Problem 3-5A (50 minutes) Part 1
CLARITA COMPANY Income Statement For Year Ended December 31, 2009 Revenues
Fees earned .............................................. $534,000 Interest earned .......................................... 20,000 Total revenues .......................................... $554,000 Expenses
Depreciation expense—Automobiles ..... 26,500 Depreciation expense—Equipment ........ 19,500 Salaries expense ...................................... 184,000 Wages expense ........................................ 43,000 Interest expense ....................................... 35,600 Office supplies expense .......................... 33,800 Advertising expense ................................ 65,500 Repairs expense—Automobiles ............. 26,800 Total expenses ......................................... 434,700 Net income .................................................. $119,300
CLARITA COMPANY Statement of Owner's Equity For Year Ended December 31, 2009
$295,800 119,300 415,100 47,000 $368,100 S. Clarita, Capital, December 31, 2008 ............. Plus: Net income ...............................................
Less: Withdrawals by owner ............................ S. Clarita, Capital, December 31, 2009 ............
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Problem 3-5A (Concluded)
CLARITA COMPANY Balance Sheet December 31, 2009 Assets
Cash ........................................................................ $149,000 Accounts receivable .............................................. 50,000 Interest receivable .................................................. 22,600 Notes receivable (due in 90 days) ........................ 171,500 Office supplies ....................................................... 16,000 Automobiles ........................................................... $171,000 Accumulated depreciation—Automobiles ........... (75,000) 96,000 Equipment ............................................................... 146,000 Accumulated depreciation—Equipment .............. (23,000) 123,000 Land ......................................................................... 79,000 Total assets ............................................................ $707,100
Liabilities
Accounts payable .................................................. $101,000 Interest payable ...................................................... 20,000 Salaries payable ..................................................... 42,000 Unearned fees ........................................................ 36,000 Long-term notes payable ...................................... 140,000 Total liabilities ........................................................ 339,000
Equity
S. Clarita, Capital .................................................... 368,100 Total liabilities and equity ..................................... $707,100
Part 2
Profit margin = $119,300 / $554,000 = 21.5% ?McGraw-Hill Companies, 2009
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145
Problem 3-6AA (40 minutes) Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities. Nov. 1 Prepaid Advertising ....................................... 2,000 Cash ..........................................................
Paid for future advertising.
2,000
1 Prepaid Insurance ........................................... 2,466 Cash ..........................................................
Paid insurance for one year.
2,466
30 Cash .................................................................. 4,200
Unearned Service Fees ...........................
Received fees in advance.
4,200
Dec. 1 Prepaid Consulting Fees ............................... 2,400 Cash ..........................................................
Paid for future consulting.
2,400
15 Cash .................................................................. 7,250 Unearned Service Fees ...........................
Received fees in advance.
7,250
31 Advertising Expense ....................................... Prepaid Advertising ................................
To adjust prepaid advertising ($2,000 - $1,300).
700
700
31 Insurance Expense .......................................... Prepaid Insurance ....................................
To adjust prepaid insurance ($2,466 x 2/12).
411
411
31 Unearned Service Fees .................................. 2,600 Service Fees Earned ................................
To adjust unearned service fees ($4,200 - $1,600).
2,600
31 Consulting Fees Expense .............................. Prepaid Consulting Fees .........................
To adjust prepaid consulting fees ($2,400 x 1/3).
800
800
31 Unearned Service Fees ................................... 4,350 Service Fees Earned ................................
To adjust unearned service fees.
4,350
?McGraw-Hill Companies, 2009 146
Fundamental Accounting Principles, 19th Edition
Problem 3-6AA (Continued) Part 2 Assume prepaid expenses are recorded as expenses and unearned revenues as revenues. Nov. 1 Advertising Expense ....................................... 2,000 Cash ..........................................................
Paid for future advertising.
2,000
1 Insurance Expense .......................................... 2,466 Cash ..........................................................
Paid insurance for one year.
2,466
30 Cash .................................................................. 4,200
Service Fees Earned ................................
Received fees in advance.
4,200
Dec. 1 Consulting Fees Expense ............................... 2,400 Cash ..........................................................
Paid for future consulting.
2,400
15 Cash .................................................................. 7,250 Service Fees Earned ................................
Received fees in advance.
7,250
31 Prepaid Advertising ........................................ 1,300 Advertising Expense ...............................
To adjust for prepaid advertising.
1,300
31 Prepaid Insurance ........................................... 2,055
Insurance Expense ..................................
To adjust for prepaid insurance. ($2,466 x 10/12)
2,055
31 Service Fees Earned ....................................... 1,600 Unearned Service Fees ...........................
To adjust for unearned service fees.
1,600
31 Prepaid Consulting Fees ................................ 1,600 Consulting Fees Expense .......................
To adjust for prepaid consulting fees. ($2,400 x 2/3)
1,600
31 Service Fees Earned ....................................... 2,900 Unearned Service Fees ...........................
To adjust for unearned service fees.
($7,250 - $4,350)
2,900
?McGraw-Hill Companies, 2009
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147
Problem 3-6AA (Concluded)
Part 3
There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following: Advertising expense for two months ..................................... $ 700 Prepaid advertising as of December 31 ................................. 1,300 Insurance expense for two months ........................................ Consulting fees expense (1/3 of total paid) ...........................
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
411 800
Prepaid insurance as of December 31 ................................... 2,055 Prepaid consulting fees ........................................................... 1,600 Service fees earned for two months ($2,600 + $4,350) ......... 6,950 Unearned service fees at 12/31 ($1,600 + $2,900) ................. 4,500
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