.
0
6,000(11)
6,000
L-Accounts payable L-Bank loan
00
(8)92,000100,000(4)125,000(2)
8,000125,000
L-Interest payable L-Dividends payable
00
937(12)15,000(14)
93715,000
Se-Common sharesSE-Retained earnings
00
175,000(1)(H)15,00043,750(G)
175,00028,750
SE-Dividends declaredSE-Income summary
0(C) 90,0000
(14)15,00015,000(H)(D)44,000190,000(A)
(E)11,2505,000(B)
0(F)6,000
(G)43,75043,750
0
SE-Sales revenueSE-Cost of goods sold
00
(A)190,000190,000(6)(10)90,00090,000(C)
00
SE-Interest expenseSE-Amortization expense
00
(12)11,25011,250(E)(11)6,0006,000(F)
00
SE-Dividend RevenueSE-Salary expense
00
(B)5,0005,000(13)(9)44,00044,000(D)
00
3.
T. George Company
Trial Balance
December 31, 20X2
DebitCredit
Cash$ 48,687
Accounts receivable25,000
Inventory10,000
Investments75,000
Land60,000
Building140,000
Accumulated amortization $ 6,000
Accounts payable8,000
Bank loan125,000
Interest payable937
Dividend payable15,000
Common shares175,000
Retained earnings-0-
Dividend declared15,000
Sales revenue190,000
Dividend revenue5,000
Cost of goods sold90,000
Salary expense44,000
Interest expense11,250
Amortization expense 6,000
$524,937$524,937
4. Closing Entries
A.SE–Sales revenue190,000
SE–Income summary190,000
BSE–Dividend revenue5,000
SE– Income summary5,000
C.SE–Income summary90,000
SE–Cost of goods sold90,000
D.SE–Income summary44,000
SE–Salary expense44,000
E. SE–Income summary11,250
SE–Interest expense11,250
F.SE–Income summary6,000
SE–Amortization expense6,000
G.SE–Income summary43,750
SE–Retained earnings43,750
H.SE–Retained earnings15,000
SE–Dividends declared15,000
3.19
1. Hughes Tool Company: Journal Entries
1.A–Cash100,000
SE–Common shares100,000
2.A–Cash300,000
L–Bank loan300,000
3.SE–Rent expense80,000
A – Prepaid Rent20,000
A – Cash100,000
4.A–Equipment250,000
A–Cash250,000
SE–Amortization expense30,000
XA–Accum. amort.30,000
$250,000 – 40,000)/7 years = $30,000.
5.A–Inventory100,000
A–Cash100,000
6.A–Cash80,000
A–Accounts receivable720,000
SE–Sales revenue800,000
7.A–Cash640,000
A–Accounts receivable640,000
8.A–Inventory550,000
L–Accounts payable550,000
9.L – Accounts Payable495,000
A – Cash495,000
10.SE–Cost of goods sold535,000
A – Inventory535,000
Cost of Goods Sold is calculated as:
Beginning Balance + Purchases – Ending Balance =
$0 + $100,000 + 550,000 – 115,000 =$535,000.
11.SE–Dividend declared40,000
A–Cash40,000
12.SE–Interest expense33,000
L–Loan20,000
A–Cash53,000
($300,000 X 11% = $33,000)
- SE–Selling and administrative
expense90,000
A–Cash70,000
L–Accrued expenses20,000
14.SE–Tax expense9,600
A–Cash7,200
L–Income Tax Payable2,400
The tax calculation is based on the income before taxes of $32,000 (see the income statement for Problem 2-31) multiplied by the tax rate of 30% or $9,600. The amount paid in cash is then determined by multiplying by 75%.
2. Hughes Tool Company: T-Accounts
A-Cash A- Accounts Receivable
00
(1)100,000100,000(3)(6)720,000640,000(7)
(2)300,000250,000(4)
(6)80,000100,000(5)80,000
(7)640,000495,000(9)
40,000(11)
53,000(12)
70,000(13)
7,200(14)
4,800
A-InventoryA- Prepaid Rent
00
(5)100,000(3)20,000
(8)550,000535,000(10
115,00020,000
A-EquipmentXA-Accum. amort.
