Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1

Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1 Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1 Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1 Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1 Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1 Fundamental accounting principles 22nd edition by wild shaw and chiappetta 1

22 Fundamental Accounting Principles ND EDITION John J Wild | Ken W Shaw | Barbara Chiappetta Fundamental Accounting Principles 22 nd edition John J Wild University of Wisconsin at Madison Ken W Shaw University of Missouri at Columbia Barbara Chiappetta Nassau Community College To my students and family, especially Kimberly, Jonathan, Stephanie and Trevor To my wife Linda and children Erin, Emily and Jacob To my mother, husband Bob and sons Michael and David FUNDAMENTAL ACCOUNTING PRINCIPLES, TWENTY-SECOND EDITION Published by McGraw-Hill Education, Penn Plaza, New York, NY 10121 Copyright © 2015 by McGraw-Hill Education All rights reserved Printed in the United States of America Previous editions © 2013, 2011, and 2009 No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning Some ancillaries, including electronic and print components, may not be available to customers outside the United States This book is printed on acid-free paper DOW/DOW ISBN 978-0-07-786227-5 (combined edition) MHID 0-07-786227-9 (combined edition) ISBN 978-0-07-763289-2 (principles, chapters 1-17) MHID 0-07-763289-3 (principles, chapters 1-17) Senior Vice President, Products & Markets: Kurt L Strand Vice President, General Manager, Products & Markets: Marty Lange Vice President, Content Design & Delivery: Kimberly Meriwether David Managing Director: Tim Vertovec Marketing Director: Brad Parkins Brand Manager: Steve Schuetz Director, Product Development: Rose Koos Director of Digital Content: Patricia Plumb Lead Product Developer: Ann Torbert Product Developer: Lindsey Schauer Marketing Manager: Michelle Nolte Digital Product Analyst: Xin Lin Director, Content Design & Delivery: Linda Avenarius Program Manager: Daryl Horrocks Content Project Managers: Lori Koetters, Brian Nacik Buyer: Carol A Bielski Design: Debra Kubiak Content Licensing Specialists: DeAnna Dausener, Keri Johnson Cover Image: Paul McGee/Getty Images Compositor: Aptara®, Inc Printer: R.R Donnelley All credits appearing on page or at the end of the book are considered to be an extension of the copyright page Library of Congress Cataloging-in-Publication Data Wild, John J Fundamental accounting principles / John J Wild, Ken W Shaw, Barbara Chiappetta.—22nd edition pages cm ISBN 978-0-07-786227-5 (alk paper)—ISBN 0-07-786227-9 (alk paper)—ISBN 978-0-07-763289-2 (alk paper : chapters 1–17)—ISBN 0-07-763289-3 (alk paper : chapters 1–17) Accounting I Shaw, Ken W II Chiappetta, Barbara III Title HF5636.W675 2015 657—dc23 2014026223 The Internet addresses listed in the text were accurate at the time of publication The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites www.mhhe.com Adapting to the Needs of Today’s Students Fundamental Accounting Principles, 22e Enhancements in technology have changed how we live and learn Working with learning resources across devices, whether smartphones, tablets, or laptop computers, empowers students to drive their own learning by putting increasingly intelligent technology into their hands Whether the goal is to become an accountant, a businessperson, or simply an informed consumer of accounting information, Fundamental Accounting Principles (FAP) has helped generations of students succeed Its leading-edge accounting content, paired with state-of-the-art technology, supports student learning and elevates understanding of key accounting principles FAP excels at engaging students with content that will help them see the relevance of accounting Its chapter-opening vignettes showcase dynamic, successful entrepreneurial individuals and companies and highlight the usefulness of accounting to business owners This edition’s featured companies—Apple, Google, and Samsung—capture student interest with their products, and their annual reports serve as a pathway for learning financial statements New in this edition, Need-to-Know illustrations in each chapter demonstrate how to apply key accounting procedures They are supported by guided video presentations FAP also delivers innovative technology to help student performance Connect Plus Accounting provides students with a media-rich eBook version of the textbook and offers instant grading and feedback for assignments that are completed online Our system for completing exercise and problem material takes accounting content to the next level, delivering assessment material in a more intuitive, less restrictive format that adapts to the needs of today’s students This technology features: • a general journal interface that looks and feels more like that found in practice • an auto-calculation feature that allows students to focus on concepts rather than rote tasks • a smart (auto-fill) drop-down design The end result is content that better prepares students for the real world Connect Plus Accounting also includes digitally based, interactive, adaptive learning tools that provide an opportunity to engage students more effectively by offering varied instructional methods and more personalized learning paths that build on different learning styles, interests, and abilities The revolutionary technology of the LearnSmart Advantage Series—consisting of LearnSmart™, SmartBook™, and SmartBook Achieve™—is available only from McGraw-Hill Education All three products are based on an intelligent learning system that uses a series of adaptive questions to pinpoint each student’s knowledge gaps and then provides an optimal learning path Students spend less time in areas they already know and more time in areas they don’t The result: Students study more efficiently, learn faster, and retain more knowledge Valuable reports provide insights into how students are progressing through textbook content and information useful for shaping in-class time or assessment Interactive Presentations teach each chapter’s core learning objectives in a rich, multimedia format, bringing the content to life Your students will come to class prepared when you assign Interactive Presentations Students can also review the Interactive Presentations as they study Further, Guided Examples provide students with narrated, animated, step-by-step walk-throughs of algorithmic versions of assigned exercises Students appreciate the Guided Examples, which help them learn accounting and complete assignments outside of class A General Ledger (GL) application, new to 22e, offers students the ability to see how transactions post from the general journal all the way through the financial statements It uses the intuitive, less restrictive format as that used for other homework, and it adds critical thinking components to each GL question, to ensure understanding of the entire process The first and only analytics tool of its kind, Connect Insight™ is a series of visual data displays—each framed by an intuitive question—to provide at-a-glance information about how your class is doing Connect Insight provides a quick analysis on five key dimensions, available at a moment’s notice from a tablet device: How are my students doing? How is my section doing? How is this student doing? How are my assignments going? and How is this assignment going? “I believe that FAP is the best intro accounting text on