Adjusting Accounts For Financial Statements Chapter 3 Copyright © 2016 McGraw-Hill Education. All...

Adjusting Accounts For Financial StatementsChapter 3

Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of

McGraw-Hill Education.

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition

03-C1:Explain the importance of

periodic reporting and the role of accrual accounting

2

The Accounting Period

C 13

Accrual Basis versus Cash Basis

Accrual Basis

Revenues are recognized when earned and expenses are recognized when incurred.

Cash Basis

Revenues are recognized when cash is received and expenses are recorded when cash is paid.

C 14

Cash Basis

Revenues are recognized when cash is received and expenses are recorded when cash is paid.


Non-GAAPNon-GAAP

C 1

Accrual Basis

Revenues are recognized when earned and expenses are recognized when incurred.

5


On December 1, 2015, FastForward paid $2,400 cash for a twenty-four month business insurance policy.

Using the cash basis, the entire $2,400 would be recognized as insurance expense in 2015. No insurance expense from this policy would be recognized in 2016 or 2017, periods covered by the policy.

On December 1, 2015, FastForward paid $2,400 cash for a twenty-four month business insurance policy.

Using the cash basis, the entire $2,400 would be recognized as insurance expense in 2015. No insurance expense from this policy would be recognized in 2016 or 2017, periods covered by the policy.C 1

6


On the accrual basis, $100 of insurance expense is recognized in 2015, $1,200 in 2016, and $1,100 in 2017. The expense is matched with the periods benefited by the insurance

coverage.

C 17

Recognizing Revenues

C 1

The revenue recognition principle states that we recognize revenue when the product or service is delivered to our customer.

8

Recognizing Expenses

The expense recognition (or matching) principle aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. This matching of expenses with the revenue benefits is a major part of the adjusting process.

C 19

03-P1:Prepare and explain adjusting

entries

10

Framework for Adjustments

P 111

An adjusting entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded.

Prepaid (Deferred) Expenses(ex. Prepaid Insurance, Prepaid Rent, Supplies, etc.

Resources paid for prior to receiving the

actual benefits.

P 112

PREPAID INSURANCE

PREPAID INSURANCE

$2,40024-month policyBeginning 12/01

On December 1, 2015, FastForward paid $2,400 to cover insurance for 24 months that began on December 1 of

2015. Scott recorded the expenditure as Prepaid Insurance on December 1.

On December 1, 2015, FastForward paid $2,400 to cover insurance for 24 months that began on December 1 of

2015. Scott recorded the expenditure as Prepaid Insurance on December 1.

P 113

PREPAID INSURANCE

PREPAID INSURANCE$2,400

$100

INSURANCE EXPENSE

$100

Insurance Expense is debited$100 to recognize the amount

of insurance coverage for Dec. andPrepaid Insurance is credited for $100

to reduce it’s balance.

$2,400/24 months = $100

P 114

PREPAID INSURANCE

PREPAID INSURANCE

$2,400

$100 adj

INSURANCE EXPENSE

adj $100

Bal. $2,300

The Balance Sheet will show$2,300 (23 months) of

Prepaid Insurance remaining!

(Balance Sheet) (Income Statement)

The Income Statement will show $100 (1 month) of

insurance expired!

P 115

Adjusting Journal entry for Insurance expired:

Dec. 31 Insurance Expense 100 Prepaid Insurance 100

To record first month's expired insurance

Dec. 1 2,400 Dec. 31 100Bal. 2,300

Insurance Expense 637

Dec. 31 100Prepaid Insurance 128

We’ve seen the adjustment in the T-accounts but we need to record the adjustment on Dec. 31, in the

General Journal. . .

We’ve seen the adjustment in the T-accounts but we need to record the adjustment on Dec. 31, in the

General Journal. . .

P 116

Straight-LineDepreciationExpense

= Asset Cost - Salvage Value

Useful Life

Another adjusting entry which needs to be made is for Depreciation

Instead of expensing the cost of a plant asset (equipment, building, cars, etc.) in the year it is

purchased we allocate or spread out the cost over their expected useful lives.