00 (4) 250,000 30,000 (4)
250,00030,000
L- Accounts PayableL-Accrued expenses
00
(9)495,000550,000(8)20,000(13)
55,00020,000
L-Income tax payableL-Loan Payable
00
2,400(14)(12)20,000300,000(2)
2,400280,000
SE-Common shares SE-Retained earnings
00
100,000(1)(I)40,00022,400(H)
100,00017,600
SE-Dividend declaredSE-Sales revenue
00
(11)40,00040,000(I)(A)800,000800,000(6)
00
SE-Cost of goods soldSE-Rent expense
00
(10)535,000535,000(B)(3)80,00080,000(C)
00
SE-Amortization expenseSE-Interest expense
00
(4)30,00030,000(D)(12)33,00033,000(E)
00
SE-Selling & admin. expenseSE-Tax expense
00
(13)90,00090,000(F)(14)9,6009,600(G)
00
SE-Income Summary
0
(B)535,000800,000(A)
(C)80,000
(D)30,000
(E)33,000
(F)90,000
(G)9,600
(H)22,40022,400
0
3.
Hughes Tool Company
Trial Balance
September 30, 20X4
DebitCredit
Cash$ 4,800
Accounts receivable80,000
Inventory115,000
Prepaid rent20,000
Equipment250,000
Accumulated amortization $ 30,000
Accounts payable55,000
Accrued expenses20,000
Loan payable280,000
Income tax payable2,400
Common shares100,000
Retained earnings-0-
Dividend declared40,000
Sales revenue800,000
Cost of goods sold535,000
Rent expense80,000
Amortization expense30,000
Interest expense33,000
Selling & administrative expenses90,000
Tax expense 9,600
$1,287,400$1,287,400
4. Closing Entries
A.SE–Sales revenue800,000
SE–Income summary800,000
B.SE–Income summary535,000
SE–Cost of goods sold535,000
C.SE–Income summary80,000
SE–Rent expense80,000
D.SE–Income summary 30,000
SE–Amortization expense30,000
E.SE–Income summary33,000
SE–Interest expense33,000
F.SE–Income summary90,000
SE–Selling and admini-
strative expense90,000
G.SE–Income summary9,600
SE–Tax expense9,600
H.SE–Income summary22,400
SE–Retained earnings22,400
I.SE–Retained earnings40,000
SE–Dividend declared40,000
3.20
1. A. J. Smith Company: Journal Entries
1.A–Cash375,000
SE–Common shares375,000
2.A–Land85,000
A–Building340,000
A–Cash50,000
SE–Common shares375,000
The land is valued at 20% of the sum of the cash and the common shares. The common shares are valued at their market value which is obtained from the information in Transaction 1.
3a.A–Equipment100,000
A–Cash50,000
L–Notes payable50,000
3b.SE–Interest expense2,500
L–Interest payable2,500
(50,000 x .10 x 6/12)
4. SE–Amortization expense5,000
XA–Accumulated amort. – eq.5,000
($100,000–0)/10 years = $10,000 per year. Since the asset has only been
in service for one half of the year, half of the yearly amortization has been recorded.
5.SE–Amortization expense10,000
XA–Accum. amort. – bldg.10,000
($340,000 –40,000)/30 years = $10,000.
6.A–Inventory200,000
L–Accounts payable200,000
7. A–Cash40,000
A–Accounts receivable175,000
SE–Sales revenue215,000
8.SE–Cost of goods sold160,000
A-Inventory160,000
9. L–Accounts payable175,000
A–Cash175,000
10.A–Cash165,000
A–Accounts receivable165,000
11.A–Cash20,000
SE–Rent revenue15,000
L–Unearned rent5,000
Four payments are received (total $20,000) during the year but the last payment applies to rent earned in the following accounting period and revenue recognition should be deferred until then.