the market—clear, concise, complete Additionally, it is clear that the authors stay in touch with the ‘times’.” — JAMES L LOCK, Northern Virginia Community College iii About the Authors JOHN J WILD is a distinguished professor of accounting at the University of Wisconsin at Madison He previously held appointments at Michigan State University and the University of Manchester in England He received his BBA, MS, and PhD from the University of Wisconsin Professor Wild teaches accounting courses at both the undergraduate and graduate levels He has received numerous teaching honors, including the Mabel W Chipman Excellence-inTeaching Award, the departmental Excellence-in-Teaching Award, and the Teaching Excellence Award from the 2003 and 2005 business graduates at the University of Wisconsin He also received the Beta Alpha Psi and Roland F Salmonson Excellence-in-Teaching Award from Michigan State University Professor Wild has received several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation KEN W SHAW is an associate professor of accounting and the Deloitte Professor of Accounting at the University of Missouri He previously was on the faculty at the University of Maryland at College Park He has also taught in international programs at the University of Bergamo (Italy) and the University of Alicante (Spain) He received an accounting degree from Bradley University and an MBA and PhD from the University of Wisconsin He is a Certified Public Accountant with work experience in public accounting Professor Shaw teaches accounting at the undergraduate and graduate levels He has received numerous School of Accountancy, College of Business and university-level teaching awards He was voted the “Most Influential Professor” by three School of Accountancy graduating classes, and is a two-time recipient of the O’Brien Excellence in Teaching Award He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners BARBARA CHIAPPETTA received her BBA in Accountancy and MS in Education from Hofstra University and is a tenured full professor at Nassau Community College For the past two decades, she has been an active executive board member of the Teachers of Accounting at Two-Year Colleges (TACTYC), serving 10 years as vice president and as president from 1993 through 1999 As an active member of the American Accounting Association, she has served on the Northeast Regional Steering Committee, chaired the Curriculum Revision Committee of the Two-Year Section, and participated in numerous national committees Professor Chiappetta has been inducted into the American Accounting Association Hall of Fame for the iv Professor Wild is an active member of the American Accounting Association and its sections He has served on several committees of these organizations, including the Outstanding Accounting Educator Award, Wildman Award, National Program Advisory, Publications, and Research Committees Professor Wild is author of Financial Accounting, Managerial Accounting, and College Accounting, each published by McGraw-Hill Education His research articles on accounting and analysis appear in The Accounting Review; Journal of Accounting Research; Journal of Accounting and Economics; Contemporary Accounting Research; Journal of Accounting, Auditing and Finance; Journal of Accounting and Public Policy; and other journals He is past associate editor of Contemporary Accounting Research and has served on several editorial boards including The Accounting Review In his leisure time, Professor Wild enjoys hiking, sports, travel, people, and spending time with family and friends Professor Shaw is an active member of the American Accounting Association and its sections He has served on many committees of these organizations and presented his research papers at national and regional meetings Professor Shaw’s research appears in the Journal of Accounting Research; The Accounting Review; Contemporary Accounting Research; Journal of Financial and Quantitative Analysis; Journal of the American Taxation Association; Strategic Management Journal; Journal of Accounting, Auditing, and Finance; Journal of Financial Research; and other journals He has served on the editorial boards of Issues in Accounting Education; Journal of Business Research; and Research in Accounting Regulation Professor Shaw is co-author of Financial and Managerial Accounting, Managerial Accounting, and College Accounting, all published by McGraw-Hill Education In his leisure time, Professor Shaw enjoys tennis, cycling, music, and coaching his children’s sports teams Northeast Region She had also received the Nassau Community College dean of instruction’s Faculty Distinguished Achievement Award Professor Chiappetta was honored with the State University of New York Chancellor’s Award for Teaching Excellence in 1997 As a confirmed believer in the benefits of the active learning pedagogy, Professor Chiappetta has authored Student Learning Tools, an active learning workbook for a first-year accounting course, published by McGraw-Hill Education In her leisure time, Professor Chiappetta enjoys tennis and participates on a U.S.T.A team She also enjoys the challenge of bridge Her husband, Robert, is an entrepreneur in the leisure sport industry She has two sons—Michael, a lawyer, specializing in intellectual property law in New York, and David, a composer, pursuing a career in music for film in Los Angeles Dear Colleagues and Friends, As we roll out the new edition of Fundamental Accounting Principles, we thank each of you who provided suggestions to improve the textbook and its teaching resources This new edition reflects the advice and wisdom of many dedicated reviewers, symposium and workshop participants, students, and instructors Throughout the revision process, we steered this textbook and its teaching tools in the manner you directed As you’ll find, the new edition offers a rich set of features—especially digital features—to improve student learning and assist instructor teaching and grading We believe you and your students will like what you find in this new edition Many talented educators and professionals have worked hard to create the materials for this product, and for their efforts, we’re grateful We extend a special thank-you to our contributing and technology supplement authors, who have worked so diligently to support this product: Contributing Author: Kathleen O’Donnell, Onondaga Community College Accuracy Checkers: Dave Krug, Johnson County Community College; Mark McCarthy, East Carolina University; Helen Roybark, Radford University; Barbara Schnathorst; and Beth Woods LearnSmart Author: April Mohr, Jefferson Community and Technical College, SW Interactive Presentations: Jeannie Folk, College of DuPage PowerPoint Presentations: Beth Kane, Northwestern University Instructor Resource Manual: Patricia Walczak, Lansing Community College Test Bank Contributors: Anna Boulware, St Charles Community College, and Brenda J McVey, University of Mississippi Digital Contributor, Connect Content, General Ledger Problems, and Exercise PowerPoints: Kathleen O’Donnell, Onondaga Community College In addition to the invaluable help from the colleagues listed above, we thank the entire FAP 22e team at McGraw-Hill Education: Tim Vertovec, Steve Schuetz, Michelle Nolte, Lindsey Schauer, Lori Koetters, Ann Torbert, Brad Parkins, Patricia Plumb, Xin Lin, Kevin Moran, Debra Kubiak, Carol Bielski, Keri Johnson, DeAnna Dausener, Sarah Evertson, Ben Pearsall, Brian Nacik, Ron Nelms, and Daryl Horrocks We could not have published this new edition