Horngren 9th Edition Solutions Ch3

Chapter 3
Accrual Accounting & Income
Short Exercises
(10 min.) S 3-1
Millions
Sales revenue. 850
Cost of goods sold (290)
All other expenses (325)
Net income.. $ 235
Beginning cash.. $ 75
Collections ($850 $27).. 823
Payments for: inventory. (380)
everything else. (255)
Ending cash $ 263
(10 min.) S 3-2
Statement Reports (Amounts in millions)

Income Interest expense $ .8
statement
Balance sheet Notes payable ($4.1 + $1.7 $1.6) $4.2
Chapter 3 Accrual Accounting & Income

3- 1
.
Interest payable. 0.3
3-2 Financial Accounting 9/e Solutions

(10 min.) S 3-3
At the end of each accounting period, the business reports

its performance through the preparation of financial
statements. In order to be useful to the various users of
financial statements they must be up-to-date. Accounts such
as cash, Equipment, Accounts Payable, Common Stock and
Dividends are up-to date and require no adjustment at the end
of the accounting period. Accounts such as Accounts
Receivable, Supplies, Salary Expense and Salaries Payable may
not be up to date as of the last day of the accounting period.
Why? Because certain transactions that took place during the
month may not have been recorded.
The accrued salaries, which are owed to the employees but

have not been paid, are an expense related to the current
period but also represent a liability or debt that is owed by the
business. The business must make an adjusting entry to
record the accrued salary owed as both an increase in Salary
Expense and an increase in Salaries Payable. If the business
does not make this adjustment, the expenses will be
understated, net income will be overstated, and liabilities will
be understated.

3- 3
(10 min.) S 3-4
The large auto manufacturer should record sales revenue when

the revenue is earned by delivering automobiles to Budget or
Hertz. The large auto manufacturer should not record any
revenue prior to delivery of the vehicles, because the large
auto manufacturer hasnt earned the revenue yet. The revenue
principle governs this decision.
When the large auto manufacturer records the revenue from

the sale, at that time not before or after the large auto
manufacturer should also record cost of goods sold, the
expense. The expense recognition principle tells when to
record expenses.
(10 min.) S 3-5
Depreciation is the periodic allocation of the cost of a tangible

long-lived asset, less its estimated residual value, over its
estimated useful life. All long-lived or plant assets, except for
land, decline in usefulness during their life and this decline is
an expense. Accountants must allocate the cost of each plant
asset, except for land, over the assets useful life.
Depreciation is the process of allocating the cost of a plant

3- 5
asset to expense. Depreciation also decreases the book value
of the asset to reflect its usage.

(10 min.) S 3-6
a. The Expense Recognition Principle
b. The Time Period Concept
c. The Revenue Principle
d. The Revenue Principle
e. The Expense Recognition Principle
(10 min.) S 3-7
a.
Oct. 31 Rent Expense ($3,000 1/6) 500

...
Prepaid 500
Rent.
To record rent expense.
Prepaid Rent Rent Expense

Oct. 1 3,000 Oct. 31 500 Oct. 31 500
Bal. 2,500 Bal. 500
b.
Oct. 31 Supplies Expense ($950 $400) 550

Supplies.. 550
3- 7
To record supplies expense.
Supplies Supplies Expense

Oct. 1 950 Oct. 31 550 Oct. 31 550
Bal. 400 Bal. 550
(10 min.) S 3-8
Req. 1
(a) Jan. Computer Equipment. 50,00

1 .. 0
Cash. 50,00
0
Purchased computer equipment.
(b) Dec. Depreciation Expense

31
Computer Equipment ($50,000 / 5) 10,00
. 0
Accumulated Depreciation
Computer 10,00
Equipment....... 0
Record depreciation expense.
Req. 2

Depreciation Expense
Computer Computer Computer
Equipment Equipment Equipment
Jan. 50,00 Dec. 10,00 Dec. 10,00

0 31 0 31 0
Bal. 50,00 Bal. 10,00 Bal. 10,00

0 0 0
Req. 3
Computer equipment. $50,000

Less: Accumulated depreciation (10,000)
Book value $40,000

3- 9
(10 min.) S 3-9
(Amounts in millions)
Income statement: 2012

Salary expense ($42.4 + $2.2).. $44.6
Balance sheet: 2012

Salary payable......... $ 2.2
(10 min.) S 3-10
Req. 1
Oct. 31 Interest Expense.. 250
Interest Payable.. 250
To accrue interest expense for October.
Nov. 30 Interest Expense.. 250

Interest Payable.. 250
To accrue interest expense for November.
Dec. 31 Interest Expense... 250

Interest Payable 250
To accrue interest expense for December.
Req. 2
Interest Payable
Oct. 31 250
Nov. 30 250
Dec. 31 250
Bal. 750

Req. 3
Dec. 31 Interest 750

Payable..........
Cash.. 750
To pay interest.
(10 min.) S 3-11
Req. 1
Oct. 31 Interest Receivable 250

Interest Revenue.. 250
To accrue interest revenue for October.
Nov. 30 Interest Receivable 250

Interest Revenue... 250
To accrue interest revenue for November.
Dec. 31 Interest Receivable 250

Interest Revenue...... 250
To accrue interest revenue for December.
Req. 2
Interest Receivable
Oct. 31 250
Nov. 30 250
Dec. 31 250
Bal. 750

3- 11
Req. 3
Dec. 31 Cash. 750

Interest 750
Receivable.
To collect interest.