- SE–Selling & distribution expense30,000
A–Cash30,000
13. SE–Tax expense6,750
L–Taxes payable3,750
A–Cash3,000
Tax Rate x Income before tax (see income summary account) =
30% x $22,500 = $6,750.
14. SE–Dividends declared4,000
A–Cash3,000
L–Dividends payable 1,000
2. A.J. Smith Company: T-Accounts
A-Cash A-Accounts receivable
00
(1)375,00050,000(2)(7)175,000165,000(10)
(7)40,00050,000(3a)
(10)165,000175,000(9)10,000
(11)20,00030,000(12)
3,000(13)
3,000(14)
289,000
A-InventoryA-Land
00
(6)200,000160,000(8)(2)85,000
40,00085,000
A-BuildingXA-Accum. amort. - bldg
00
(2)340,00010,000(5)
340,00010,000
A-EquipmentXA-Accum. amort. – equip.
00
(3a)100,0005,000(4)
100,0005,000
L-Accounts payable
0
(9)175,000200,000(6)
25,000
L-Notes payableL-Interest payable
00
50,000(3a)2,500(3b)
50,0002,500
L-Unearned rent L-Taxes payable
00
5,000(11)3,750(13)
5,0003,750
L-Dividends payableSE–Common shares
00
1,000(14)375,000(1)
375,000(2)
1,000750,000
SE-Income summarySE–Retained earnings
00
(C)160,000215,000(A)(I)4,00015,750(H)
(D)15,00015,000(B)
(E) 2,50011,750
(F)30,000
(G)6,750
15,750 SE-Dividend declared
(H)15,7500
(14)4,0004,000(I)
00
SE-Sales revenue
0
(A)215,000215,000(7)
0
SE-Rent revenueSE–Cost of goods sold
00
(B)15,00015,000(11)(8)160,000160,000(C)
00
SE-Interest expenseSE–Amortization expense
00
(3b)2,5002,500(E)(4)5,000
(5)10,00015,000(D)
00
SE-Selling & distribution expenseSE–Tax expense
00
(12)30,00030,000(F)(13)6,7506,750(G)
00
A.J. Smith Company
Trial Balance
December 31, 20X1
DebitCredit
Cash$ 289,000
Accounts receivable10,000
Inventory40,000
Land85,000
Building340,000
Accumulated amortization – bldg.$ 10,000
Equipment100,000
Accumulated amortization – equip. 5,000
Accounts payable25,000
Notes payable50,000
Interest payable2,500
Unearned rent5,000
Income tax payable3,750
Dividend payable1,000
Common shares750,000
Retained earnings-0-
Dividend declared4,000
Sales revenue215,000
Rent revenue15,000
Cost of goods sold160,000
Interest expense2,500
Amortization expense15,000
Selling & distribution expenses30,000
Tax expense 6,750
$1,082,250 $1,082,250
4. Closing Entries
A.SE – Sales revenue215,000
SE – Income summary215,000
B.SE – Rent revenue15,000
SE – Income summary15,000
C.SE – Income summary160,000
SE – Cost of goods sold160,000
D.SE – Income summary15,000
SE – Amortization expense15,000
E.SE – Income summary2,500
SE – Interest expense2,500
F.SE – Income summary30,000
SE – Selling and
distribution expense30,000
G.SE – Income summary6,750
SE – Tax expense6,750
H.SE – Income summary15,750
SE – Retained earnings15,750
I.SE – Retained earnings4,000
SE – Dividends declared4,000
3.21
1)Sales$ 8,300
2)COGS(2,700)
3)Interest income120
4)Rent expense(600)
5)Utility expense(198)(last month’s utility bill of $250 does not effect this month’s income statement)
6)Wages expense(350)
7)Other expense (990)
$ 3,582
3.22
September expense / October expense1) / $3,000 (5000 x 3/5) / $2,000 (5000 x 2/5)
2) / $800 / $900
3) / $45 / $45
4) / $93.33 (140 x 2/3) / $46.67 (140 x 1/3)