without your efforts John J Wild Ken W Shaw Barbara Chiappetta v Easy to Use Proven Effective McGraw-Hill CONNECT PLUS ACCOUNTING McGraw-Hill Connect Plus Accounting is a digital teaching and learning environment that gives students the means to better connect with their coursework, with their instructors, and with the important concepts they will need to know for success now and in the future With Connect Plus Accounting, instructors can easily deliver assignments, quizzes, and tests online Students can review course material and practice important skills McGraw-Hill Connect Plus Accounting provides all of the following learning and teaching resources: • • • • SmartBook, powered by LearnSmart SmartBook Achieve Auto-graded online homework General ledger problems • • • Auto-graded Excel simulations Interactive Presentations Guided Examples In short, Connect Plus Accounting offers students powerful tools and features that optimize their time and energy, enabling them to focus on learning SmartBook, Powered by LearnSmart LearnSmartTM is the market-leading adaptive study resource that is proven to strengthen memory recall, increase class retention, and boost grades LearnSmart allows students to study more efficiently because they are made aware of what they know and don’t know SmartBookTM, which is powered by LearnSmart, is the first and only adaptive reading experience designed to change the way students read and learn It creates a personalized reading experience by highlighting the most impactful concepts a student needs to learn at that moment in time As a student engages with SmartBook, the reading experience continuously adapts by highlighting content based on what the student knows and doesn’t know This ensures that the focus is on the content he or she needs to learn, while simultaneously promoting long-term retention of material Use SmartBook’s real-time reports to quickly identify the concepts that require more attention from individual students—or the entire class The end result? Students are more engaged with course content, can better prioritize their time, and come to class ready to participate SmartBook Achieve SmartBook Achieve™—a revolutionary study and learning experience—pinpoints an individual student’s knowledge gaps and provides targeted, interactive learning help at the moment of need The rich, dynamic learning resources delivered in that moment of need help students learn the material, retain more knowledge, and earn better grades The program’s continuously adaptive learning path ensures that every minute a student spends with Achieve is returned as the most value-added minute possible vi Tailored to You Online Assignments Connect Plus Accounting helps students learn more efficiently by providing feedback and practice material when they need it, where they need it Connect Plus grades homework automatically and gives immediate feedback on any questions students may have missed Our assignable, gradable end-of-chapter content includes a general 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www.coursesmart.com McGraw-Hill Customer Experience Group Contact Information At McGraw-Hill, we understand that getting the most from new technology can be challenging That’s why our services don’t stop after you purchase our products You can contact our Product Specialists 24 hours a day to get product training online Or you can search the knowledge bank of Frequently Asked Questions on our support website For customer support, call 800-331-5094 or visit www.mhhe.com/support ix Chapter 157 Completing the Accounting Cycle zero balances FastForward’s post-closing trial balance is shown in Exhibit 4.6 The post-closing trial balance usually is the last step in the accounting process EXHIBIT 4.6 FASTFORWARD Post-Closing Trial Balance December 31, 2015 Post-Closing Trial Balance Debit Cash Accounts receivable Supplies Prepaid insurance Equipment Accumulated depreciation—Equipment Accounts payable Salaries payable Unearned consulting revenue C Taylor, Capital Totals Credit $ 4,275 1,800 8,670 2,300 26,000 $ $43,045 300 6,200 210 2,750 33,585 $43,045 Point: Only balance sheet (permanent) accounts are on a post-closing trial balance Decision Maker Colleague A friend shows you the post-closing trial balance she is working on as part of a class assignment You review the statement quickly and see a line item for rent expense You immediately tell your friend, “I see that you have an error.” How did you conclude so quickly that an error exists? ■ [Answers follow the chapter’s Summary.] ACCOUNTING CYCLE The term accounting cycle refers to the steps in preparing financial statements It is called a cycle because the steps are repeated each reporting period Exhibit 4.7 shows the 10 steps in the cycle, beginning with analyzing transactions and ending with a post-closing trial balance or reversing entries Steps through usually occur regularly as a company enters into transactions Analyze transactions 10 Reverse Accounting Cycle (Optional) Prepare postclosing trial balance Explanations   1. Analyze transactions   2. Journalize   3. Post   4. Prepare unadjusted trial balance   5. Adjust   6. Prepare adjusted trial balance   7. Prepare statements   8. Close   9. Prepare post-closing trial balance 10. Reverse (optional) Post Journalize Close Prepare statements Prepare unadjusted trial balance Adjust Prepare adjusted trial balance Analyze transactions to prepare for journalizing Record accounts, including debits and credits, in a journal Transfer debits and credits from the journal to the ledger Summarize unadjusted ledger accounts and amounts Record adjustments to bring account balances up to date; journalize and post adjustments Summarize adjusted ledger accounts and amounts Use adjusted trial balance to prepare financial statements Journalize and post entries to close temporary accounts Test clerical accuracy of the closing procedures Reverse certain adjustments in the next period—optional step; see Appendix 4A * Steps 4, 6, and can be done on a work sheet A work sheet is useful in planning adjustments, but adjustments (step 5) must always be journalized and posted Steps 3, 4, 6, and are automatic with a computerized system C2 Identify steps in the accounting cycle EXHIBIT 4.7 Steps in the Accounting Cycle* 158 Chapter Completing the Accounting Cycle Steps through are done at the end of a period Reversing entries in step 10 are optional and are explained in Appendix 4A NEED-TO-KNOW 4-2 Use the adjusted trial balance solution for Magic Company from Need-To-Know 4-1 to prepare its closing entries Closing Entries Dec 31 P2 Dec 31 Dec 31 Do More: QS 4-6, E 4-8, E 4-6, E 4-7, E 4-9 Dec 31 QC2 Fees Earned Income Summary To close the revenue account Income Summary Salaries Expense Office Supplies Expense To close the expense accounts Income Summary Magic, Capital To close Income Summary Magic, Capital Magic, Withdrawals To close the Withdrawals account 79,000 79,000 64,000 56,000 8,000 15,000 15,000 20,000 20,000 CLASSIFIED BALANCE SHEET C3 Explain and prepare a classified balance sheet Our discussion to this point has been limited to unclassified financial statements This section describes a classified balance sheet The next chapter describes a classified income statement An unclassified balance sheet is one whose items are broadly grouped into assets, liabilities, and equity One example is FastForward’s balance sheet in Exhibit 4.2 A classified balance sheet organizes assets and liabilities into important subgroups that provide more information to decision makers