Chapter 3 Homework Solutions PDF

(5-10 min.) E 3-12 (All amounts in millions) Statement Report 1. Income statement Sales revenue...............................

(5-10 min.) E 3-12 (All amounts in millions) Statement Report 1. Income statement Sales revenue................................ $4,000 Operating expenses....................... 800 Balance sheet Accounts receivable...................... $ 400 Accounts payable.......................... 700 2. Cash basis would report only the cash transactions of the company. Statement Report Income statement Sales revenue................................. $4,100 Operating expenses....................... 800 Balance sheet Accounts receivable...................... 0 Accounts payable.......................... 0 (5-10 min.) E 3-17 a. Yes, the company is obligated to pay its employees for the work they did during the current month, so the $20,000 in wages should be accrued as a liability and expense at the end of the month. b. Under accrual accounting, expenses must be recorded when they are incurred, not when they are paid. This treatment is therefore not acceptable. c. Revenue should be recorded now as it has been earned. d. Revenue should be recorded as earned. The company should record its revenue based on the percentage of the project completed at each year end. e. It should record utility expense in the year the utilities were consumed, which is the year ended December 31. f. (15-20 min.) E 3-18 Req. 1 Adjusting Entries ACCOUNT TITLES DEBIT CREDIT a. Insurance Expense ($700 + $2,100 – $800)…………….. 2,000 Prepaid Insurance...................................................... 2,000 b. Interest Receivable.......................................................... 900 Interest Revenue........................................................ 900 c. Unearned Service Revenue ($800 – $300)…………….. 500 Copyright © 2024 Pearson Canada Inc. 119  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual Service Revenue........................................................ 500 d. Depreciation Expense..................................................... 6,200 Accumulated Depreciation........................................ 6,200 e. Salary Expense ($9,000  3/5)........................................ 5,400 Salary Payable........................................................... 5,400 f. Income Tax Expense ($20,000  0.25)........................... 5,000 Income Tax Payable.................................................. 5,000 Req. 2 The accountant could have reported a better operating performance than actually occurred by not making the adjustments to the expense accounts, which would have resulted in lower total expenses and higher net income as follows: Net income overstated by omission of: Depreciation expense..................................................................... $ 6,200 Salary expense............................................................................... 5,400 Income tax expense........................................................................ 5,000 Insurance expense.......................................................................... 2,000 Total overstatement........................................................................ $18,600 It would have been unethical for the accountant to omit these adjustments because their omission results in an income statement that does not accurately report the company’s net income for the period. By overstating the company’s operating performance, the accountant is intentionally misleading the users of the financial statements into thinking the company performed better than it actually did, which constitutes fraud. Copyright © 2024 Pearson Canada Inc. 120  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (10-20 min.) E 3-21 Accounts Receivable Supplies 1,300 900 (a) 600 Bal. 300 Bal. 1,300 Accrued Sales Revenue Unearned Sales Revenue 0 (d) 700 800 (c) 600 Bal. 100 Bal. 600 Salary Payable Salary Expense (b) 2,000 4,200 Bal. 2,000 (b) 2,000 Bal. 6,200 Sales Revenue 14,400 (c) 600 (d) 700 Bal. 15,700 Supplies Expense (a) 600 Bal. 600 (35-55 min.) E 3-27 Req. 1 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Adjusting Entries December 31 Unearned Service Revenue................................................ 6,700 Service Revenue ($19,500 – $12,800).......................... 6,700 31 Salary Expense ($4,900 – $4,000)..................................... 900 Salary Payable.............................................................. 900 31 Rent Expense ($1,400 – $1,200)........................................ 200 Prepaid Rent................................................................. 200 31 Depreciation Expense ($300 – $0)..................................... 300 Accumulated Depreciation........................................... 300 31 Interest Expense ($1,600 – $0)........................................... 1,600 Interest Payable............................................................. 1,600 Closing Entries 31 Service Revenue................................................................. 19,500 Retained Earnings......................................................... 19,500 Copyright © 2024 Pearson Canada Inc. 121  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual 31 Retained Earnings.............................................................. 8,200 Salary Expense............................................................. 4,900 Rent Expense................................................................ 1,400 Depreciation Expense................................................... 300 Interest Expense............................................................ 1,600 31 Retained Earnings.............................................................. 1,000 Dividends...................................................................... 