3.23a. Sheridan Office Supplies Ltd. Journal Entries
1.A-Equipment60,000
A-Cash60,000
2.A-Prepaid insurance1,800
A-Cash1,800
3.A-Inventory360,000
L-Accounts payable360,000
4.A-Accounts receivable410,000
SE-Sales410,000
SE-Cost of goods sold270,000
A-Inventory270,000
5.A-Cash420,000
A-Accounts receivable420,000
6.L-Accounts payable300,000
A-Cash300,000
7.SE-Advertising expense9,000
A-Cash9,000
8.SE-Rent expense24,000
A-Cash24,000
9.L-Wages payable7,000
SE-Wages expense81,000
A-Cash88,000
10.A-Cash4,000
SE-Dividend revenue4,000
11.SE-Dividend declared12,000
A-Cash12,000
d. Adjusting entries
12.SE-Wages expense3,500
L-Wages payable3,500
13.SE-Amortization expense5,000
XA-Accum. amort. – equip5,000
($60,000 – 10,000) / 10 = $5,000
14.SE-Insurance expense600
A-Prepaid insurance600
$1,800 / 3 = $600
b. Sheridan Office Supplies Ltd.: T-Accounts
A-CashA-Accounts receivable
106,00050,000
(5)420,00060,000(1)(4)410,000420,000(5)
(10)4,0001,800(2)
300,000(6)40,000
9,000(7)
24,000(8)
88,000(9)
12,000(11)
35,200
A-InventoryA-Prepaid rent
120,0000
(3)360,000270,000(4)(2)1,800
210,0001,800600(14)
1,200
A-Investment
100,000
100,000
A-EquipmentXA-Accum. amort. – equip.
00
(1)60,0005,000(13)
60,0005,000
L-Accounts payableL-Wages payable
60,0007,000
(6)300,000360,000(3)(9)7,000
120,0000
3,500(12)
3,500
SE-Common sharesSE–Retained earnings
300,0009,000
300,0009,000
(J)12,00020,900(I)
17,900
SE-Income summarySE–Dividends declared
00
(C)270,000410,000(A)(11)12,000
(D)9,0004,000(B)
(E) 24,00012,00012,000(J)
(F)84,500
(G)6000
(H)5,000
20,900
(I)20,900
0
SE-SalesSE-Dividend revenue
00
410,000(4)4,000(10)
(A)410,000410,000(B)4,0004,000
00
SE-Cost of goods soldSE–Advertising expense
00
(4)270,000(7)9,000
270,000270,000(C)9,0009,000(D)
00
SE-Rent expenseSE–Wages expense
00
(8)24.000(9)81,000
24,00024,000(E)81,000
(12)3,500
0
84,50084,500(F)
0
SE-Insurance expenseSE–Amortization expense
00
(14)600(13)5,000
600600(G)5,0005,000(H)
00
c. Trial balance
Sheridan Office Supplies Ltd.
Trial Balance
December 31, 20x2
DebitCredit
Cash$ 35,200
Accounts receivable40,000
Inventory210,000
Prepaid insurance1,800
Investment100,000
Equipment60,000
Accounts payable$120,000
Wages payable-0-
Common shares300,000
Retained earnings9,000
Dividend declared12,000
Sales 410,000
Dividend revenue4,000
Cost of goods sold270,000
Advertising expense9,000
Rent expense24,000
Wages expense 81,000
$843,000$843,000
- Adjusted trial balance
Sheridan Office Supplies Ltd.
Adjusted Trial Balance
December 31, 20X2
DebitCredit
Cash$ 35,200
Accounts receivable40,000
Inventory210,000
Prepaid insurance1,200
Investment100,000
Equipment60,000
Accumulated amortization – equip.$ 5,000
Accounts payable 120,000
Wages payable3,500
Common shares300,000
Retained earnings9,000
Dividend declared12,000
Sales 410,000
Dividend revenue4,000
Cost of goods sold270,000
Advertising expense9,000
Rent expense24,000
Wages expense84,500
Insurance expense600
Amortization expense 5,000
$851,500$851,500
- Income statement and balance sheet
Sheridan Office Supplies Ltd.
