CARRBORO TEXTILE COMPANY Partial Balance Sheet
Note 1. On February 2, 2005, Carrboro entered into an agreement with Worldwide Life Insurance Company whereby Worldwide would lend Carrboro $450,000,
SOLUTIONS TO PROBLEMS P12-1
1. 2004
Dec. 23 Equipment: Computer
[($60,000 - ($60,000 x 0.02)] 58,800 Accounts Payable: Computers
International 58,800
29 Cash 60,000
Notes Payable: First Local Bank 60,000
30 Retained Earnings 20,000
Dividends Payable (10,000 x $2.00) 20,000
31 Interest Expense 40
Interest Payable
($60,000 x 0.12 x 2/360) 40 2005
Jan. 2 Accounts Payable: Computers
International 58,800
Cash 58,800
5 Dividends Payable 20,000
Cash 20,000
28 Interest Expense [($60,000 x
0.12 x 30/360) - $40] 560
Notes Payable 60,000
Interest Payable 40
Cash 60,600
2. BYRD COMPANY
Partial Balance Sheet December 31, 2004 Current Liabilities
Accounts payable $58,800
Notes payable 60,000
Interest payable 40
Dividends payable 20,000
P12-1 (continued)
3. 2.4;Currentliab. $500,000
liab.
Current
$1,200,000 liab. 2.4;
Current assets Current
: 2004 of
beg.
At
ratio Current
$638,840 1.97
$1,260,000
$20,000
$40
$60,000
$58,000
$500,000
$60,000
$1,200,000 :
2004 of
beg.
At
P12-2
1. a. Cash received
(1) Interest-bearing: $60,000
(2) Noninterest-bearing: $60,000 x 0.88 = $52,800 b. Effective interest rate
(1) Interest-bearing: 12%
(2) Noninterest-bearing:
$52,000 7,200
$ = 13.64%
c. Interest expense for 2003
(1) Interest-bearing: $60,000 x 0.12 x 2/12 = $1,200 (2) Noninterest-bearing: $ 7,200 x 2/12 = $1,200
2. Interest-bearing Noninterest-bearing
2004 Nov.
Dec.
2005 Oct.
1
31
31
31
Cash
Discount on Notes Payable Notes Payable
Interest Expense
Discount on Notes Payable Interest Payable
Interest Expense Interest Payable
Discount on Note Payable Cash
Notes Payable Cash
60,000 –
1,200
6,000 1,200
60,000
60,000
-- 1,200
-- 7,200
60,000
52,800 7,200
1,200
6,000 –
60,000
60,000
1,200 –
6,000
60,000
P12-3 2004
Nov. 1 Accounts Payable 15,000
Notes Payable (Johnson) 15,000
Dec. 1 Purchases 22,000
Notes Payable (Winslow) 22,000
31 Interest Expense* 520
Interest Payable 520
*[($15,000 x 0.12 x 60/360 = $300) + ($22,000 x 0.12 x 30/360 = $220)]
2005
Mar. 1 Notes Payable (Johnson) 15,000
Interest Payable 300
Interest Expense 300
Cash 15,600
1 Notes Payable (Winslow) 22,000
Interest Payable 220
Interest Expense 440
Cash 22,660
P12-4 1. 2005
Mar. 31 Salaries and Wages Expense:
Compensated Absences 9,000
Liability for Employee
Compensation for Future Absences [(15 employees x 3/12 of 6 x $100) + (15
employees x 4.5 x $100)] 9,000
Apr. 30 Salaries and Wages Expense 42,000 Liability for Employee Compensation
for Future Absences 3,000
Cash 45,000
June 30 Salaries and Wages Expense:
Compensated Absences 9,000
Liability for Employee
Compensation for Future Absences 9,000
P12-4 (continued)
2. REXALLO COMPANY
Partial Balance Sheet March 31, 2005 Current Liabilities
Liability for employee compensation
for future absences $9,000
P12-5
1. Cash ($1,665,400 x 1.05) 1,748,670
Sales 1,665,400
Sales Taxes Payable 83,270
Accounts Receivable ($2,820,500 x 1.05) 2,961,525
Sales 2,820,500
Sales Taxes Payable 141,025
Sales Taxes Payable 168,220
Cash 168,220
2. MAULDIN COMPANY
Partial Balance Sheet December 31, 2004 Current Liabilities
Sales taxes payable $ 56,075
P12-6
1. F.I.C.A. Wages Unemployment Tax Wages
Johnson Long Morse Stewart Sharpe Ledbetter
Totals
$ 27,000 18,000 80,000*
28,000 26,000 30,000
$209,000
$ 7,000 7,000 7,000 7,000 7,000 7,000
$42,000
*The maximum amount subject to FICA tax
P12-6 (continued) 1. (continued)
State unemployment tax
$42,000 x 0.044 = $ 1,848 Federal unemployment tax
$42,000 x 0.008 = 336 F.I.C.A.