The formula for straight-line depreciation is:

P 117

USEFUL LIFE The period of time that an asset is expected

to help produce revenues. Useful life expires as a result of wear and

tear, or because it no longer satisfies the needs of the business.

P 118

SALVAGE VALUE• The expected market value or selling price

of an asset at the end of its useful life• Also called:

– Scrap Value or – Residual Value USED. . .

Great

condition!

P 119

DEPRECIATION EXAMPLEFastForward purchased equipment on Dec 1 for $26,000. It has an estimated useful live of 60 months. The equipment is expected to be worth about $8,000 at the end of five years. They purchased the equipment on Dec 1 but it is now Dec 31.

Because FastForward expects the equipmentto be worth $8,000 when the five years

are over, only $18,000 of the cost needsto be spread over the next 60 months.

P 120

STRAIGHT-LINE METHOD

FORMULA:

1st step: Calculate Net Cost (the amount to depreciate).

Original Cost

Salvage Value =

Net Cost

$26,000 $8,000 = $18,000

P 121

Calculating Depreciation Expense

2nd step: Determine depreciation expense for this accounting period (one month).

FORMULA:

Net Cost

Estimated Useful Life

$18,000

60 mos.

$300 per month

Now that we know depreciation forthe month is $300, let’s figure out the

adjusting entry. . .P 1

22

Depreciation adjustment reflected in our T-accounts looks like this:

Equipment Depreciation Expense

12/1 26,000 12/31 300

Accumulated Depreciation12/31 300

23

The depreciation amount of $300 is credited to this account instead of the

asset account.

Let’ look at the journal entry for the adjustment for Depreciation..

Equipment Depreciation Expense

12/1 26,000 12/31 300

Accumulated Depreciation-Equipment

12/31 300

Dec. 31 Depreciation Expense 300 Accumulated Depreciation - Equipment 300

To record monthly equipment depreciationP 1

24

FastForwardPartial Balance SheetAt February 28, 2016

Assets Cash .Equipment 26,000$ Less: accumulated deprec. (900) 25,100 . .Total Assets

Depreciation would show up on our balance sheet like this:

After three months of

depreciation have been taken, the

Equipment is shown net of accumulated depreciation.

$

P 125

NEED-TO-KNOW

For each separate case below, follow the three-step process for adjusting the prepaid asset account. Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record an adjusting entry to get from step 1 to step 2.

Assume no other adjusting entries are made during the year.

Prepaid Insurance. The Prepaid Insurance account has a $5,000 debit balance to start the year. A review of insurance policies and payments shows that $1,000 of unexpired insurance remains at year-end.

Prepaid Rent. On October 1 of the current year, the company prepaid $12,000 for one year of rent for facilities being occupied from that day forward. The company debited Prepaid Rent and credited Cash for $12,000. December 31 year-end statements must be prepared.

Supplies. The Supplies account has an $1,000 debit balance to start the year. Supplies of $2,000 were purchased during the current year and debited to the Supplies account. A December 31 physical count shows $500 of supplies remaining.

Accumulated Depreciation. The company has only one fixed asset (equipment) that it purchased at the start of this year. That asset had cost $38,000, had an estimated life of 10 years, and is expected to be valued at $8,000 at the end of the 10-year life.

P 126

NEED-TO-KNOW

Step 1: Determine what the current account balance equals. $5,000Step 2: Determine what the current account balance should equal. $1,000

Unadj. 5,000Adjustment 4,000

Adj. 1,000

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date Debit CreditDec. 31 Insurance expense 4,000

Prepaid Insurance 4,000

Prepaid Insurance. The Prepaid Insurance account has a $5,000 debit balance to start the year. A review of insurance policies and payments shows that $1,000 of unexpired insurance remains at year-end.

Prepaid Insurance

General Journal

P 127

Income StatementRevenue

Debit Expense

Balance SheetCredit Asset

Liability

NEED-TO-KNOW


Oct. 1 12,000Adjustment 3,000

Dec. 31 9,000


Date Debit CreditDec. 31 Rent Expense 3,000

Prepaid Rent 3,000

Prepaid Rent

General Journal

Prepaid Rent. On October 1 of the current year, the company prepaid $12,000 for one year of rent for facilities being occupied from that day forward. The company debited Prepaid Rent and credited Cash for $12,000. December 31 year-end statements must be prepared.