Classification Structure A classified balance sheet has no required layout, but it usually contains the categories in Exhibit 4.8 One of the more important classifications is the separation between current and noncurrent items for both assets and liabilities Current items are those expected to come due (either collected or owed) within one year or the company’s operating cycle, whichever is longer The operating cycle is the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services “Operating” refers to company operations and “cycle” refers to the circular flow of cash used for company inputs and then cash received from its outputs The length of a company’s operating cycle depends on its activities For a service company, the operating cycle is the time span between (1) paying employees who perform the services and (2) receiving cash from customers For a merchandiser selling products, the operating cycle is the time span between (1) paying suppliers for merchandise and (2) receiving cash from customers EXHIBIT 4.8 Typical Categories in a Classified Balance Sheet Assets Liabilities and Equity Current assets Noncurrent assets Long-term investments Plant assets Intangible assets Current liabilities Noncurrent liabilities Equity Chapter 159 Completing the Accounting Cycle Most operating cycles are less than one year This means most companies use a one-year period in deciding which assets and liabilities are current A few companies have an operating cycle longer than one year For instance, producers of certain beverages (wine) and products (ginseng) that require aging for several years have operating cycles longer than one year A balance sheet lists current assets before noncurrent assets and current liabilities before noncurrent liabilities This consistency in presentation allows users to quickly identify current assets that are most easily converted to cash and current liabilities that are shortly coming due Items in current assets and current liabilities are listed in the order of how quickly they will be converted to, or paid in, cash Classification Categories This section describes the most common categories in a classified balance sheet The balance sheet for Snowboarding Components in Exhibit 4.9 shows the typical categories Its assets are classified as either current or noncurrent Its noncurrent assets include three main categories: long-term investments, plant assets, and intangible assets Its liabilities are EXHIBIT 4.9 SNOWBOARDING COMPONENTS Balance Sheet January 31, 2015 Assets Current assets Cash Short-term investments Accounts receivable, net Merchandise inventory Prepaid expenses Total current assets Long-term investments Notes receivable Investments in stocks and bonds Land held for future expansion Total long-term investments Plant assets Equipment and buildings Less accumulated depreciation Equipment and buildings, net Land Total plant assets Intangible assets Total assets Liabilities Current liabilities Accounts payable Wages payable Notes payable Current portion of long-term liabilities Total current liabilities Long-term liabilities (net of current portion) Total liabilities Equity T Hawk, Capital Total liabilities and equity Cameron Spencer/Getty Images Example of a Classified Balance Sheet $ 6,500 2,100 4,400 27,500 2,400 $ 42,900 1,500 18,000 48,000 67,500 203,200 53,000 150,200 73,200 223,400 10,000 $343,800 $ 15,300 3,200 3,000 7,500 $ 29,000 150,000 179,000 164,800 $343,800 160 Chapter Completing the Accounting Cycle classified as either current or long-term Not all companies use the same categories of assets and liabilities for their balance sheets K2 Sports, a manufacturer of snowboards, reported a balance sheet with only three asset classes: current assets; property, plant and equipment; and other assets Point: Current is also called short-term, and noncurrent is also called long-term Current Assets Current assets are cash and other resources that are expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer Examples are cash, short-term investments, accounts receivable, short-term notes receivable, goods for sale (called merchandise or inventory), and prepaid expenses The individual prepaid expenses of a company are usually small in amount compared to many other assets and are often combined and shown as a single item The prepaid expenses in Exhibit 4.9 likely include items such as prepaid insurance, prepaid rent, office supplies, and store supplies Prepaid expenses are usually listed last because they will not be converted to cash (instead, they are used) A second major balance sheet classification is long-term (or noncurrent) investments Notes receivable and investments in stocks and bonds are longterm assets when they are expected to be held for more than the longer of one year or the operating cycle Land held for future expansion is a long-term investment because it is not used in operations Long-Term Investments ©Stephen D Cannerelli/Syracuse Newspapers/The Image Works Point: Plant assets are also called fixed assets; property, plant and equipment; or long-lived assets Point: Furniture and fixtures are referred to as F&F, which are classified as noncurrent assets Plant Assets Plant assets are tangible assets that are both long-lived and used to produce or sell products and services Examples are equipment, machinery, buildings, and land that are used to produce or sell products and services The order listing for plant assets is usually from most liquid to least liquid such as equipment and machinery to buildings and land Intangible assets are long-term resources that benefit business operations, usually lack physical form, and have uncertain benefits Examples are patents, trademarks, copyrights, franchises, and goodwill Their value comes from the privileges or rights granted to or held by the owner K2 Sports reported intangible assets of $228 million, which is nearly 20 percent of its total assets Its intangibles included trademarks, patents, and licensing agreements Intangible Assets Point: Many financial ratios are distorted if accounts are not classified correctly Current liabilities are obligations due to be paid or settled within one year or the operating cycle, whichever is longer They are usually settled by paying out current assets such as cash Current liabilities often include accounts payable, notes payable, wages payable, taxes payable, interest payable, and unearned revenues Also, any portion of a longterm liability due to be paid within one year or the operating cycle, whichever is longer, is a current liability Unearned revenues are current liabilities when they will be settled by delivering products or services within one year or the operating cycle, whichever is longer Current liabilities are reported in the order of those to be settled first Point: Only assets and liabilities (not equity) are classified as current or noncurrent Long-Term Liabilities Long-term liabilities are obligations not due within one year or the operating cycle, whichever is longer Notes payable, mortgages payable, bonds payable, and lease obligations are common long-term liabilities If a company has both short- and long-term items in each of these categories, they are commonly separated into two accounts in the ledger Current Liabilities Equity is the owner’s claim on assets For a proprietorship, this claim is reported in the equity section with an owner’s capital account (For a partnership, the equity section reports a capital account for each partner For a corporation, the equity section is divided into two main subsections, contributed