$209,000 x 0.08 = 16,720 Total payroll taxes $18,904
2. Salaries and Wages Expense 214,000
Employees' Income Taxes Withholding Payable 42,800*
F.I.C.A. Taxes Payable 16,720
Cash 154,480
*$214,000 total wages x 0.20
Payroll Tax Expense 18,904
F.I.C.A. Taxes Payable 16,720
Federal Unemployment Taxes Payable 336
State Unemployment Taxes Payable 1,848
P12-7
Bonus = 0.10 ($5,000,000 - B - T) Taxes = 0.30 ($5,000,000 - B)
1. B = 0.10 [$5,000,000 - B - 0.30 ($5,000,000 - B)]
= 0.10 ($5,000,000 - B - $1,500,000 + 0.30 B)
= 0.10 ($3,500,000 - 0.70 B)
= $350,000 - 0.07 B 1.07 B = $350,000
B = $327,102.80
2. T = 0.30 ($5,000,000 - $327,102.80)
= 0.30 ($4,672,897.20)
= $1,401,869.16
Check: B = 0.10 ($5,000,000 - $327,102.80 - $1,401,869.26)
= 0.10 ($3,271,028.04)
= $327,102.80
P12-7 (continued) 3. 2004
Dec. 31 Salaries Expense (Officer's Bonus) 327,102.80
Officer's Bonus Payable 327,102.80
31 Income Tax Expense 1,401,869.16
Income Taxes Payable 1,401,869.16
4. NATIONAL MOTORS
Partial Balance Sheet December 31, 2004 Current Liabilities
Officer's bonus payable $ 327,102.80
Income taxes payable 1,401,869.16
P12-8
1. July 1, 2004 lien date No entry
Three monthly entries: July 31 - Sept. 30, 2004
Property Tax Expense ($15,300 12) 1,275
Property Taxes Payable 1,275
Oct. 30, 2004
Property Tax Expense* 1,317.22
Property Taxes Payable 1,317.22
*Actual tax $15,680
Less: Tax expense recorded
($1,275 x 3) (3,825)
Remaining tax expense $11,855
Remaining months in fiscal year 9
Tax expense per month $ 1,317.22
Nov. 30, 2004 payment of property taxes Property Taxes Payable [(3 x $1,275) +
$1,317.22] 5,142.22
Prepaid Property Taxes 10,537.78
Cash 15,680.00
P12-8 (continued) 1. (continued)
Eight monthly entries: Nov. 30, 2004 - June 30, 2005*
Property Tax Expense 1,317.22
Prepaid Property Taxes 1,317.22
*Last entry amount is $1,317.24 to correct rounding error
2. ROSEN CORPORATION
Partial Balance Sheet December 31, 2004 Current Assets
Prepaid property taxes [$10,537.78 -
(2 x $1,317.22)] $7,903.34
P12-9 1. 2004
Cash (or Accounts Receivable) 500,000
Sales 500,000
Warranty Expense [$550,000 x (0.03 +
0.05 + 0.07)] 75,000
Estimated Liability Under Warranties 75,000
Estimated Liability Under Warranties 62,000
Cash (or Other Assets) 62,000
2005
Cash (or Accounts Receivable) 650,000
Sales 650,000
Warranty Expense ($650,000 x 0.15) 97,500
Estimated Liability Under Warranties 97,500
Estimated Liability Under Warranties 82,000
Cash (or Other Assets) 82,000
2006
Cash (or Accounts Receivable) 700,000
Sales 700,000
Warranty Expense ($700,000 x 0.15) 105,000
Estimated Liability Under Warranties 105,000
P12-9 (continued) 1. (continued)
Estimated Liability Under Warranties 85,000