P 128


Debit Expense


Liability

NEED-TO-KNOW

Step 1: Determine what the current account balance equals. $3,000Step 2: Determine what the current account balance should equal. $500

Unadj. 3,000Adjustment 2,500

Dec. 31 500


Date Debit CreditDec. 31 Supplies Expense 2,500

Supplies 2,500

Supplies. The Supplies account has a $1,000 debit balance to start the year. Supplies of $2,000 were purchased during the current year and debited to the Supplies account. A December 31 physical count shows $500 of supplies remaining.

Supplies

General Journal

P 129


Debit Expense


Liability

NEED-TO-KNOW

Step 1: Determine what the current account balance equals. $0Step 2: Determine what the current account balance should equal. $3,000

Unadj. 0Adjustment 3,000Dec. 31 3,000 ($38,000 - $8,000)

10 yearsStep 3: Record an adjusting entry to get from step 1 to step 2.

Date Debit CreditDec. 31 Depreciation Expense 3,000

Accumulated Depreciation 3,000

Accumulated Depreciation

General Journal

Accumulated Depreciation. The company has only one fixed asset (equipment) that it purchased at the start of this year. That asset had cost $38,000, had an estimated life of 10 years, and is expected to be valued at $8,000 at the end of the 10-year life.

P 130


Debit Expense

Balance SheetCredit Contra-Asset

Liability

Unearned (Deferred)Revenues

Cash received in advance of providing products or services.

P 131

NEED-TO-KNOWFor each separate case below, follow the three-step process for adjusting the unearned revenue liability account.

Step 1: Determine what the current account balance equals. Step 2: Determine what the current account balance should equal. Step 3: Record an adjusting entry to get from step 1 to step 2.


Unearned Rent Revenue. The company collected $24,000 rent in advance on September 1, debiting Cash and crediting Unearned Rent Revenue. The tenant was paying 12 months rent in advance and occupancy began September 1.

Unearned Services Revenue. The company charges $100 per month to spray a house for insects. A customer paid $600 on November 1 in advance for six treatments, which was recorded with a debit to Cash and a credit to Unearned Services Revenue. At year-end, the company has applied two treatments for the customer.

P 132

NEED-TO-KNOW


Sept. 1 24,000Adjustment 8,000

Dec. 31 16,000 (8 mos. @ $2,000)


Date Debit CreditDec. 31 Unearned Rent Revenue 8,000

Rent Revenue 8,000

General Journal

Unearned Rent Revenue. The company collected $24,000 rent in advance on September 1, debiting Cash and crediting Unearned Rent Revenue. The tenant was paying 12 months rent in advance and occupancy began September 1.

Unearned Rent Revenue

Income StatementRevenueExpense

Balance SheetAssetLiabilityDebit

Credit

P 133

NEED-TO-KNOW

Step 1: Determine what the current account balance equals. $600Step 2: Determine what the current account balance should equal. $400

Nov. 1 600Adjustment 200

Dec. 31 400


Date Debit CreditDec. 31 Unearned Services Revenue 200

Services Revenue 200

Unearned Services Revenue. The company charges $100 per month to spray a house for insects. A customer paid $600 on November 1 in advance for six treatments, which was recorded with a debit to Cash and a credit to Unearned Services Revenue. At year-end, the company has applied two treatments for the customer.

Unearned Services Revenue

General Journal


Balance SheetAssetLiabilityDebit

Credit

P 134

Costs incurred in a period that are

both unpaid and unrecorded.

Accrued Expenses

P 135

NEED-TO-KNOWFor each separate case below, follow the three-step process for adjusting the accrued expense account.



Salaries Payable. At year-end, salaries expense of $5,000 has been incurred by the company, but is not yet paid to employees.

Interest Payable. At its December 31 year-end, the company holds a mortgage payable that has incurred $1,000 in annual interest that is neither recorded nor paid. The company intends to pay the interest on January 3 of the next year.

