a.Insurance Expense ............................................................ Prepaid Insurance ...............................................
1,215
1,215
1,215 1,215
b.Insurance Expense ............................................................ Prepaid Insurance ............................................... 3-6
Unearned Fees ...................................................................... Fees Earned ......................................................... 3-7
a.Salary Expense .................................................................. Salaries Payable ..................................................
9,570
9,570
9,360
12,480
9,360 12,480
b.Salary Expense .................................................................. Salaries Payable .................................................. 3-8
$59,850 ($63,000 – $3,150) 3-9
$195,816,000 ($128,776,000 + $67,040,000) 3-10 Error (a)
Error (b)
Over- stated
Revenue for the year would be ............... Expenses for the year would be ............. Net income for the year would be .......... Assets at December 31 would be ........... Liabilities at December 31 would be ...... Owner’s equity at December 31
would be ...................................................
$ 0
0 0 0 6,900
0
Under- Over- Under- stated stated stated $6,900 $ 0 $ 0
0 0 3,740 6,900 3,740 0
0 0 0 0 0 3,740 6,900
3,740
0
1.
2. 3. 4. 5. 6.
3-11
$175,840 ($172,680 + $6,900 – $3,740) 3-12
a.Accounts Receivable ......................................................... Fees Earned .........................................................
11,500
11,500
b. No. If the cash basis of accounting is used, revenues are recognized
only when the cash is received. Therefore, earned but unbilled revenues would not be recognized in the accounts, and no adjusting entry would be necessary. 3-13
a. Fees earned (or revenues) will be understated. Net income will be
understated.
b. Accounts (fees) receivable (or assets) will be understated. Owner’s
equity will be understated. 3-14
Depreciation Expense .......................................................... 5,200
Accumulated Depreciation .................................
3-15
a. $204,600 ($318,500 – $113,900)
b. No. Depreciation is an allocation of the cost of the equipment to the
periods benefiting from its use. It does not necessarily relate to value or loss of value. 3-16
a. $2,268,000,000 ($5,891,000,000 – $3,623,000,000)
b. No. Depreciation is an allocation method, not a valuation method.
That is, depreciation allocates the cost of a fixed asset over its useful life. Depreciation does not attempt to measure market values, which may vary significantly from year to year. 3-17
a.Depreciation Expense ....................................................... 7,500
Accumulated Depreciation .................................
b. (1) Depreciation expense would be understated. Net income would
be overstated. (2) Accumulated depreciation would be understated, and total assets
would be overstated. Owner’s equity would be overstated.
3-18
1.Accounts Receivable ......................................................... 4
Fees Earned .........................................................
5,200
7,500
4
2.Supplies Expense .............................................................. 3
Supplies ...............................................................
3.Insurance Expense ............................................................ 8 Prepaid Insurance ...............................................
4.Depreciation Expense ....................................................... 5 Accumulated Depreciation—Equipment ...........
5.Wages Expense .................................................................. 1 Wages Payable ....................................................
3-19
a. Dell Computer Corporation Amount Percent Net sales
$35,404,000 100.0 Cost of goods sold (29,055,000) 82.1 Operating expenses (3,505,000) 9.9 Operating income (loss)
$ 2,844,000 8.0 b. Gateway Inc.
Amount Percent Net sales
$ 4,171,325 100.0 Cost of goods sold (3,605,120) 86.4 Operating expenses (1,077,447) 25.8 Operating income (loss)
$ (511,242) (12.2)
c. Dell is more profitable than Gateway. Specifically, Dell’s cost of
goods sold of 82.1% is significantly less (4.3%) than Gateway’s cost of goods sold of 86.4%. In addition, Gateway’s operating expenses are over one-fourth of sales, while Dell’s operating expenses are 9.9% of sales. The result is that Dell generates an operating income of 8.0% of sales, while Gateway generates a loss of 12.2% of sales. Obviously, Gateway must improve its operations if it is to remain in business and remain competitive with Dell. 4-1
e, c, g, b, f, a, d 4-2
a. Income statement: 3, 8, 9
b. Balance sheet: 1, 2, 4, 5, 6, 7, 10
3 8 5 1
4-3
a. Asset: 1, 4, 5, 6, 10 b. Liability: 9, 12 c. Revenue: 2, 7 d. Expense: 3, 8, 11
4-4 1. f 2. c 3. b 4. h 5. g 6. j 7. a 8. i 9. d
10. e
4–5
ITHACA SERVICES CO.
Work Sheet
For the Year Ended January 31, 2006
Adjusted
Trial Balance Adjustments Trial Balance
Account Title
Dr.
Cr.
Dr.
Cr.
Dr.
Cr.
1 Cash
8
8 2 Accounts Receivable 50 (a) 7 57 3 Supplies
8 (b) 5 3 4 Prepaid Insurance 12 (c) 6 6 5 Land
50 50 6 Equipment
32 32 7 Accum. Depr.—Equip. 2 (d) 5 7 8 Accounts Payable 26 26 9 Wages Payable
0 (e) 1 1 10 Terry Dagley, Capital 112
112
11 Terry Dagley, Drawing 8 8
1234567891011
12 13 14 15 16 17 18 19 20 Fees Earned Wages Expense 16 Rent Expense 8 Insurance Expense 0 Utilities Expense 6 Depreciation Expense 0 Supplies Expense 0 Miscellaneous Expense 2 Totals 200 60
200 (e) (c) (d) (b) 1 6 5 5 24 (a) 7
24 213 67 12 17 13 8 14 6 15 6 16 5 17 5 18 2 19 213 20
Continue
ITHACA SERVICES CO.
Work Sheet
For the Year Ended January 31, 2006
Adjusted Income Balance
Trial Balance Statement Sheet
Account Title
Dr.
Cr.
Dr.
Cr.
Dr. Cr.
1 Cash 8
8 2 Accounts Receivable 57 57 3 Supplies 3 3 4 Prepaid Insurance 6 6 5 Land 50 50 6 Equipment 32 32 7 Accum. Depr.—Equip. 7 7 8 Accounts Payable 26 26 9 Wages Payable 1 1 10 Terry Dagley, Capital 112
112
11 Terry Dagley, Drawing 8 8 12 Fees Earned 67 67 13 Wages Expense 17 17 14 Rent Expense 8 8 15 Insurance Expense 6 6 16 Utilities Expense 6 6 17 Depreciation Expense 5 5 18 Supplies Expense 5 5 19 Miscellaneous Expense 2 2 20 Totals 213 213 49 67 164 146 21 Net income (loss) 18 1821 22 67 67 164 164
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
22