Cash (or Other Assets) 85,000
2. Estimated liabilities under warranties at December 31, 2006: $136,700 Estimated Liabilities Under Warranty
2004 62,000 Bal. 12/31/03 88,200
2005 82,000 2004 75,000
2006 85,000 2005 97,500
2006 105,000 Bal. 12/31/06 136,700 P12-10
Cash (or Accounts Receivable) 7,944,000
Sales (8,000 x $920) 7,360,000
Unearned Warranty Revenue (8,000 x $73) 584,000
Warranty Expense 94,400
Cash (or Other Assets) 94,400
Unearned Warranty Revenue 94,400
Warranty Revenue 94,400
P12-11 1. October
Cash or Accounts Receivable (21,000 x $2.80) 58,800
Sales 58,800
Inventory of Premium Shovel Sets (880 x $3.00) 2,640
Cash 2,640
Premium Expense [(12,000 15) x $3.00] 2,400
Inventory of Premium Shovel Sets 2,400
Premium Expense [{(0.70 x 21,000) - 12,000}
15] x $3.00 540
Estimated Premium Claims Outstanding 540
Sales 58,800
Premium Expense 2,940
Income Summary 55,860
P12-11 (continued) 1. (continued)
November
Cash or Accounts Receivable (24,000 x $2.80) 67,200
Sales 67,200
Inventory of Premium Shovel Sets
(1,083 x $3.00) 3,249
Cash 3,249
Premium Expense 2,661
Estimated Premium Claims Outstanding 540 Inventory of Premium Shovel Sets
[(16,005 15) x $3.00] 3,201
Premium Expense {[0.70 x (21,000 + 24,000)] -
(12,000 + 16,005)} 15 x $3.00 699
Estimated Premium Claims Outstanding 699
Sales 67,200
Premium Expense 3,360
Income Summary 63,840
December
Cash or Accounts Receivable (33,000 x $2.80) 92,400
Sales 92,400
Inventory of Premium Shovel Sets
(1,697 x $3.00) 5,091
Cash 5,091
Premium Expense 3,450
Estimated Premium Claims Outstanding 699 Inventory of Premium Shovel Sets
[(20,745 15) x $3.00] 4,149
Premium Expense {[0.70 x (21,000 + 24,000 + 33,000)] - (12,000 + 16,005 + 20,745)}
15 x $3.00 1,170
Estimated Premium Claims Outstanding 1,170
Sales 92,400
Premium Expense 4,620
Income Summary 87,780
P12-11 (continued)
2. YUMMY CEREAL COMPANY
Partial Balance Sheets
At the End of October November December Current Assets
Inventory of premium shovel sets Current Liabilities
Estimated premium claims outstanding
$240
$540
$288
$699
$1,230
$1,170 P12-12
1. This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the most likely amount ($80,000) within the range of amounts as follows:
2004
Dec. 31 Estimated Loss From Litigation 80,000 Estimated Liability From
Pending Lawsuit 80,000
2. This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the estimated cost of repairs ($200,000) as follows:
2004
Dec. 31 Estimated Expense From Recall
Repairs 200,000
Estimated Liability For
Recall Repairs 200,000
The potential lawsuits for injury claims are disclosed in a note to the financial statements because there is a reasonable possibility that a loss may have been incurred.
