Accounting Unit 2

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E3-19

E3−19

	Requirements

	1.	Show whether each transaction would be handled as a revenue or an expense using both the cash basis and accrual basis accounting systems by completing the following table. (Expenses should be shown in parentheses.) Also, indicate the dollar amount of the revenue or expense. The May 1 transaction has been completed as an example.





	Amount of Revenue (Expense) for May
	Date		Cash Basis Amount of Revenue (Expense)	Accrual Basis Amount of Revenue (Expense)


	May 1		($1,800)	$ 0


	2.	After completing the table, calculate the amount of net income or net loss for Fantastic Catering under the accrual basis and cash basis accounting systems for

		for May.

	3.	Considering your results from Requirement 2, which method gives the best picture of the true earnings of Fantastic Catering? Why?


Solution:

	Requirement 1
	Amount of Revenue (Expense) for May
	Date		Cash Basis Amount of Revenue (Expense)	Accrual Basis Amount of Revenue (Expense)

	May 1		$(1,800)	$ 0
	5
	9
	14
	23
	31
	31
	31








	Requirement 2


















	Requirement 3

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E3-27

E3-27

	Indicate if an adjusting entry is needed for each item on October 31 for the month of October. Assuming the adjusting entry is not made, indicate which specific category or categories of accounts on the financial statements are misstated and if they are overstated or understated. Use the following table as a guide. Item (a) is completed as an example:





			Specific Category of Accounts on the Balance Sheet		Specific Category of Accounts on the Income Statement
		Adjusting Entry Needed?		Over / Understated		Over / Understated
	Item
	(a)	Yes	Liability	Over	Revenue	Under
			Equity	Under

Solution:

	Item	Adjusting Entry Needed?	Specific Category of Accounts on the Balance Sheet	Over / Understated	Specific Category of Accounts on the Income Statement	Over / Understated


	(a)

	(b)

	(c)

	(d)

	(e)

	(f)

	(g)

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P3-35A

P3-35A

	Requirements

	1.	Journalize the adjusting entries on December 31.

	2.	Using the unadjusted trial balance, open the T-accounts with the unadjusted balances. Post the adjusting entries to the T-accounts.


	3.	Prepare the adjusted trial balance.

	4.	How will Aurora Air Purification System use the adjusted trial balance?


Solution:

	Requirement 1

		Date	Accounts and Explanation		Debit	Credit






























































	Requirement 2

		Cash		Accounts Payable




		Service Revenue		Accounts Receivable






		Salaries Payable		Salaries Expense




		Prepaid Rent		Unearned Revenue




		Rent Expense		Office Supplies




		Aurora, Capital		Aurora, Withdrawals




		Depreciation Expense—Equipment		Accumulated Depreciation—Equipment




		Equipment		Advertising Expense




		Supplies Expense




	Requirement 3

	AURORA AIR PURIFICATION SYSTEM
	Adjusted Trial Balance
	December 31, 2016
					Balance
		Account Title			Debit	Credit





















	Requirement 4

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P3-37A

P3-37A

	Requirements

	1.	Analyze the worksheet to determine the adjusting entries that account for the differences between the unadjusted trial balance and the adjusted trial balance. Complete the worksheet. Use letters a through e to label the five adjustments.


	2.	Journalize the adjusting entries.

























Solution:

	Requirement 1

	GANVILLE THEATER PRODUCTION COMPANY
	Worksheet
	December 31, 2016

				Unadjusted Trial Balance		Adjustments			Adjusted Trial Balance
	Account Names			Debit	Credit		Debit	Credit	Debit	Credit
	Cash			$ 4,000					$ 4,000
	Accounts Receivable			6,000					7,000
	Of‚fice Supplies			1,300					400
	Prepaid Insurance			3,600					3,150
	Equipment			28,000					28,000
	Accumulated Depreciation—Equipment				$ 8,800					$ 12,600
	Accounts Payable				5,000					5,000
	Salaries Payable									100
	Common Stock				13,500					13,500
	Dividends			31,000					31,000
	Service Revenue				76,000					77,000
	Depreciation Expense—Equipment								3,800
	Supplies Expense								900
	Utilities Expense			5,400					5,400
	Salaries Expense			24,000					24,100
	Insurance Expense								450
	Total			$ 103,300	$ 103,300				$ 108,200	$ 108,200






	Requirement 2

	Date		Accounts and Explanation					Debit	Credit

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P3A-38A

P3A-38A

	Requirements

	1.	Journalize the transactions assuming that Night Flyer debits an asset account for prepaid expenses and credits a liability account for unearned revenues.


	2.	Journalize the related adjusting entries at December 31, 2016.

	3.	Post the journal and adjusting entries to the T-accounts, and show their balances at December 31, 2016. (Ignore the Cash account.)


	4.	Repeat Requirements 1–3. This time debit an expense account for prepaid expenses and credit a revenue account for unearned revenues.


	5.	Compare the account balances in Requirements 3 and 4. They should be equal.

Solution:

		Requirement 1

		Date	Accounts and Explanation			Debit	Credit





















		Requirement 2

		Date	Accounts and Explanation			Debit	Credit

















































		Requirement 3

			Prepaid Rent	Rent Expense




			Prepaid Insurance	Insurance Expense




			Unearned Revenue	Service Revenue




		Requirement 4

		Date	Accounts and Explanation			Debit	Credit




































































			Prepaid Rent	Rent Expense




			Prepaid Insurance		Insurance Expense




			Unearned Revenue	Service Revenue




		Requirement 5

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Decision Case 3-1

Decision Case 3-1

	Help Swift Classified Ads compute its net income for the year. Advise Stasney whether to continue operating Swift Classified Ads.