1,000 (continued) E 3-27 Req. 2 Yosaf Portraits Ltd. Balance Sheet As at December 31, 20XX ASSETS Current Assets: Cash......................................................................................................... $10,200 Prepaid rent [$1,100 – ($1,400 – $1,200)].............................................. 900 Total current assets............................................................................ 11,100 Capital Assets: Equipment................................................................... $32,100 Less accumulated depreciation ($3,800 + $300)........ (4,100) 28,000 Total assets.................................................................................................... $39,100 LIABILITIES Current Liabilities: Accounts payable.................................................................................... $ 4,600 Salary payable ($4,900 – $4,000)........................................................... 900 Unearned service revenue [$8,400 – ($19,500 – $12,800)].................... 1,700 Interest payable....................................................................................... 1,600 Total current liabilities...................................................................... 8,800 Note payable, long-term................................................................................. 10,000 Total liabilities................................................................................................ 18,800 SHAREHOLDERS’ EQUITY Common shares............................................................................................. 8,700 Retained earnings ($1,300 + $19,500 – $8,200 – $1,000)…………………... 11,600 Total shareholders’ equity............................................................................. 20,300 Total liabilities and shareholders’ equity...................................................... $39,100 Req. 3 Current Prior Year Year Total current assets $11,100 Current ratio = = = 1.26 1.55 Total current liabilities $8,800 Copyright © 2024 Pearson Canada Inc. 122  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual The ability to pay current liabilities with current assets has deteriorated during 2020. Total liabilities $18,800 Debt ratio = = = 0.48 0.45 Total assets $39,100 The overall ability to pay total liabilities has deteriorated slightly during 20XX. (10-20 min.) E 3-26 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Closing Entries (Amounts in thousands) Dec. 31 Revenue.............................................................................. 23,600 Other Revenue.................................................................... 600 Retained Earnings......................................................... 24,200 31 Retained Earnings.............................................................. 23,000 Cost of Services Sold………………... 11,600 Selling, General, and Administrative Expense............. 6,900 Depreciation Expense................................................... 4,100 Income Tax Expense..................................................... 400 31 Retained Earnings………………………. 400 Dividends…………………………….… 400 Net income for the year was $1,200 thousand ($24,200 – $23,000). Retained Earnings Clo. Expenses 23,000 Opening bal. 1,900 Clo. Dividends 400 Clo. Revenue 24,200 Closing bal. 2,700 Copyright © 2024 Pearson Canada Inc. 123  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (240 min.) E 3-29 Reqs. 1, 3, 6, and 8 Cash Accounts Receivable Jan. 2 5,000 Jan. 2 500 Jan. 18 1,700 Jan. 28 600 9 800 3 3,000 21 900 12 200 Bal. 1,100 28 600 26 900 31 1,000 Bal. 1,700 Supplies Equipment Jan. 5 900 Adj. 600 Jan. 3 3,000 Bal. 300 Accumulated Depreciation – Equipment Furniture Adj. 100 Jan. 4 6,000 Accumulated Depreciation – Furniture Accounts Payable Adj. 200 Jan. 26 900 Jan. 4 6,000 5 900 Bal. 6,000 Accrued Service Revenue Adj. 1,000 Copyright © 2024 Pearson Canada Inc. 124  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (continued) E 3-29 Reqs. 1, 3, 6, and 8 Salary Payable Unearned Service Revenue Adj. 1,000 Adj. 300 Jan. 21 900 Bal. 600 Common Shares Retained Earnings Jan. 2 5,000 Clo. 2,600 Clo. 1,000 Clo. 3,800 Bal. 200 Dividends Service Revenue Jan. 31 1,000 Clo. 1,000 Jan. 9 800 18 1,700 Bal. 2,500 Adj. 1,000 Adj. 300 Clo. 3,800 Bal. 3,800 Rent Expense Utilities Expense Jan. 2 500 Clo. 500 Jan. 12 200 Clo. 200 Salary Expense Depreciation Expense – Equipment Adj. 1,000 Clo. 1,000 Adj. 100 Clo. 100 Depreciation Expense – Furniture Supplies Expense Adj. 200 Clo. 200 Adj. 600 Clo. 600 Copyright © 2024 Pearson Canada Inc. 125  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (continued) E 3-29 Req. 2 January 2 through 18 entries are repeated from Solution to Exercise 2-25. Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Jan. 2 Cash.............................................................................. 5,000 Common shares.................................................... 5,000 2 Rent Expense................................................................ 500 Cash...................................................................... 500 3 Equipment.................................................................... 3,000 Cash...................................................................... 3,000 4 Furniture....................................................................... 6,000 Accounts Payable................................................. 6,000 5 Supplies........................................................................ 900 Accounts Payable................................................. 900 9 Cash.............................................................................. 800 Service Revenue................................................... 800 12 Utilities Expense.......................................................... 200 Cash...................................................................... 200 18 Accounts Receivable.................................................... 