3. This loss contingency is accrued at the end of 2004 because (a) it is an existing condition, (b) a loss is probable, and (c) the loss can be reasonably estimated. The loss is accrued at the minimum amount of the range ($40,000) because it is not likely that the loss will be less, as follows:
2004
Dec. 31 Estimated Loss From Pollution Fine 40,000 Estimated Liability For
Pollution Fine 40,000
P12-12 (continued)
4. Because of conservatism, this gain contingency is not accrued but is disclosed in the notes to the financial statements.
P12-13 (AICPA adapted solution)
Note to Instructor: This problem includes a potential appropriation of retained earnings that is not discussed until Chapter 16. However, students should be able to solve the problem without specific knowledge of this topic.
1. 2004
Dec. 31 Magazine Subscriptions Collected
in Advance 600,000a
Magazine Subscriptions Revenue 600,000
To record subscriptions earned during 2004.
aLiability account:
Book balance at December 31, 2004 $2,500,000 Adjusted balance ($600,000 +
$900,000 + $400,000) (1,900,000)
Credit to revenue account $ 600,000
2. No journal entry should be made to accrue for an expense, because the absence of insurance coverage does not mean that an asset has been impaired or a liability has been incurred as of the balance sheet date. Greenlaw may, however, appropriate retained earnings for self-insurance as long as actual costs or losses are not charged to the appropriation of retained earnings and no part of appropriation is transferred to income. The loss contingency may also be disclosed in the notes to the financial statements. Appropriation of retained earnings and/or disclosure in the notes to the financial statements are not required.
3. Estimated Loss From Pending Lawsuit 100,000
Estimated Liability From Pending Lawsuit 100,000
To record estimated minimum damages on breach-of-contract litigation.
4. No journal entry should be made for this loss contingency, because it is not probable that an asset has been impaired or a liability has been incurred and the loss cannot be reasonably estimated as of the balance sheet date. The loss contingency should be disclosed in the notes to financial statements.
P12-14
1. The $3,000,000 commercial paper liquidated prior to the refinancing will be classified as a current liability on Palmer's balance sheet at December 31, 2004. FASB Interpretation No. 8 states that even if funds used to retire short-term debt are replaced, the liability must nevertheless be recorded as a current liability.
2. The remaining $4,000,000 will be classified as long-term debt, since Palmer issued the long-term bonds after the balance sheet date but before the date of issuance, thereby demonstrating the ability to refinance.
P12-15
ATWOOD TABLE COMPANY Partial Balance Sheet
December 31, 2004 Current Liabilities
Notes payable $2,000,000
Long-Term Liabilities
Notes payable (expected to be refinanced in 2005) $6,000,000
P12-16 1. 2004
Jan. 1 Machinery 72,597.90*
Discount on Notes Payable 7,402.10
Notes Payable 80,000.00
) (P
$20,000 P
* on 4,i 4%
Mar. 31 Interest Expense (see schedule) 2,903.92
Notes Payable 20,000.00
Discount on Notes Payable 2,903.92
Cash 20,000.00
P12-16 (continued) 1. (continued)
Jun. 30 Interest Expense (see schedule) 2,220.07
Notes Payable 20,000.00
Discount on Notes Payable 2,220.07
Cash 20,000.00
Sep. 30 Interest Expense (see schedule) 1,508.88
Notes Payable 20,000.00
Discount on Notes Payable 1,508.88
Cash 20,000.00
Dec. 31 Interest Expense (see schedule) 769.23
Notes Payable 20,000.00