capital and retained earnings.) Equity Chapter 161 Completing the Accounting Cycle Use the adjusted trial balance solution for Magic Company from Need-To-Know 4-1 to prepare its classified balance sheet as of December 31, 2015 NEED-TO-KNOW 4-3 Classified Balance Sheet MAGIC COMPANY Balance Sheet December 31, 2015 C3 Assets Current assets Cash Accounts receivable Total current assets Plant assets Land Total plant assets Total assets 85,000 85,000 $115,000 Liabilities Current liabilities Accounts payable $ 12,000 Total current liabilities Long-term notes payable Total liabilities 12,000 33,000 45,000 $ 13,000 17,000 30,000 Equity Magic, Capital 70,000 Total liabilities and equity $115,000 GLOBAL VIEW We explained that accounting under U.S GAAP is similar, but not identical, to that under IFRS This section discusses differences in the closing process and in reporting assets and liabilities on a balance sheet Closing Process The closing process is identical under U.S GAAP and IFRS Although unique accounts can arise under either system, the closing process remains the same Reporting Assets and Liabilities The definition of an asset is similar under U.S GAAP and IFRS and involves three basic criteria: (1) the company owns or controls the right to use the item, (2) the right arises from a past transaction or event, and (3) the item can be reliably measured Both systems define the initial asset value as historical cost for nearly all assets After acquisition, one of two asset measurement systems is applied: historical cost or fair value Generally, U.S GAAP defines fair value as the amount to be received in an orderly sale IFRS defines fair value as exchange value—either replacement cost or selling price We describe these differences, and the assets to which they apply, in later chapters The definition of a liability is similar under U.S GAAP and IFRS and involves three basic criteria: (1) the item is a present obligation requiring a probable future resource outlay, (2) the obligation arises from a past transaction or event, and (3) the obligation can be reliably measured As with assets, both systems apply one of two measurement systems to liabilities: historical cost or fair value Later chapters discuss specific differences Do More: QS 4-9, E 4-12, P 4-3 QC3 162 Chapter Completing the Accounting Cycle Sustainability and Accounting TheNakedHippie, as introduced in this chapter’s opening feature, puts great emphasis on its computation of net income This is because it reinvests 100% (all) of its net income into supporting sidewalk businesses and small shops in poor countries Its recycling of profits is depicted in the graphic below from its website This is an extension of the ancient adage, “give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.” Accounting plays a key role, serving as the metric to compute the profits that are recycled The computation of net income requires reliable use of the accounting cycle and adherence to basic accounting principles for computing revenues, expenses, and profits Reprinted by permission of The Naked Hippie, www.thenakedhippie.com Decision Analysis A1 Compute the current ratio and describe what it reveals about a company’s financial condition Current Ratio An important use of financial statements is to help assess a company’s ability to pay its debts in the near future Such analysis affects decisions by suppliers when allowing a company to buy on credit It also affects decisions by creditors when lending money to a company, including loan terms such as interest rate, due date, and collateral requirements It can also affect a manager’s decisions about using cash to pay debts when they come due The current ratio is one measure of a company’s ability to pay its short-term obligations It is defined in Exhibit 4.10 as current assets divided by current liabilities EXHIBIT 4.10 Current ratio Current Ratio Current assets Current liabilities Using financial information from Limited Brands, Inc., we compute its current ratio for the recent sixyear period The results are in Exhibit 4.11 EXHIBIT 4.11 Limited Brands’ Current Ratio $ in millions 2013 2012 2011 2010 2009 2008 Current assets Current liabilities Current ratio Industry current ratio $2,205 $1,538 1.4 1.5 $2,368 $1,526 1.6 1.6 $2,592 $1,504 1.7 1.7 $3,250 $1,322 2.5 1.9 $2,867 $1,255 2.3 2.0 $2,919 $1,374 2.1 2.1 Chapter 163 Completing the Accounting Cycle Limited Brands’ current ratio averaged 1.9 for its fiscal years 2008 through 2013 The current ratio for each of these years suggests that the company’s short-term obligations can be covered with its short-term assets However, if its ratio would approach 1.0, Limited would expect to face challenges in covering liabilities If the ratio were less than 1.0, current liabilities would exceed current assets, and the company’s ability to pay short-term obligations could be in doubt Limited Brands’ liquidity, as evidenced by its current ratio, declined in 2011, 2012, and 2013, which roughly matches the industry decline Millions Ratio 2.5 $3,500 $3,000 $2,500 2.0 $2,000 $1,500 1.5 $1,000 $500 1.0 $0 2013 Limited: 2012 2011 Current Liabilities ($) 2010 2009 Current Assets ($) 2008 Current Ratio Decision Maker Analyst You are analyzing the financial condition of a company to assess its ability to meet upcoming loan payments You compute its current ratio as 1.2 You also find that a major portion of accounts receivable is due from one client who has not made any payments in the past 12 months Removing this receivable from current assets lowers the current ratio to 0.7 What you conclude? ■ [Answers follow the chapter’s Summary.] The partial work sheet of Midtown Repair Company at December 31, 2015, follows Adjusted Trial Balance Debit Cash Notes receivable (current) Prepaid insurance Prepaid rent Equipment Accumulated depreciation—Equipment Accounts payable Long-term notes payable C Trout, Capital C Trout, Withdrawals Repair services revenue Interest revenue Depreciation expense—Equipment Wages expense Rent expense Insurance expense Interest expense Totals Credit Income Statement Debit Credit NEED-TO-KNOW Balance Sheet and Statement of Owner’s Equity Debit Credit 95,600 50,000 16,000 4,000 170,000 57,000 52,000 63,000 178,500 30,000 180,800 7,500 28,500 85,000 48,000 6,000 5,700 538,800 538,800 Required Complete the work sheet by extending the adjusted trial balance totals to the appropriate financial statement columns Prepare closing entries for Midtown Repair Company Set up the Income Summary and the C Trout, Capital account in the general ledger (in balance column format) and post the closing entries to these accounts Determine the balance of the C Trout, Capital account to be reported on the December 31, 2015, balance sheet Prepare an income statement, statement of owner’s equity, and classified balance sheet (in report form) as of December 31, 2015 The balance in C Trout, Capital on December 31, 2014, was $178,500 COMPREHENSIVE 164 Chapter Completing the Accounting Cycle PLANNING THE SOLUTION Extend the adjusted trial balance account balances to the appropriate financial statement columns Prepare entries to close the revenue accounts to Income Summary, to close the expense accounts to Income Summary, to close Income Summary to the capital account, and to close the withdrawals account to the capital account Post the first and second closing entries to the Income Summary account Examine the balance of income summary and verify that it agrees with the net income shown on the work sheet Post the third and fourth closing