Income Statement
For the year ended December 31, 20x2
Sales$410,000
Dividend revenue4,000
Total revenue414,000
Expenses
Cost of goods sold$270,000
Advertising expense9,000
Rent expense24,000
Wages expense84,500
Insurance expense600
Amortization expense5,000
Total expenses393,100
Net income$ 20,900
Sheridan Office Supplies Ltd.
Balance Sheet
As at December 31, 20x2
Assets
Current assets
Cash$ 35,200
Accounts receivable40,000
Inventory210,000
Prepaid insurance1,200
Total current assets286,400
Investments$100,000
Equipment60,000
Less accumulated amortization(5,000)
Total noncurrent assets155,000
Total assets$441,400
Liabilities
Accounts payable$120,000
Wages payable3,500
Total liabilities$123,500
Shareholders’ equity
Common shares$300,000
Retained earnings*17,900
Total shareholders’ equity317,900
Total liabilities & shareholders’ equity$441,400
*$9,000 +20,900 – 12,000 = $17,900
f. Closing entries
A.SE-Sales410,000
SE-Income summary410,000
B.SE-Dividend revenue4,000
SE-Income summary4,000
C.SE-Income summary270,000
SE-Cost of goods sold270,000
D.SE-Income summary9,000
SE-Advertising expense9,000
E.SE-Income summary24,000
SE-Rent expense24,000
F.SE-Income summary84,500
SE-Wages expense84, 500
G.SE-Income summary600
SE-Insurance expense600
H.SE-Income summary5,000
SE-Amortization expense5,000
I.SE-Income summary20,900
SE-Retained earnings20,900
J.SE-Retained earnings12,000
SE-Dividends declared12,000
3.24a. On the Go Pizza: Journal Entries
1.A-Cash450,000
A-Accounts receivable30,000
SE-Sales480,000
2.A-Supplies inventory190,000
A-Cash190,000
3.SE-Cost of supplies used185,000
A-Supplies inventory185,000
4.L-Wages payable4,000
SE-Wage expense61,000
A-Cash65,000
5.SE-Other expenses42,000
A-Cash42,000
6.SE-Dividends declared10,000
A-Cash10,000
d. Adjusting entries
7.SE-Wages expense3,000
L-Wages payable3,000
8.SE-Rent expense24,000
A-Prepaid rent24,000
9.SE-Amortization expense5,000
XA-Accum. amort. – equip.5,000
$40,000 / 8 = $5,000
10.SE-Amortization expense11,000
XA-Accum. amort. – del.veh.11,000
($60,000 - $5,000)/5
b. On the Go Pizza: T-Accounts
A-CashA-Accounts receivable
140,00020,000
(1)450,000190,000(2)(1)30,000
65,000(4)
42,000(5)50,000
10,000(6)
283,000
A-Supplies inventoryA-Prepaid rent
5,00048,000
(2)190,000185,000(3)
48,00024,000(8)
10,000
24,000
A-EquipmentXA-Accum. amort. – equip.
40,0000
5,000(9)
40,000
5,000
A-Delivery vehicleXA-Accum. amort. – del. veh.