Discount on Notes Payable 769.23
Cash 20,000.00
Schedule of Interest Expense and Obligation Reduction
Date Payment 4% Interest Expense Reduction of
Obligation Net
Obligation 2004
Jan. 1 Mar. 31 Jun. 30 Sep. 31 Dec. 31
$20,000 20,000 20,000 20,000
$80,000
$2,903.92 2,220.07 1,508.88 769.23
$7,402.10
$17,096.08 17,779.93 18,491.12 19,230.77
$72,597.90
$72,597.90 55,501.82 37,721.89 19,230.77 -0-
2. NORTHERN MANUFACTURING COMPANY
Partial Balance Sheet June 30, 2004 Current Liabilities
Notes payable $40,000.00
Less: Discount on notes payable (2,278.11) $37,721.89 P12-17
2004
Jan. 5 Purchases [$30,000 -
($30,000 x 0.02)] 29,400
Accounts Payable 29,400
P12-17 (continued)
Jan. 26 Accounts Payable 29,400
Purchases Discounts Lost 600
Cash 30,000
Mar. 31 Vans 19,950
Cash 9,950
Notes Payable 10,000
May 1 Cash [$50,000 - ($50,000 x 0.12)] 44,000 Discount on Notes Payable 6,000
Notes Payable 50,000
Nov. 2 Cash 500
Refundable Deposits Received
on Furniture Rentals 500
3 Accounts Receivable 15,975
Sales 15,000
Sales Taxes Payable 975
6 Vans 19,170
Cash 18,000
Use Taxes Payable 1,170
Dec. 31 Property Tax Expense ($36,000 12) 3,000
Property Taxes Payable 3,000
31 Income Tax Expense 150,000
Income Taxes Payable 150,000
31 Interest Expense ($10,000 x
0.12 x 9/12) 900
Interest Payable 900
31 Interest Expense ($50,000 x
0.12 x 8/12) 4,000
Discount on Notes Payable 4,000
P12-18 2004
Nov. 1 Cash ($40,000 - $1,200) 38,800 Discount on Notes Payable
($40,000 x 12% x 3/12) 1,200
Notes Payable 40,000
9 Cash 500,000
Sales (100 x $5,000) 500,000
9 Warranty Expense (100 x $125) 12,500 Estimated Liability under
Warranties 12,500
12 Cash 30,000
Sales (100 x $300) 30,000
14 Inventory of Premium Disks 400
Cash (80 x $5) 400
20 Estimated Liability under Warranties 2,900
Cash 2,900
30 Sales Salaries Expense: Compensated
Absences (_ x $7,200) 4,800 Office Salaries Expense: Compensated
Absences (1/3 x $7,200) 2,400 Liability for Employee's
Compensation for Future
Absences (1/12 x $86,400) 7,200
30 Sales Salaries Expense 96,000
Office Salaries Expense 48,000
F.I.C.A. Taxes Payable
(8% x $144,000) 11,520
Employee Federal Income Taxes Withholding Payable
(15% x $144,000) 21,600
Cash 110,880
30 Payroll Tax Expense 11,520
F.I.C.A. Taxes Payable
(8% x $144,000) 11,520
P12-18 (continued)
Dec. 14 Premium Expense (20 x $5) 100
Inventory of Premium Disks 100
29 Loss from Accident 1,500
Estimated Liability Due to
Litigation 1,500
31 Sales Salaries Expense:
Compensated Absences 4,800 Office Salaries Expense:
Compensated Absences 2,400 Liability for Employee's
Compensation for Future
Absences 7,200
31 Sales Salaries Expense
($97,200 - $3,400) 93,800
Office Salaries Expense
($48,600 - $1,600) 47,000
Liability for Employee's
Compensation for Future Absences 5,000 F.I.C.A. Taxes Payable
(8% x $145,800) 11,664
Employee Federal Income Taxes Withholding Payable
(15% x $145,800) 21,870
Cash 112,266
31 Payroll Tax Expense 11,664
F.I.C.A. Taxes Payable 11,664
31 Salaries Expense (Officer's Bonus) 40,412
Officer's Bonus Payable 40,412a
aB = 0.10 ($560,000 - T) T = 0.30 ($560,000 - B)
B = 0.10 [$560,000 - 0.30 ($560,000 - B)]
B = 0.10 [$560,000 - $168,000 + 0.30 B]
B = $56,000 - $16,800 + 0.03 B B - 0.03 B = $39,200
0.97 B = $39,200 B = $39,200 0.97 B = $40,412
P12-18 (continued)
Dec. 31 Income Tax Expense 155,876
Income Taxes Payable 155,876a
aT = 0.30 ($560,000 - $40,412) T = $155,876
31 Premium Expense 300
Estimated Premium Claims
Outstanding 300a
aTotal software packages sold 100 Total proofs estimated for
redemption (80% x 100) 80 Less: Proofs redeemed (20) Estimated number of proofs