Solution:

	Swift Classified Ads
	Income Statement
	Year Ended December 31

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Ethical Issue 3-1

Ethical Issue 3-1

	Requirements

	1.	Compute the overall effects of these transactions on the company’s reported net income for 2016.


	2.	Why is Steinbach taking this action? Is his action ethical? Give your reason, identifying the parties helped and the parties harmed by Steinbach’s action.



	3.	As a personal friend, what advice would you give the accountant?

Solution:

	Requirement 1












	Requirement 2


















	Requirement 3

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E4-17

E4-17

	Requirements

	1.	Prepare the classified balance sheet of Penny O'Hara Dance Studio Company at August 31, 2016. Use the report form. You must compute the ending balance of O'hara, Capital.

	2.	Compute O’Hara’s current ratio at August 31, 2016. One year ago, the current ratio was 1.57. Indicate whether O’Hara’s ability to pay current debts has improved, deteriorated, or remained the same.



Solution:

	Requirement 1

	PENNY O'HARA DANCE STUDIO COMPANY
	Balance Sheet
	August 31, 2016
	Assets













	Liabilities













	Owner's Equity










	Requirement 2

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E4-18

Requirements

1. Complete Voice Link’s worksheet for the month ended November 30, 2016.

2. How much was net income for November?

Solution:

Requirement 1

VOICE LINK

Worksheet

November 30, 2016

Account Names

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Requirement 2

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&L&"Arial,Bold"Chapter 4: Completing the Accounting Cycle&R&"Arial,Bold"Page &P of &N

E4-19

E4-19

	Requirements

	1.	Complete the income statement for the month ended November 30, 2016.

	2.	Complete the statement of owner's equity for the month ended November 30, 2016. Assume there were no contributions made by the owner during the month.


	3.	Complete the unclassified balance sheet as of November 30, 2016. Use the account form.


Solution:

	Requirement 1

	VOICE LINK
	Income Statement
	Month Ended November 30, 2016














	Requirement 2

	VOICE LINK
	Statement of Owner's Equity
	Month Ended November 30, 2016










	Requirement 3

	VOICE LINK
	Balance Sheet
	November 30, 2016
	Assets		Liabilities





			Owner's Equity

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P4-32A

Requirements

Prepare the journal entries and post to the T-accounts.

Prepare an unadjusted trial balance.

Complete the worksheet for the month ended December 31, 2016. (optional)

Prepare the adjusting entries and post to the T-accounts.

Prepare an adjusted trial balance.

Prepare the income statement, the statement of owner's equity, and the unclassified balance sheet in account form.

Prepare the closing entries and post to the T-accounts.

Prepare a post-closing trial balance.

Solution:

Requirement 1

Date

Accounts and Explanation

Debit

Credit

Date

Accounts and Explanation

Debit

Credit

Requirement 1, 4, and 7

Cash

Wonder, Withdrawals

Income Summary

Accounts Receivable

Service Revenue

Office Supplies

Salaries Expense

Prepaid Insurance

Rent Expense

Equipment

Utilities Expense

Accumulated Depreciation—Equipment

Advertising Expense

Land

Supplies Expense

Accounts Payable

Insurance Expense

Utilities Payable

Interest Expense

Interest Payable

Depreciation Expense—Equipment

Unearned Revenue

Notes Payable

Wonder, Capital

Requirement 2

WONDER’S QUALITY AUTOMOTIVE

Unadjusted Trial Balance

December 31, 2016

Balance

Account Title

Debit

Credit

Requirement 4

Date

Accounts and Explanation

Debit

Credit

Requirement 5

WONDER’S QUALITY AUTOMOTIVE

Adjusted Trial Balance

December 31, 2016

Balance

Account Title

Debit

Credit

Requirement 3

WONDER’S QUALITY AUTOMOTIVE

Worksheet

December 31, 2016

Account Names

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance

Income Statement

Balance Sheet

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

Requirement 6

WONDER’S QUALITY AUTOMOTIVE

Income Statement

Month Ended December 31, 2016

WONDER’S QUALITY AUTOMOTIVE

Statement of Owner’s Equity

Month Ended December 31, 2016

WONDER’S QUALITY AUTOMOTIVE

Balance Sheet

December 31, 2016

Assets

Liabilities

Owner's Equity

Requirement 7

Date

Accounts and Explanation

Debit

Credit

Requirement 8

WONDER’S QUALITY AUTOMOTIVE

Post-Closing Trial Balance

December 31, 2016

Balance

Account Title

Debit

Credit

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&L&"Arial,Bold"Chapter 4: Completing the Accounting Cycle&R&"Arial,Bold"Page &P of &N

Fraud Case 4-1

Fraud Case 4-1

	Requirements

	1.	How did the fraudulent accounting just described affect the current ratio?

	2.	Can you think of any reasons why someone in the company would want to take this kind of action?


Solution:

	Requirement 1









	Requirement 2

&L&"Arial,Bold"&12HORNGREN'S ACCOUNTING - Eleventh Edition

&L&"Arial,Bold"Chapter 4: Completing the Accounting Cycle&R&"Arial,Bold"Page &P of &N