P 136

NEED-TO-KNOW


Unadj. 0Adjustment 5,000Dec. 31 5,000


Date Debit CreditDec. 31 Salaries Expense 5,000

Salaries Payable 5,000

Salaries Payable. At year-end, salaries expense of $5,000 has been incurred by the company, but is not yet paid to employees.

Salaries Payable

General Journal


Balance SheetAssetLiabilityCreditDebit

P 137

NEED-TO-KNOW




Date Debit CreditDec. 31 Interest Expense 1,000

Interest Payable 1,000

Interest Payable. At its December 31 year-end, the company holds a mortgage payable that has incurred $1,000 in annual interest that is neither recorded nor paid. The company intends to pay the interest on January 3 of the next year.

Interest Payable

General Journal


Balance SheetAssetLiabilityCreditDebit

P 138

Accrued RevenuesRevenues earned in a

period that are both unrecorded and not yet received.

P 139

NEED-TO-KNOWFor each separate case below, follow the three-step process for adjusting the accrued revenue account.



Accounts Receivable. At year-end, the company has completed services of $1,000 for a client, but the client has not yet been billed for those services.

Interest Receivable. At year-end, the company has earned, but not yet recorded, $500 of interest earned from its investments in government bonds.

P 140

NEED-TO-KNOW




Date Debit CreditDec. 31 Accounts Receivable 1,000

Services Revenue 1,000

Accounts Receivable

General Journal

Accounts Receivable. At year-end, the company has completed services of $1,000 for a client, but the client has not yet been billed for those services.


Balance SheetAssetLiability

DebitCredit

P 141

NEED-TO-KNOW

Step 1: Determine what the current account balance equals. $0Step 2: Determine what the current account balance should equal. $500

Unadj. 0Adjustment 500Dec. 31 500


Date Debit CreditDec. 31 Interest Receivable 500

Interest Revenue 500

Interest Receivable. At year-end, the company has earned, but not yet recorded, $500 of interest earned from its investments in government bonds.

Interest Receivable

General Journal


Balance SheetAssetLiability

DebitCredit

P 142

Links to Financial Statements

P 143

03-P2: Adjusted Trial Balance

44

Adjusted Trial Balance

45P 2

03-P3: Prepare financial statements from an adjusted

trial balance

46

Preparing Financial Statements from an Adjusted Trial Balance

P3

Step 1— Prepare income statement using revenue and expense accounts from trial balance.

Step 2—Prepare statement of retained earnings using retained earnings and dividends from trial balance; and pull net income from step 1.

Step 3—Prepare balance sheet using asset and liability account from trial balance; and pull updated retained earnings balance from step 2.

Step 4—Prepare statement of cash flows from changes in cash flows for the period (illustrated later in the book).

47

NEED-TO-KNOWUse the following adjusted trial balance of Magic Company to prepare its (1) income statement, (2) statement of

Retained earnings, and (3) balance sheet (unclassified), for the year ended, or date of, December 31, 2015. The Retained Earnings account balance is $45,000 at December 31, 2014.

P348

Debit CreditCash $13,000Accounts receivable 17,000Land 85,000Accounts payable $12,000Long-term notes payable 33,000Common Stock 30,000

Dividends 20,000Fees earned 79,000Salaries expense 56,000Office supplies expense 8,000Totals $199,000 $199,000

Magic CompanyAdjusted Trial BalanceDecember 31, 2015

Retained Earnings 45,000

Debit Credit

Fees earned $79,000Expenses

Salaries expense $56,000Office supplies expense 8,000

64,000Net income $15,000

For Year Ended December 31, 2015

Magic CompanyIncome Statement

P 349

The Income Statement





Debit Credit

Fees earned $79,000

Retained Earnings, Dec. 31 2014 $45,000

Expenses

Plus: Net income 15,000

Salaries expense $56,000

Less: Dividends (20,000)