60,0000
11,000(10)
60,000
11,000
L-Wages payable
4,000
(4)4,000
0
3,000(7)
3,000
SE-Common sharesSE–Retained earnings
200,000109,000
200,000109,000
(H)10,000149,000(G)
248,000
SE-Income summarySE–Dividends declared
00
(B)185,000480,000(A)(6)10,000
(C)64,000
(D) 42,00010,00010,000(H)
(E)24,000
(F)16,0000
149,000
(G)149,000
0
SE-Sales SE-Cost of supplies used 0 0 480,000 (1) (3) 185,000
(A)480,000480,000185,000185,000(B)
00
SE-Wages expenseSE–Other expense
00
(4)61,000(5)42,000
61,00042,00042,000(D)
(7)3,000
0
64,00064,000(C)
0
SE-Rent expenseSE–Amortization expense
00
(8)24,000(9)5,000
(10)11,000
24,00024,000(E)
16,00016,000(F)
0
0
c. Trial balance
On the Go Pizza
Trial Balance
December 31, 20X2
DebitCredit
Cash$ 283,000
Accounts receivable50,000
Supplies inventory 10,000
Prepaid rent48,000
Equipment40,000
Delivery vehicles60,000
Common shares$200,000
Retained earnings109,000
Dividend declared10,000
Sales 480,000
Cost of supplies used185,000
Wages expense61,000
Other expense 42,000
$789,000$789,000
- Adjusted trial balance
On the Go Pizza
Adjusted Trial Balance
December 31, 20X2
DebitCredit
Cash$ 283,000
Accounts receivable50,000
Supplies inventory 10,000
Prepaid rent24,000
Equipment40,000
Accumulated amortization – equip.$ 5,000
Delivery vehicles60,000
Accumulated amortization – del.veh.11,000
Wages payable3,000
Common shares 200,000
Retained earnings109,000
Dividend declared10,000
Sales 480,000
Cost of supplies used185,000
Wages expense64,000
Other expense42,000
Rent expense24,000
Amortization expense 16,000
$808,000$808,000
- Income statement and balance sheet
On the Go Pizza
Income Statement
For the year ended December 31, 20X2
Sales$480,000
Expenses
Cost of supplies used$185,000
Wages expense64,000
Other expense42,000
Rent expense24,000
Amortization expense16,000
Total expenses331,000
Net income$149,000
On the Go Pizza
Balance Sheet
As at December 31, 20X2
Assets
Current assets
Cash$ 283,000
Accounts receivable50,000
Supplies inventory 10,000
Prepaid rent24,000
Total current assets367,000
Equipment$40,000
Less accumulated amortization(5,000)35,000
Delivery vehicles60,000
Less accumulated amortization11,00049,000
Total noncurrent assets84,000
Total assets$451,000
Liabilities
Wages payable$ 3,000
Shareholders’ equity
Common shares$200,000
Retained earnings*248,000
Total shareholders’ equity448,000
Total liabilities & shareholders’ equity$451,000
*$109,000 +149,000 – 10,000 = $248,000
f. Closing entries
A.SE-Sales480,000
SE-Income summary480,000
B.SE-Income summary185,000
SE-Cost of supplies used185,000
C.SE-Income summary64,000
SE-Wages expense64,000
D.SE-Income summary42,000
SE-Other expense42,000
E.SE-Income summary24,000
SE-Rent expense24,000
F.SE-Income summary16,000
SE-Amortization expense16,000
G.SE-Income summary149,000
SE-Retained earnings149,000
H.SE-Retained earnings10,000
SE-Dividends declared10,000
3.25a. Evergreen Retail Company: journal entries
1.A-Cash4,500
L-Bank loan4,500
2. A-Equipment8,000
A-Cash8,000
3.A-Inventory17,600
L-Accounts payable17,600
4.A-Accounts receivable14,300
A-Cash11,200
SE-Sales25,500
SE-Cost of goods sold16,900
A-Inventory16,900
5.A-Cash12,700
A-Accounts receivable12,700
6.L-Accounts payable15,800
A-Cash15,800
7.SE-Wage expense2,300
A-Cash2,300
8.SE-Dividends declared1,500
A-Cash1,500
9.SE-Interest expense450
A-Cash450
$4,500 x .10 = $450
d. Adjusting entries
10.SE-Amortization expense1,420
XA-Accumulated amortization1,420
($8,000 – 900) / 5 = $1,420
11.SE-Wage expense200
L-Wages payable200
b. Evergreen Retail Company: T-Accounts
A-CashA-Accounts receivable
(1)4,5008,000(2)(4)14,30012,700(5)
(4)11,200 15,800(6)
(5)12,700 2,300(5)1,600
1,500(8)
450(9)
350
A-Inventory
(3)17,60016,900(4)
700
A-EquipmentXA-Accum. amort. – equip.