entries to the capital account Use the work sheet’s two right-most columns and your answer in part to prepare the classified balance sheet SOLUTION Completing the work sheet Adjusted Trial Balance Debit Cash Notes receivable (current) Prepaid insurance Prepaid rent Equipment Accumulated depreciation—Equipment Accounts payable Long-term notes payable C Trout, Capital C Trout, Withdrawals Repair services revenue Interest revenue Depreciation expense—Equipment Wages expense Rent expense Insurance expense Interest expense Totals Net income Totals Credit Balance Sheet and Statement of Owner’s Equity Income Statement Debit Credit 95,600 50,000 16,000 4,000 170,000 Debit 95,600 50,000 16,000 4,000 170,000 57,000 52,000 63,000 178,500 57,000 52,000 63,000 178,500 30,000 30,000 180,800 7,500 28,500 85,000 48,000 6,000 5,700 538,800 Credit 538,800 180,800 7,500 28,500 85,000 48,000 6,000 5,700 173,200 15,100 188,300 188,300 365,600 188,300 365,600 350,500 15,100 365,600 Closing entries Dec 31 Dec 31 Dec 31 Dec 31 Repair Services Revenue Interest Revenue Income Summary To close revenue accounts Income Summary Depreciation Expense—Equipment Wages Expense Rent Expense Insurance Expense Interest Expense To close expense accounts Income Summary C Trout, Capital To close the Income Summary account C Trout, Capital C Trout, Withdrawals To close the withdrawals account 180,800 7,500 188,300 173,200 28,500 85,000 48,000 6,000 5,700 15,100 15,100 30,000 30,000 Chapter Completing the Accounting Cycle Set up the Income Summary and the capital ledger accounts and post the closing entries Income Summary Date 2015 Jan Dec 31 31 31 Explanation Account No 901 PR Debit Beginning balance Close revenue accounts Close expense accounts Close Income Summary Credit 188,300 173,200 15,100 C Trout, Capital Date 2015 Jan Dec 31 31 Explanation Balance 188,300 15,100 Account No 301 PR Debit Beginning balance Close Income Summary Close C Trout, Withdrawals Credit Balance 15,100 178,500 193,600 163,600 30,000 The final capital balance of $163,600 (from part 3) will be reported on the December 31, 2015, balance sheet The final capital balance reflects the increase due to the net income earned during the year and the decrease for the owner’s withdrawals during the year MIDTOWN REPAIR COMPANY Income Statement For Year Ended December 31, 2015 Revenues Repair services revenue Interest revenue Total revenues Expenses Depreciation expense—Equipment Wages expense Rent expense Insurance expense Interest expense Total expenses Net income $180,800 7,500 $188,300 28,500 85,000 48,000 6,000 5,700 173,200 $ 15,100 MIDTOWN REPAIR COMPANY Statement of Owner’s Equity For Year Ended December 31, 2015 C Trout, Capital, December 31, 2014 Add: Investment by owner Net income Less: Withdrawals by owner C Trout, Capital, December 31, 2015 $178,500 $ 15,100 15,100 193,600 30,000 $163,600 165 166 Chapter Completing the Accounting Cycle MIDTOWN REPAIR COMPANY Balance Sheet December 31, 2015 Assets Current assets Cash Notes receivable Prepaid insurance Prepaid rent Total current assets Plant assets Equipment Less: Accumulated depreciation—Equipment Total plant assets Total assets Liabilities Current liabilities Accounts payable Long-term liabilities Long-term notes payable Total liabilities Equity C Trout, Capital Total liabilities and equity $ 95,600 50,000 16,000 4,000 165,600 $170,000 (57,000) 113,000 $278,600 $ 52,000 63,000 115,000 163,600 $278,600 APPENDIX 4A Reversing Entries Point: As a general rule, adjusting entries that create new asset or liability accounts are likely candidates for reversing Reversing entries are optional They are recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period The purpose of reversing entries is to simplify a company’s recordkeeping Exhibit 4A.1 shows an example of FastForward’s reversing entries The top of the exhibit shows the adjusting entry FastForward recorded on December 31 for its employee’s earned but unpaid salary The entry recorded three days’ salary of $210, which increased December’s total salary expense to $1,610 The entry also recognized a liability of $210 The expense is reported on December’s income statement The expense account is then closed The ledger on January 1, 2016, shows a $210 liability and a zero balance in the Salaries Expense account At this point, the choice is made between using or not using reversing entries Point: Firms that use reversing entries hope that this simplification will reduce errors Accounting without Reversing Entries The path down the left side of Exhibit 4A.1 is described in the chapter To summarize here, when the next payday occurs on January 9, we record payment with a compound entry that debits both the expense and liability accounts and credits Cash Posting that entry creates a $490 balance in the expense account and reduces the liability account balance to zero because the debt has been settled The disadvantage of this approach is the slightly more complex entry required on January Paying the accrued liability means that this entry differs from the routine entries made on all other paydays To construct the proper entry on January 9, we must recall the effect of the December 31 adjusting entry Reversing entries overcome this disadvantage P4 Prepare reversing entries and explain their purpose Accounting with Reversing Entries The right side of Exhibit 4A.1 shows how a reversing entry on January overcomes the disadvantage of the January entry when not using reversing entries A reversing entry is the exact opposite of an adjusting entry For FastForward, the Salaries Payable liability account is debited for $210, meaning that this account now has a zero balance after the entry is posted The Salaries Payable account temporarily understates the liability, but this is not a problem Chapter Accrue salaries expense on December 31, 2015 EXHIBIT 4A.1 Salaries Expense 210 Salaries Payable 210 Salaries Expense Date Expl Debit Credit Balance Reversing Entries for an Accrued Expense 2015 Dec 12 (7) 700 700 26 (16) 700 1,400 31 (e) 210 1,610 Salaries Payable Date Expl Debit Credit Balance 2015 Dec 31 WITHOUT Reversing Entries No reversing entry recorded on January 1, 2016 (e) 210 NO ENTRY Salaries Expense Expl Debit Credit Balance Date 210 WITH Reversing Entries Reversing entry recorded on January 1, 2016 — OR — Salaries Payable 210 Salaries Expense 210 Salaries Expense* Expl Debit Credit Balance Date 2016 2016 Salaries Payable Expl Debit Credit Balance Date Jan 210 Dec 31 (e) 210 210 2015 Dec 31 2016 210 Salaries Payable Expl Debit Credit Balance Date 2015 (e) 210 210 2016 210 Jan Pay the accrued and current salaries on January 9, the first payday in 2016 Salaries Expense 490 Salaries Payable 210 Cash 700 Salaries Expense Date Expl Debit Credit Balance Salaries Expense 700 Cash 700 Salaries Expense* Expl Debit Credit Balance Date 2016 490 Jan Jan Salaries Payable Expl Debit Credit Balance Date Jan Date 490 Dec 31 (e) 210 210 210 700 210 490 Salaries Payable Expl Debit Credit Balance Dec 31 (e) 210 210 2016 2016 Jan 2016 2015 2015 210 Jan 210 Under both approaches, the expense and liability accounts have identical balances after the cash payment on January Salaries Expense Salaries Payable 167 Completing the Accounting Cycle $490 $ *Circled numbers in the Balance column indicate abnormal balances since financial statements are not prepared before the liability is settled on January The credit to the Salaries Expense account is unusual because it gives the account an abnormal credit balance We highlight an abnormal balance by circling