Office supplies expense 8,000


64,000Net income $15,000



Magic Company

Magic Company

Income Statement

Statement of Retained Earnings

P 350

The Statement of Retained Earnings

Debit CreditCash $13,000

Accounts receivable 17,000Land 85,000

Accounts payable $12,000Long-term notes payable 33,000Common Stock 30,000

Dividends 20,000Fees earned 79,000Salaries expense 56,000Office supplies expense 8,000

Totals $199,000 $199,000



Fees earned $79,000


Expenses






64,000Net income $15,000

Cash $13,000 Accounts payable $12,000Accounts receivable 17,000 Long-term notes payable 33,000Land 85,000 Total liabilities 45,000

Common Stock 30,000

Total assets $115,000 Total liabilities and equity 115,000

Assets Liabilities

Equity



Magic CompanyBalance Sheet

December 31, 2015

Magic Company

Magic Company

Income Statement

Statement of Owner’s Equity

P 351

Debit Credit

Debit CreditCash $13,000

Accounts receivable 17,000Land 85,000

Accounts payable $12,000Long-term notes payable 33,000Common Stock 30,000

Dividends 20,000Fees earned 79,000Salaries expense 56,000Office supplies expense 8,000

Totals $199,000 $199,000



40,000Retained EarningsTotal Equity 70,000

Balance Sheet

03-P4:Describe and prepare closing

entries

52

Recording Closing Entries Close Credit Balances in

Revenue Accounts to Income Summary.

Close Debit Balances in Expense accounts to Income Summary.

Close Income Summary account to Retained Earnings.

Close Dividends to Retained Earnings.

P 453

NEED-TO-KNOW

Debit Credit

Magic CompanyTrial Balance

December 31, 20X2

Use the adjusted trial balance of Magic Company to prepare its closing entries.

P 454





Date Debit CreditDec. 31 Fees earned 79,000

Income summary 79,000

Dec. 31 Income summary 64,000Salaries expense 56,000Office supplies expense 8,000

Dec. 31 Income summary 15,000Retained earnings 15,000

Dec. 31 Retained earnings 20,000Dividends 20,000

General Journal

Expenses 64,000 Revenues 79,000Net income 15,000

Closing 15,0000

12/31/2014 45,000Dividends 20,000 Net income 15,000

12/31/2015 40,000

Income summary

Retained earnings

Debit CreditCash $13,000Accounts receivable 17,000Land 85,000Accounts payable $12,000Long-term notes payable 33,000

Retained earnings 45,000Dividends 20,000Fees earned 79,000Salaries expense 56,000Office supplies expense 8,000Totals $199,000 $199,000

P 455

Common stock 30,000


Common stock 30,000

Total assets $115,000 Total liabilities and equity 115,000

Assets Liabilities

Equity


December 31, 2015

Expenses 64,000 Revenues 79,000Net income 15,000

Closing 15,0000

12/31/2014 45,000Dividends 20,000 Net income 15,000

12/31/2015 40,000

Income Summary

Retained Earnings

P 456

Retained earnings

Debit CreditCash $13,000Accounts receivable 17,000Land 85,000Accounts payable $12,000Long-term notes payable 33,000

Common Stock 30,000

Totals $115,000 $115,000Retained earnings 40,000

40,000Total equity 75,000

03-P5: Explain and prepare a post-

closing trial balance

57

Post-Closing Trial Balance

List of permanent accounts and their balances after posting closing entries.

Total debits and credits must be equal.

P 5

58

Post-Closing Trial Balance

P 5

59

03-C2: Identify steps in the accounting

cycle.

60

Accounting Cycle

C 2 61

03-C3: Explain and prepare a classified balance sheet

62

Current items are those expected to come due (both collected and owed) within the longer of one year or

the company’s normal operating cycle.

Classified Balance Sheet

C 363

Current assets are expected to be sold, collected, or used within one year or the

company’s operating cycle.

C 3

Current Assets

64

Long-term investments are expected to be held for more than one year or the operating cycle.

C 3

Long-Term Investments

65

Plant assets are tangible long-lived assets used to produce or sell products and services.

C 3

Plant Assets

66

Intangible assets are long-term resources used to produce or sell products and services and that lack

physical form.

C 3

Intangible Assets

67

Current liabilities are obligations due within the longer of one year or the company’s operating cycle.