for future redemption 60 Premium expense (60 x $5) $300
31 Interest Expense 800
Discount on Notes Payable
(2/3 x $1,200) 800
APPENDIX C
REVIEW OF THE ACCOUNTING PROCESS
CONTENT ANALYSIS OF EXERCISES AND PROBLEMS
Number Content Time Range
(minutes) EC-1 Financial Statement Interrelationship. Diagram. 5-10 EC-2 Journal Entries. Sales, purchases, accounts payable. 5-10 EC-3 Journal Entries. Sales, purchases, accounts payable, accounts
receivable. Post to t-accounts. 5-10
EC-4 Income Statement. Partial through gross profit on sales. 5-10 EC-5 Income Statement. Calculations, fill in the blanks. 5-10 EC-6 Financial Statements. Prepare income statement, retained
earnings statement, balance sheet, closing entries. 10-20 EC-7 Adjusting Entries. Bad debts, accruals, deferrals. 5-15 EC-8 Adjusting Entries. Recognizing necessary adjustments, journal
entries. 10-15
EC-9 Adjusting Entries. Record changes in trial balance accounts. 5-10 EC-10 Closing Entries. Prepare from ending account balances. 5-15 EC-11 Reversing Entries. Recognizing and preparing appropriate
reversals. 5-15
EC-12 Special Journals. Indicate appropriate journal and account for
various transactions. 10-15
EC-13 Worksheet. Adjustments, income statement, retained earnings statement, balance sheet. Prepare financial statements from worksheet.
10-20
EC-14 Worksheet. Adjustments, income statement, retained earnings statement, balance sheet. Financial statement preparation.
Closing entries.
15-20
EC-15 Cash-Basis Accounting. Prepare accrual-based income statement and balance sheet from cash-basis accounting records.
15-20
Number Content Time Range (minutes) PC-1 Trial Balance. Journal entries, posting to general ledger,
preparing trial balance. 90-120
PC-2 Financial Statements. Periodic inventory system. Preparation of income statement, retained earnings statement, balance sheet from trial balance. Closing entries.
30-45
PC-3 Financial Statements. Perpetual inventory system. Preparation of income statement, retained earnings statement, balance sheet from trial balance. Closing entries.
30-45
PC-4 Adjusting Entries. Recognize, calculate, journalize adjustments.
Accruals, deferrals, year-end. 15-30
PC-5 Adjusting Entries. Calculate and journalize accruals, deferrals,
and year-end adjustments. 20-40
PC-6 Adjusting Entries. Determine by comparing trial balance and
adjusted trial balance. Prepare necessary reversing entries. 20-40 PC-7 Adjusting Entries. Year-end adjustments to update trial
balance accounts. 20-40
PC-8 Reversing Entries. Note payable, note receivable. Recording
collection, payment with and without reversing entries. 15-30 PC-9 Errors. Effect on net income, total assets, total liabilities, total
stockholders' equity. 15-20
PC-10 Errors in Financial Statements. Indicate effect on net income,
assets, liabilities, and stockholders' equity of various errors. 15-20 PC-11 Reversing Entries. Prepare appropriate reversals and explain
why entries should be reversed. 15-30
PC-12 Special Journals. Various transactions, record in appropriate
journal. 30-40
PC-13 Worksheet. Prepare and complete worksheet. Financial
statements, adjusting and closing entries. 60-90
PC-14 Worksheet. Complete worksheet. Prepare financial
statements, adjusting and closing entries. 75-105 PC-15 Special Journals. Journalize and post various transactions in
appropriate journals and accounts. 45-90
PC-16 Comprehensive. Journal entries, posting, trial balance,
financial statements, adjusting and closing entries. 90-120 PC-17 Comprehensive: Statements From Incomplete Records.