it Because of the reversing entry, the January entry to record payment is straightforward This entry debits the Salaries Expense account and credits Cash for the full $700 paid It is the same as all other entries made to record 10 days’ salary for the employee Notice that after the payment entry is posted, the Salaries Expense account has a $490 balance that reflects seven days’ salary of $70 per day (see the lower right side of Exhibit 4A.1) The zero balance in the Salaries Payable account is now correct The lower section of Exhibit 4A.1 shows that the expense and liability accounts have exactly the same balances whether reversing entries are used or not This means that both approaches yield identical results 168 Chapter Completing the Accounting Cycle Summary Explain why temporary accounts are closed each period Temporary accounts are closed at the end of each accounting period for two main reasons First, the closing process updates the capital account to include the effects of all transactions and events recorded for the period Second, it prepares revenue, expense, and withdrawals accounts for the next reporting period by giving them zero balances C1 Identify steps in the accounting cycle The accounting cycle consists of 10 steps: (1) analyze transactions, (2) journalize, (3) post, (4) prepare an unadjusted trial balance, (5) adjust accounts, (6) prepare an adjusted trial balance, (7) prepare statements, (8) close, (9) prepare a post-closing trial balance, and (10) prepare (optional) reversing entries C2 Explain and prepare a classified balance sheet Classified balance sheets report assets and liabilities in two categories: current and noncurrent Noncurrent assets often include long-term investments, plant assets, and intangible assets Owner’s equity for proprietorships (and partnerships) report the capital account balance A corporation separates equity into common stock and retained earnings C3 Compute the current ratio and describe what it reveals about a company’s financial condition A company’s current ratio is defined as current assets divided by current liabilities We use it to evaluate a company’s ability to pay its current liabilities out of current assets A1 Prepare a work sheet and explain its usefulness A work sheet can be a useful tool in preparing and analyzing financial statements It is helpful at the end of a period in preparing adjusting entries, an adjusted trial balance, and financial statements A work sheet usually contains five pairs of columns: Unadjusted Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, and Balance Sheet & Statement of Owner’s Equity P1 Describe and prepare closing entries Closing entries involve four steps: (1) close credit balances in revenue (and gain) accounts to Income Summary, (2) close debit balances in expense (and loss) accounts to Income Summary, (3) close Income Summary to the capital account, and (4) close withdrawals account to owner’s capital P2 Explain and prepare a post-closing trial balance A post-closing trial balance is a list of permanent accounts and their balances after all closing entries have been journalized and posted Its purpose is to verify that (1) total debits equal total credits for permanent accounts and (2) all temporary accounts have zero balances P3 reversing entries and explain their purpose P4A Prepare Reversing entries are an optional step They are applied to accrued expenses and revenues The purpose of reversing entries is to simplify subsequent journal entries Financial statements are unaffected by the choice to use or not use reversing entries Guidance Answers to Decision Maker Entrepreneur Yes, you are concerned about the absence of a depreciation adjustment Equipment does depreciate, and financial statements must recognize this occurrence Its absence suggests an error or a misrepresentation (there is also the possibility that equipment is fully depreciated) Analyst A current ratio of 1.2 suggests that current assets are sufficient to cover current liabilities, but it implies a minimal buffer in case of errors in measuring current assets or current liabilities Removing the past due receivable reduces the current ratio to 0.7 Your assessment is that the company will have some difficulty meeting its loan payments Colleague The error is readily spotted in your friend’s postclosing trial balance as you know that rent expense is a temporary account Post-closing trial balances only show permanent accounts Key Terms Accounting cycle Classified balance sheet Closing entries Closing process Current assets Current liabilities Current ratio Income Summary Intangible assets Long-term investments Long-term liabilities Operating cycle Permanent accounts Post-closing trial balance Pro forma financial statements Reversing entries Temporary accounts Unclassified balance sheet Working papers Work sheet Chapter Multiple Choice Quiz 169 Completing the Accounting Cycle Answers at end of chapter G Venda, owner of Venda Services, withdrew $25,000 from b Entering a liability amount in the Balance Sheet and the business during the current year The entry to close the withdrawals account at the end of the year is: c Entering an expense account in the Balance Sheet and Statement of Owner’s Equity Credit column Statement of Owner’s Equity Debit column a G Venda, Withdrawals G Venda, Capital b Income Summary G Venda, Capital c G Venda, Withdrawals Cash d G Venda, Capital Salary Expense e G Venda, Capital G Venda, Withdrawals d Entering an asset account in the Income Statement 25,000 e Entering a liability amount in the Income Statement 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 The following information is available for the R Kandamil Company before closing the accounts After all of the closing entries are made, what will be the balance in the R Kandamil, Capital account? Total revenues Total expenses R Kandamil, Capital R Kandamil, Withdrawals a $360,000 b $250,000 c $160,000 Debit column 25,000 Credit column The temporary account used only in the closing process to hold the amounts of revenues and expenses before the net difference is added or subtracted from the owner’s capital account is called the a Closing account d Balance Column account b Nominal account e Contra account c Income Summary account Based on the following information from Repicor Company’s balance sheet, what is Repicor Company’s current ratio? Current assets Investments Plant assets Current liabilities Long-term liabilities D Repicor, Capital $300,000 195,000 100,000 45,000 d $150,000 e $60,000 a 2.10 b 1.50 c 1.00 Which of the following errors would cause the Balance Sheet and Statement of Owner’s Equity columns of a work sheet to be out of balance? a Entering a revenue amount in the Balance Sheet and Statement of Owner’s Equity Debit column A $ 75,000 30,000 300,000 50,000 60,000 295,000 d 0.95 e 0.67 Superscript letter A denotes assignments based on Appendix 4A Icon denotes assignments that involve decision making Discussion Questions What are the steps in recording closing entries? What accounts are affected by closing entries? What ac3 counts are not affected? What two purposes are accomplished by recording closing entries? What is the purpose of the Income Summary account? Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense account What tasks are aided by a work sheet? Why are the debit and credit entries in the Adjustments columns of the work sheet identified with letters? What is a company’s operating cycle? What classes of assets and liabilities are shown on a typical 10 11 12.A 13.A 14 classified balance sheet? How is unearned revenue classified on the balance sheet? What are the characteristics of plant assets? How reversing entries simplify recordkeeping? If a company recorded accrued salaries expense of $500 at the end of its fiscal year, what reversing entry could be made? When would it be made? Refer to the most recent balance sheet for Apple in Appendix A What five main non- APPLE current asset categories are used on its classified balance sheet? 170 Chapter Completing the Accounting Cycle 15 Refer to Samsung’s most recent bal- ance sheet in Appendix A Identify Samsung and list its nine current assets 16 Refer to Google’s most recent balance sheet in Appendix A Identify the GOOGLE eight accounts listed as current liabilities QUICK STUDY QS 4-1 Ordering work sheet steps P1 QS 4-2 Applying a work sheet P1 QS 4-3 Interpreting a work sheet P1 17 Refer to Samsung’s financial Samsung statements in Appendix A What journal entry was likely recorded as of December 31, 2013, to close its Income Summary account? List the following steps in preparing a work sheet in their proper order by writing a number from through in the blank space provided a Total the statement columns, compute net income (loss), and complete work sheet b Extend adjusted balances to appropriate financial statement columns c Prepare an unadjusted trial balance on the work sheet d Prepare an adjusted trial balance on the work sheet e Enter adjustments data on the work sheet In preparing a work sheet, indicate the financial statement Debit column to which a normal balance in the following accounts should be extended Use IS for the Income Statement Debit column and BS for the Balance Sheet and Statement of Owner’s Equity Debit column a Equipment d Depreciation Expense—Equipment b Owner, Withdrawals e Accounts Receivable c Prepaid Rent f Insurance Expense The following selected information is taken from the work sheet for Warton Company as of December 31, 2015 Using this information, determine the amount for B Warton, Capital, that should be reported on its December 31, 2015, balance sheet Income Statement B Warton, Capital B .Warton, Withdrawals Totals QS 4-4 Preparing a partial work sheet P1 QS 4-5 Explaining temporary and permanent accounts C1 QS 4-6 Prepare closing entries from the ledger P2 Dr Cr Balance Sheet and Statement of Owner’s Equity Dr Cr 72,000 39,000 122,000 181,000 The ledger of Claudell Company includes the following unadjusted normal balances: Prepaid Rent $1,000, Services Revenue $55,600, and Wages Expense $5,000 Adjusting entries are required for (a) prepaid rent expired, $200; (b) accrued services revenue $900; and (c) accrued wages expense $700 Enter these unadjusted balances and the necessary adjustments on a work sheet and complete the work sheet for these accounts Note: Also include the following accounts: Accounts Receivable, Wages Payable, and Rent Expense Choose from the following list of terms/phrases to best complete the statements below a Temporary c One or more e Zero balances b Permanent d One f Income Summary accounts generally consist of all balance sheet accounts, and these accounts are not closed Permanent accounts report on activities related to future accounting periods, and they carry their ending balances into the next period Temporary accounts accumulate data related to accounting period accounts include all income statement accounts, the withdrawals account, and the Income Summary account The ledger of Mai Company includes the following accounts with normal balances: D Mai, Capital $9,000; D Mai, Withdrawals $800; Services Revenue $13,000; Wages Expense $8,400; and Rent Expense $1,600 Prepare the necessary closing entries from the available information at December 31 Chapter 171 Completing the Accounting Cycle Identify which of the following accounts would be included in a post-closing trial balance a Accounts Receivable c Goodwill e Income Tax Expense b Salaries Expense d Land f Salaries Payable QS 4-7 List the following steps of the accounting cycle in their proper order a Posting the journal entries f Preparing the financial statements b Journalizing and posting adjusting entries g Preparing the unadjusted trial balance c Preparing the adjusted trial balance h Journalizing transactions and events d Journalizing and posting closing entries i Preparing the post-closing trial balance e Analyzing transactions and events QS 4-8 The following are common categories on a classified balance sheet A Current assets D Intangible assets B Long-term investments E Current liabilities C Plant assets F Long-term liabilities For each of the following items, select the letter that identifies the balance sheet category where the item typically would appear Land not currently used in operations Accounts payable Notes payable (due in five years) Store equipment Accounts receivable Wages payable Trademarks Cash QS 4-9 Answer each of the following questions related to international accounting standards a Explain how the closing process is different between accounting under IFRS versus U.S GAAP b What basic principle U.S GAAP and IFRS rely upon in recording the initial acquisition value for nearly all assets? QS 4-10 Compute Chavez Company’s current ratio using the following information QS 4-11 Accounts receivable Accounts payable Buildings Cash $18,000 11,000 45,000 7,000 Long-term notes payable Office supplies Prepaid insurance Unearned services revenue $21,000 2,800 3,560 3,000 Identify post-closing accounts P3 Identifying the accounting cycle C2 Classifying balance sheet items C3 International accounting standards P2 Identifying current accounts and computing the current ratio A1 On December 31, 2014, Yates Co prepared an adjusting entry for $12,000 of earned but unrecorded management fees On January 16, 2015, Yates received $26,700 cash in management fees, which included the accrued fees earned in 2014 Assuming the company uses reversing entries, prepare the January 1, 2015, reversing entry and the January 16, 2015, cash receipt entry QS 4-12A These 16 accounts are from the Adjusted Trial Balance columns of a company’s 10-column work sheet In the blank space beside each account, write the letter of the appropriate financial statement column (A, B, C, or D) to which a normal account balance is extended A Debit column for the Income Statement columns B Credit column for the Income Statement columns C Debit column for the Balance Sheet and Statement of Owner’s Equity columns D Credit column for the Balance Sheet and Statement of Owner’s Equity columns Accounts Receivable Interest Revenue 10 Accumulated Depreciation Machinery 11 Office Supplies Owner, Withdrawals 12 Insurance Expense Depreciation Expense 13 Interest Receivable Accounts Payable 14 Cash Service Fees Revenue 15 Rent Expense Owner, Capital 16 Wages Payable Interest Expense EXERCISES Reversing entries P4 Exercise 4-1 Extending adjusted account balances on a work sheet P1 ... students and family, especially Kimberly, Jonathan, Stephanie and Trevor To my wife Linda and children Erin, Emily and Jacob To my mother, husband Bob and sons Michael and David FUNDAMENTAL ACCOUNTING. .. Library of Congress Cataloging-in-Publication Data Wild, John J Fundamental accounting principles / John J Wild, Ken W Shaw, Barbara Chiappetta. 22nd edition pages cm ISBN 978-0-07-786227-5 (alk paper)—ISBN... Publications, and Research Committees Professor Wild is author of Financial Accounting, Managerial Accounting, and College Accounting, each published by McGraw-Hill Education His research articles on accounting