Current Liabilities

C 368

Long-term liabilities are obligations not due within the longer of one year or the company’s operating

cycle.

C 3

Long-Term Liabilities

69

Equity is the owner’s claim on the assets.

C 3

Equity

70

NEED-TO-KNOW

Magic Company

Use the adjusted trial balance of Magic Company to prepare its classified balance sheet as of December 31, 2015.

C 371

Debit Credit

Adjusted Trial BalanceDecember 31, 20X2

Debit Credit

Trial Balance





NEED-TO-KNOW

Current assets Cash $13,000 Accounts receivable 17,000

Total current assets 30,000Plant assets Land 85,000

Total plant assets 85,000Total assets $115,000

Current liabilitiesAccounts payable $12,000Total current liabilities 12,000

Long-term notes payable 33,000Total liabilities $45,000

Common Stock 30,000

Total liabilities and equity


December 31, 2015

Use the adjusted trial balance of Magic Company to prepare its classified balance sheet as of December 31, 2015.

Assets

Liabilities

Equity

$115,000

Long-term liabilities

Debit Credit

Magic CompanyAdjusted Trial BalanceDecember 31, 20X2

C 372

Debit Credit

Adjusted Trial BalanceDecember 31, 20X2

Debit Credit

Trial Balance

Debit Credit

Cash $13,000Accounts receivable 17,000Land 85,000Accounts payable $12,000Long-term notes payable 33,000

Common Stock 30,000

Dividends 20,000Fees earned 79,000Salaries expense 56,000


Totals $199,000 $199,000

Magic Company

Adjusted Trial Balance

December 31, 2015


Retained Earnings 40,000Total equity 70,000

Global View

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.

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.

73

Global ViewBoth U.S. GAAP and IFRS include similar guidance for adjusting accounts. Although

some variations exist in revenue and expense recognition.

74

03-A1: Compute profit margin and describe its use in analyzing

company performance.

75

Profit Margin

The profit margin ratio measures the company’s net income to net sales.

ProfitMargin

=

A 1

Limited Brands, Inc.

Net IncomeNet Sales

76

03-A2: Compute the current ratio and describe what it reveals about

a company’s financial condition.

77

Current RatioHelps assess the company’s ability to pay its

debts in the near future

Current ratio = Current assets

Current liabilities

Limited Brands, Inc.

A 278

03-P6: Appendix 3A Alternative Accounting for

Prepayments

79

Appendix 3A: Alternative Accounting for Prepayments

P6

An alternative method is to record all prepaid expenses

with debits to expense accounts.

The adjusting entry depends on how the original payment was recorded.

80

Appendix 3A: Alternative Accounting for Prepayments

P681

Appendix 3A: Alternative Accounting for Revenues

P6

An alternative method is to record all revenues to a liability account or a revenue account.

The adjusting entry depends on how the original receipt was recorded.

82

Appendix 3A: Alternative Accounting for Revenues

P683

03-P7: Appendix 2CPrepare a work sheet and

explain its usefulness.

84

Benefits of a Work SheetAids the

preparation of financial

statements.

Reduces possibility of

errors.

Links accounts and their

adjustments.

Assists in planning and organizing an

audit.

Helps in preparing

interim financial statements.

Shows the effects of proposed

transactions.

Not a required report.

P 785

NEED-TO-KNOWThe following 10-column work sheet contains the year-end unadjusted trial balance for Sampson Companyas of December 31, 2016. Complete the work sheet by entering the necessary adjustments, computing the adjusted

account balances, extending the adjusted balances into the appropriate financial statement columns, and entering the amount of net income for the period. Note: The common stock account balance was $32,000 at December 31, 2015.

No. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.101 Cash 23,000106 Accounts receivable 8,000183 Land 52,000201 Accounts payable 10,000251 Long-term notes payable 43,000301 Common Stock 32,000302 Dividends 10,000401 Fees earned 70,000622 Salaries expense 54,000650 Office supplies expense 8,000

Totals 155,000 155,000

UnadjustedTrial Balance Adjustments

AdjustedTrial Balance

IncomeStatement

Balance Sheet and Statement of Ret. Earnings

1. Prepare and complete the work sheet, starting with the unadjusted trial balance and including adjustmentsbased on the following.

a. The company has earned $9,000 in fees that were not yet recorded at year-end.b. The company incurred $2,000 in salary expense that was not yet recorded at year-end. (Hint: For simplicity, assume it records any salary not yet paid as part of accounts payable.)

c. The long-term note payable was issued on December 31 this year. Thus, no interest has yet accruedon this loan.P 7

86

a. The company has earned $9,000 in fees that were not yet recorded at year-end.b. The company incurred $2,000 in salary expense that was not yet recorded at year-end.

(Hint: For simplicity, assume it records any salary not yet paid as part of accounts payable.)c. The long-term note payable was issued on December 31 this year. Thus, no interest has yet accruedon this loan.

No. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.101 Cash 23,000 23,000 23,000106 Accounts receivable 8,000 (a) 9,000 17,000 17,000183 Land 52,000 52,000 52,000201 Accounts payable 10,000 (b) 2,000 12,000 12,000251 Long-term notes payable 43,000 43,000 43,000301 Common Stock 32,000 32,000 32,000302 Dividends 10,000 10,000 10,000401 Fees earned 70,000 (a) 9,000 79,000 79,000622 Salaries expense 54,000 (b) 2,000 56,000 56,000650 Office supplies expense 8,000 8,000 8,000

Totals 155,000 155,000 11,000 11,000 166,000 166,000 64,000 79,000 102,000 87,000Net income 15,000 15,000Totals 79,000 79,000 102,000 102,000



IncomeStatement

Balance Sheet and Statement of Owner's Equity

P 787

88

No. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.101 Cash 23,000 23,000 23,000106 Accounts receivable 8,000 (a) 9,000 17,000 17,000183 Land 52,000 52,000 52,000201 Accounts payable 10,000 (b) 2,000 12,000 12,000251 Long-term notes payable 43,000 43,000 43,000301 Common Stock 32,000 32,000 32,000302 Dividends 10,000 10,000 10,000401 Fees earned 70,000 (a) 9,000 79,000 79,000622 Salaries expense 54,000 (b) 2,000 56,000 56,000650 Office supplies expense 8,000 8,000 8,000

Totals 155,000 155,000 11,000 11,000 166,000 166,000 64,000 79,000 102,000 87,000Net income 15,000 15,000Totals 79,000 79,000 102,000 102,000



IncomeStatement

Balance Sheet and Statement of Ret. Earnings

Date Debit CreditDec. 31 Accounts Receivable 9,000

Fees earned 9,000

Dec. 31 Salaries expense 2,000Accounts payable 2,000

Dec. 31 No journal entry required

General Journal

2. Use information from the completed work sheet in part 1 to prepare adjusting entries.

P 7

Debit CreditCash $23,000Accounts receivable 17,000Land 52,000Accounts payable $12,000Long-term notes payable 43,000Common Stock 32,000Dividends 10,000Fees earned 79,000Salaries expense 56,000Office supplies expense 8,000Totals $166,000 $166,000

Fees earned $79,000

Retained Earnings, Dec. 31 2015 $ 00

Expenses





Retained Earnings, Dec. 31 2016 $ 5,000

64,000Net income $15,000


Common Stock 32,000

Total assets $92,000Total liabilities and equity 92,000

Assets Liabilities

Equity



Sampson CompanyBalance Sheet

December 31, 2016

Sampson Company

Sampson Company

Income Statement

Statement of Retained Earnings

3. Prepare the income statement and the statement of retained earnings for the year ended December 31 andthe unclassified balance sheet at December 31.

P 7 5,000Retained Earnings

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03-P8: Appendix 3CReversing Entries

90

P 8

Appendix 4A – Reversing EntriesReversing 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.

Let’s see how the accounting for our payroll accrual will be handled with and without

reversing entries.

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Without Reversing Entries With Reversing Entries

93P 8

End of Chapter 3

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Adjusting Accounts For Financial Statements Chapter 3 Copyright © 2016 McGraw-Hill Education. All...

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