(2)8,0001,420(10)
8,0001,420
L-Accounts payableL-Wages payable
(6)15,80017,600(3)200(11)
1,800200
L-Bank loanSE–Retained earnings
4,500(1)(C)1,5004,230(B)
4,5002,730
SE-Income summarySE–Dividends declared
(B)4,2304,230(A)(8)1,500
01,5001,500(C)
0
SE-Sales SE-Cost of goods sold 25,500 (1) (4) 16,900
(A)25,50025,50016,90016,900(A)
00
SE-Wages expenseSE–Amortization expense
(7)2,300(10)1,420
2,3001,4201,420(A)
(11)200
0
2,5002,500(A)
0
SE-Interest expense
(9)450 450(A)
0
c. Trial balance
Evergreen Retail Company
Trial Balance
December 31, 20x1
DebitCredit
Cash $ 350
Accounts receivable1,600
Inventory 700
Equipment8,000
Accounts payable$ 1,800
Bank loan4,500
Dividend declared1,500
Sales 25,500
Cost of goods sold16,900
Wages expense2,300
Interest expense 450
$31,800$31,800
- Adjusted trial balance
Evergreen Retail Company
Adjusted Trial Balance
December 31, 20x1
DebitCredit
Cash $ 350
Accounts receivable1,600
Inventory 700
Equipment8,000
Accumulated amortization$ 1,420
Accounts payable 1,800
Wages payable200
Bank loan4,500
Dividend declared1,500
Sales 25,500
Cost of goods sold16,900
Wages expense2,500
Amortization expense1,420
Interest expense 450
$33,420$33,420
e. Closing entries
A.SE-Sales25,500
SE-Cost of goods sold16,900
SE-Wages expense2,500
SE-Amortization expense1,420
SE-Interest expense450
SE-Income summary4,230
B.SE-Income summary4,230
SE-Retained earnings4,230
C.SE-Retained earnings1,500
SE-Dividends declared1,500
3.26 Classic Ltd. : Journal entries
1.A-Cash30,000
SE-Common shares30,000
2. A-Prepaid insurance600
A-Cash600
3.A-Inventory31,350
L-Accounts payable31,350
4.A-Accounts receivable35,000
A-Cash30,000
SE-Sales65,000
5.A-Cash32,000
A-Accounts receivable32,000
6.SE-Cost of goods sold35,800
A-Inventory35,800
7.L-Accounts payable30,500
A-Cash30,500
8.A-Equipment 11,000
A-Cash11,000
9.SE-Dividends declared1,300
L-Dividend payable1,300
10.L-Dividend payable1,250
A-Cash1,250
d. Adjusting entries
11.SE-Insurance expense300
A-Prepaid insurance300
12.SE-Amortization expense3,300
XA-Accumulated amort.3,300
b. Classic Ltd.: T-Accounts
A-CashA-Accounts receivable
(1)30,000600(2)(4)35,00032,000(5)
(4)30,000 30,500(7)
(5)32,000 11,000(8)3,000
1,250(10)
48,650
A-InventoryA-Prepaid insurance
(3)31,35035,800(6)(2)600
4,450600300(11)
300
A-EquipmentXA-Accum. amort. – equip.
(8)11,0003,300(12)
11,0003,300
L-Accounts payable L-Dividend payable
(7)30,50031,350(3)(10)1,2501,300(9)
85050
SE-Common sharesSE–Retained earnings
30,000(1)(C)1,30025,600(B)
30,00024,300
SE-Income summarySE–Dividends declared
(B)25,60025,600(A)(9)1,300
01,3001,300(C)
0
SE-Sales SE-Cost of goods sold 65,000 (4) (6) 35,800
(A)65,00065,00035,80035,800(A)
00
SE-Insurance expense SE–Amortization expense
(11)300(12)3,300
300300(A)3,3003,300(A)
00
c. Trial balance
Classic Ltd.
Trial Balance
December 31, 20--
DebitCredit
Cash $48,650
Accounts receivable3,000
Inventory $4,450
Prepaid insurance600
Equipment11,000
Accounts payable 850
Dividend payable50
Common shares30,000
Dividend declared1,300
Sales 65,000
Cost of goods sold 35,800
$100,350$100,350
- Adjusted trial balance
Classic Ltd.