1,700 Service Revenue................................................... 1,700 Req. 2 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Jan. 21 Cash........................................................................ 900 Unearned Service Revenue.............................. 900 21 No entry; no transaction yet 26 Accounts Payable................................................... 900 Cash.................................................................. 900 28 Cash........................................................................ 600 Accounts Receivable........................................ 600 30 Dividends............................................................... 1,000 Cash.................................................................. 1,000 Copyright © 2024 Pearson Canada Inc. 126  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (continued) E 3-29 Reqs. 4 and 5 Web Marketing Services Inc. Adjusted Trial Balance January 31, 20XX TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT Cash 1,700 1,700 Accounts receivable 1,100 1,100 Accrued service revenue — (a) 1,000 1,000 Supplies 900 (c) 600 300 Equipment 3,000 3,000 Accumulated dep’n. – equip. (d1) 100 100 Furniture 6,000 6,000 Accumulated dep’n. – furn. — (d2) 200 200 Accounts payable 6,000 6,000 Salary payable — (e) 1,000 1,000 Unearned service revenue 900 (b) 300 600 Common shares 5,000 5,000 Retained earnings — — Dividends 1,000 1,000 Service revenue 2,500 (a)1,000 3,800 (b) 300 Rent expense 500 500 Utilities expense 200 200 Salary expense (e) 1,000 1,000 Depreciation expense – equip. (d1) 100 100 Depreciation expense – furn. (d2) 200 200 Supplies expense (c) 600 600 14,400 14,400 3,200 3,200 16,700 16,700 Copyright © 2024 Pearson Canada Inc. 127  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (continued) E 3-29 Req. 6 Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Adjusting Entries (a) Jan. 31 Accrued Service Revenue.................................................... 1,000 Service Revenue............................................................. 1,000 (b) 31 Unearned Service Revenue.................................................. 300 Service Revenue............................................................. 300 (c) 31 Supplies Expense ($900 – $300).......................................... 600 Supplies.......................................................................... 600 (d1) 31 Depreciation Expense – Equipment..................................... 100 Accumulated Depreciation – Equip............................... 100 (d2) 31 Depreciation Expense – Furniture........................................ 200 Accumulated Depreciation – Furn................................. 200 (e) 31 Salary Expense..................................................................... 1,000 Salary Payable................................................................ 1,000 Req. 7 Web Marketing Services Inc. Income Statement For the Month Ended January 31, 20XX Revenues: Service revenue $3,800 Expenses: Salary expense 1,000 Supplies expense 600 Rent expense 500 Utilities expense 200 Depreciation expense – furniture 200 Depreciation expense – equipment 100 Total expenses 2,600 Net income $1,200 Copyright © 2024 Pearson Canada Inc. 128  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual (continued) E 3-29 Web Marketing Services Inc. Statement of Retained Earnings For the Month Ended January 31, 20XX Retained earnings, January 1, 20XX $ 0 Add: Net income 1,200 1,200 Less: Dividends (1,000) Retained earnings, January 31, 20XX $ 200 Req. 7 Web Marketing Services Ltd. Balance Sheet January 31, 20XX ASSETS LIABILITIES Current liabilities: Current assets: $ 1,700 Accounts payable $ 6,000 Cash 1,100 Salary payable 1,000 Accounts receivable 1,000 Unearned service Accrued service revenue 300 revenue 600 Supplies Total current 4,100 Total current liabilities 7,600 assets Capital assets: Equipment SHAREHOLDERS’ EQUITY $3,000 Less accum. Common shares 5,000 dep’n. 2,900 Retained earnings 200 (100) Furniture Total shareholders’ equity $6,000 Less accum. 5,200 dep’n. 5,800 (200) Total liabilities and Total assets $12,800 shareholders’ equity $12,800 Req. 8 Copyright © 2024 Pearson Canada Inc. 129  Financial Accounting Eighth Canadian Edition Instructor’s Solutions Manual Journal DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT Closing Entries Jan. 31 Service Revenue........................................................................ 3,800 Retained Earnings................................................................ 3,800 31 Retained Earnings..................................................................... 2,600 Rent Expense....................................................................... 500 Utilities Expense.................................................................. 200 Salary Expense..................................................................... 1,000 Depreciation Expense – Equipment..................................... 100 Depreciation Expense – Furniture....................................... 200 Supplies Expense................................................................. 600 31 Retained Earnings..................................................................... 1,000 Dividends............................................................................. 1,000 (continued) E 3-29 Req. 9 Total current assets $4,100 Current ratio = = = 0.54 Total current liabilities $7,600 Total liabilities $7,600 Debt ratio = = = 0.59 Total assets $12,800 The current ratio indicates a weak current financial position. The business has $0.54 in current assets for every $1.00 of current liabilities. It could possibly have trouble paying current liabilities with current assets. The debt ratio of 0.59 is low enough to suggest that, overall, the business should be able to pay its debts, as it is not financing its assets with high levels of debt. Copyright © 2024 Pearson Canada Inc. 130