Prepare worksheet and financial statements from checkbook and other information.
45-90
Number Content Time Range (minutes) PC-18 (AICPA adapted). Comprehensive. Accrual adjustments to
cash-basis records, worksheet, statement of changes in capital. 45-90
ANSWERS TO QUESTIONS
QC-1 A primary objective of financial reporting is to provide information that is useful to present and potential investors and creditors and other users in making rational investment, credit, and similar decisions.
QC-2 An accounting system is the means by which a company records and stores the financial and managerial information from its transactions so that it can retrieve and report the information in an accounting statement. All companies have accounting systems, ranging in degree of sophistication from the simple to the complex.
QC-3 Assets = Liabilities + Stockholders' Equity
Stockholders' Equity = Contributed Capital + Retained Earnings
Retained Earnings = Beginning Retained Earnings + Net Income - Dividends
Net Income = Revenues - Expenses
QC-4 A double-entry system standardizes the method that a company uses to record changes in its accounts resulting from various business transactions or events. For each transaction or event that a company records, the dollar amount of the debits entered in all the related accounts must be equal to the total dollar amount of the credits. These debit or credit entries affect two or more accounts in the assets, liabilities, and stockholders' equity (including the temporary accounts). All normal accounts on the left side of the accounting equation (assets) are increased by debits and decreased by credits whereas accounts on the right side of the equation
(liabilities and stockholders' equity) are increased by credits and decreased by debits.
QC-5 A permanent account is an account whose balance at the end of the accounting period is carried forward into the next accounting period. Examples: Cash,
Accounts Payable, Capital Stock. A temporary account is an account that is used temporarily to determine the change in retained earnings that occurred during the accounting period. The balance in a temporary account is closed out at the end of the period. Examples: Sales, Purchases, Salaries Expense.
QC-6 The major financial statements of a company include:
a. The income statement, which summarizes the results of the company's income- producing activities for the accounting period.
b. The balance sheet, which summarizes the amounts of the assets, liabilities, and stockholders' equity of the company on a particular date.
c. The statement of cash flows, which summarizes the cash receipts and cash payments of the company for the accounting period.
Some companies also have a fourth financial statement for reporting their comprehensive income.
QC-7 a. An account is used by a company to store the recorded monetary information from its transactions and events. An account can be in several physical forms such as a location on a computer disk or a standardized business paper.
b. A contra account is an account established to emphasize a reduction from a related account.
c. A ledger is the group of accounts for a company.
d. A journal (or document of original entry) is used by a company to initially record the debit and credit entries to all accounts affected by its transactions.
e. Posting involves transferring the date and debit and credit amounts from the journal entries to the appropriate debit and credit sides of the applicable accounts in the general or subsidiary ledger.
QC-8 The advantages to a company of initially recording each transaction in a journal include the following.
a. Use of a journal helps to prevent errors because all account titles and debit and credit entries are initially recorded in one place.
b. All the transactional information is recorded in one place, thereby providing a complete picture of the transaction.
c. Since the transactions are recorded as they occur, the journal also provides a chronological record of the company's financial transactions.