Adjusted Trial Balance
December 31, 20--
DebitCredit
Cash $48,650
Accounts receivable3,000
Inventory $4,450
Prepaid insurance300
Equipment11,000
Accumulated amortization3,300
Accounts payable 850
Dividend payable50
Common shares30,000
Dividend declared1,300
Sales 65,000
Cost of goods sold35,800
Insurance expense300
Amortization expense 3,300
$103,650$103,650
e. Closing entries
A.SE-Sales65,000
SE-Cost of goods sold35,800
SE-Insurance expense300
SE-Amortization expense3,300
SE-Income summary25,600
B.SE-Income summary25,600
SE-Retained earnings25,600
C.SE-Retained earnings1,300
SE-Dividends declared1,300
3.27 Adjusting entries
1.SE-Sales2,000
L-Deposits from customers2,000
2.SE-Sales persons’ commission500
A-Advances to sales persons500
3.SE-Office salaries600
L-Salaries payable600
4.SE-Rent expense1,500
A-Prepaid rent1,500
5.SE-Office supplies used1,500
A-Office supplies1,500
6.SE-Amortization expense1,000
XA-Accumulated amortization1,000
7.SE-Income tax expense*1,975
L-Income tax payable1,975
*Sales198,000
Cost of goods sold(120,000)
Sales persons’ commissions(30,500)
Office salaries(25,600)
Miscellaneous expense(10,000)
Rent expense(1,500)
Office supplies used(1,500)
Amortization expense(1,000)
$7,900
$7,900 x 25% = $1,975
3.28
Downunder Company
Income Statement
For the year ending December 31, 2001
Sales / $71,500Cost of goods sold / 40,000
Gross profit / 31,500
Wages expense / 3,500
Operating income / 28,000
Interest income / 515
Net income / $28,515
Downunder Company
Balance Sheet
December 31, 2001
Assets / Liabilities and Shareholders’ EquityCash / $ 845 / Wages payable / $ 1,215
Accounts receivable / 24,200 / Bank loan / 15,000
Inventory / 8,900 / Shareholders’ equity / 69,230
Equipment / 51,500
Total Assets / $85,445 / Total liabilities and
Shareholders’ equity / $85,445
3.29
- Increase assets (inventory) and decrease assets (cash)
b. Increase assets (framing supplies) and increase liabilities (accounts payable)
c. Decrease assets (cash) and decrease liabilities (bank loan)
d. Increase assets (cash), increase shareholders’ equity (revenue)
Decrease shareholders’ equity (cost of goods sold), decrease assets (inventory)
e. Decrease assets (inventory) and decrease shareholders’ equity (loss due to breakage)
f. Increase assets (cash) and decrease assets (accounts receivable)
g. Decrease assets (cash) and decrease liabilities (accounts payable)
Management Perspective Problems
3.30 There are incentives for companies to speed up the accounting closing
process. Management and external users of financial statements need up-to-date information in order to make decisions. Such information cannot be useful if it is not provided on a timely basis. Thus, pressure from financial statement users is one incentive for companies to speed up the process. Also, sophisticated computer systems have decreased the costs of closing the books, making it easier for companies to speed up this process.
3.31Plausible arguments from management against adjusting financial statements based on the suggestions of auditors include the following:
- The suggested adjustments do not have a material impact on the financial statements
- If the suggestions increase assets or profits, management might argue that the financial statements are conservative i.e. their estimates risk understatement of assets and profits rather than overstatement
- There is no sound justification for the adjustment - it is based on the assumption that errors found in the sample tested can be assumed to exist in the population to the same degree
- Management might argue that their policies have not changed, and no similar adjustments had been suggested in the prior year
3.32a. The matching concept is important in this case because, in order to arrive at a fair representation of the profits for the year, all expenses that are associated with the reported revenue should be matched to this revenue. If such matching is not done, profits depend upon the timing of cash receipts and payments, rather than the actual costs incurred to generate the revenues.