QC-9 a. Purchase of land on account b. Sale of capital stock for cash c. Collection of accounts receivable d. Payment of accounts payable
e. Retirement of capital stock for cash (note: many examples may show a
decrease in an asset and an increase in a contra-stockholders' equity account) QC-10 a. Purchase of merchandise on account
b. Return of defective merchandise for credit c. Purchase of merchandise for cash
d. Return of defective merchandise for cash refund
QC-11 The steps that a company completes in the accounting cycle include:
a. Recording daily transactions or events in a journal. The daily transactions or events are recorded in the general journal or the special journal.
b. Posting journal entries to the accounts in the general ledger. The dates and debit and credit amounts from the journal entries in the general journal and the special journals are transferred to the appropriate debit and credit sides of the
applicable accounts in the ledger.
c. Preparing and posting adjusting entries. At the end of the accounting period, certain accounts are updated through the use of an adjusting entry so that financial statements include the correct amounts for the current period. Those entries are transferred (by posting) to the appropriate accounts in the ledger just as the other journal entries are.
d. Preparing the financial statements. After all the adjusting entries have been posted to the general ledger, an adjusted trial balance is prepared. From the adjusted trial balance, the income statement, the retained earnings statement, and the balance sheet are prepared.
e. Preparing and posting closing entries. All the temporary accounts are closed (their balances are reduced to zero) and the inventory and retained earnings accounts are updated by closing entries which are posted to the general ledger.
QC-12 For most companies, not all of their accounts are up to date at the end of the accounting period. Some of these accounts need to be adjusted so that all revenues and expenses are recorded and the balance sheet accounts have a correct ending balance. This is accomplished through the use of adjusting entries.
QC-13 A prepaid expense is a good or service purchased by the company for use in its operations, but which has not been fully consumed by the end of the accounting period.
Example: Assume the company paid for a two year insurance policy on July 1, in the amount of $400 and recorded this as Prepaid Insurance. At the end of the year, the following adjusting entry is necessary:
Insurance Expense [($400 2) x 1/2] 100
Prepaid Insurance 100
A deferred revenue is a payment received by the company in advance for the future delivery of inventory or performance of services.
Example: Assume the company received 6 months rent, totaling $1,200 in advance on November 1 and recorded the receipt as Unearned Rent. On December 31, the following adjusting entry is necessary:
Unearned Rent ($1,200 x 2/6) 400
Rent Revenue 400
QC-14 An accrued expense is an expense incurred during the accounting period that has been neither paid nor recorded.
Example: Assume a company pays employees' salaries once a month on the 15th of the month. The monthly salaries payment is $5,000. On December 31, the following adjusting entry is necessary:
Salaries Expense ($5,000 x 1/2) 2,500
Salaries Payable 2,500
An accrued revenue is a revenue earned during the accounting period that has neither been received nor recorded.
Example: Assume a company received a 90-day note receivable dated December 1. The note has a face value of $10,000 and bears an annual interest rate of 12%.
The adjusting entry on December 31 is:
Interest Receivable
($10,000 x 0.12 x 1/12) 100
Interest Revenue 100
QC-15 Examples of adjusting entries used to record estimated items include:
a. Estimation of bad debts: Assume a company adopts a policy of providing allowance for bad debt losses that is equal to ẵ% of net sales. In the current year, the company has net sales of $1,500,000. The adjusting entry on December 31 is:
Bad Debt Expense
($1,500,000 x 0.005) 7,500
Allowance for Doubtful Accounts 7,500
b. Estimation of depreciation expense: The cost of a depreciable asset is
systematically allocated as an expense to each accounting period in which the asset is used. This allocation process is called depreciation. Assume that on July 1 of the current year, a company purchased certain office equipment for $20,000, which is estimated to have a useful life of 10 years and a residual value of $500.
Depreciation expense is calculated using the following formula (assuming the straight-line method is used):
life service Estimated
value residual
Estimated on Cost
depreciati Annual
On December 31 of the current year, the company records the following adjusting entry relating to its depreciation expense:
Depreciation Expense 975
Accumulated Depreciation