(5-10 min.) S 3-12
Unearned revenues are liabilities because The World Star has

received cash from subscribers in advance of providing them
with newspapers. Receiving the cash in advance creates an
obligation (a liability) for The World Star. As The World Star
delivers newspapers to subscribers, The World Star earns the
revenue, and the dollar amount of the unearned revenue then
goes into the revenue account.
a. Cash. 60,000
Unearned Subscription 60,000
Revenue.......
Received cash for revenue in advance.
b. Unearned Subscription 40,000

Revenue..................
Subscription Revenue 40,000
To record the earning of subscription
revenue that was collected in advance.
(5-10 min.) S 3-13
Prepaid Rent at December 31:

a. Unadjusted amount. $18,000
b. Adjusted amount ($18,000 $6,000).. 12,000

3- 13
Rent Expense at December 31:
c. Unadjusted amount $ -0-
d. Adjusted amount ($18,000 / 3). 6,000

(10 min.) S 3-14
a. Accounts 55,000
Receivable...
Service 55,000
Revenue..
Cash. 35,000
Accounts Receivable. 35,000
b. Cash. 9,000
Unearned Service 9,000
Revenue..
Unearned Service 7,000

Revenue
Service Revenue.. 7,000
(15-30 min.) S 3-15
Sparrow Sporting Goods Company

Income Statement
For the Year Ended March 31, 2012
Thousands
Net revenues. $175,500
Cost of goods sold. 136,000
All other expenses.. 29,000
Net income $ 10,500

3- 15
Statement of Retained Earnings
For the Year Ended March 31, 2012
Thousands
Retained earnings, March 31, 2011... $21,500
Add: Net income 10,500
Retained earnings, March 31, 2012... $32,000

(continued) S 3-15

Balance Sheet
March 31, 2012
Thousands
ASSETS
Current:
Cash.............................................. $
20,800
Accounts receivable..................... 28,000
Inventories.................................... 35,000
Other current assets.................... 5,000
Total current assets................. 88,800
Property and equipment, net........ 6,300
Other assets................................. 22,00
0
Total assets....................................... $117,100
LIABILITIES
Total current liabilities................. $
55,100
Long-term liabilities..................... 7,50
0
Total liabilities................................... 62,600
STOCKHOLDERS EQUITY
Common stock.............................. 22,500
Retained earnings......................... 32,00
0
Total stockholders equity................. 54,50
0

3- 17
Total liabilities and stockholders equity $117,100

(5-10 min.) S 3-16
CLOSING ENTRIES
Thousands
Mar. 31 Net Revenues . 175,50
0
Retained 175,50
Earnings....... 0
Retained 165,00
31 Earnings. 0
Cost of Goods Sold. 136,00
0
All Other 29,000
Expenses..
Retained Earnings
Mar. 31, 2012 165,00 Mar. 31, 2011 Bal. 21,500
Expenses 0
Mar. 31, 2012 175,50
Revenues 0
Mar. 31, 2012 Bal. 32,000
Retained Earnings ending balance agrees with the amount

reported on the statement of retained earnings and the
balance sheet (in S 3-15).

3- 19
(5 min.) S 3-17
(Dollars in thousands)
Req. 1
Net working capital =Total current assets - Total
current liabilities
$33,700 = $88,800 - $55,100
Req. 2
Total current assets $88,80

0 1.6
Current ratio = = =
Total current $55,10 1
liabilities 0
Req. 3
Total liabilities $62,60

0 0.5
Debt ratio = = =
Total assets $117,10 3
0
Req. 4
Net working capital of $33,700 means current assets exceed

current liabilitiesa positive sign. The current ratio and debt
ratio values are strong.

(10 min.) S 3-18
1
Earned revenue of $10,000 on account:
.
Net working capital = [($88,800 + $10,000)-

a.
$43,700 $55,100]
$98,800
b. Current ratio = = 1.79
$55,100
$62,600
c. Debt ratio = $127,100 ($117,100 + = 0.49
$10,000)
2
Paid accounts payable of $10,000:
.
Net working capital = $33,700 [($88,800 - $10,000) -
a.
($55,100- $10,000)]
$78,800
b. Current ratio = = 1.74
$45,100
$52,600 ($62,600 -
$10,000)
c. Debt ratio = = 0.49
$107,100 ($117,100 -
$10,000)

3- 21
Exercises
(5-10 min.) E 3-19A
Statement Reports (in millions)

1. Income statement Sales revenue $4,30
0
Operating expenses. 1,200
Balance sheet Accounts receivable $

900
Accounts payable. 1,000
2. Cash basis would report only the cash collections of

$4,500 from customers and the payment of operating
expenses ($1,200). Their balance sheet should have
included neither accounts receivable nor accounts
payable.
(5-10 min.) E 3-20A
a. Cash Basis b. Accrual

Basis
Revenues.. $540,000 $530,000

.
Expenses.. 420,000 440,000
.
Net $120,000 $ 90,000
income
The accrual basis measures net income better because its

information about revenues and expenses is more complete
than the information provided by the cash basis.

3- 23
(5-10 min.) E 3-21A
Millions
a. Revenue. $840
The revenue principle says to record revenue when it

has been earned, regardless of when cash is collected.
Therefore, report the amount of revenue earned,
regardless of when the company collects cash.
b. Total expense... $500
The expense recognition principle governs accounting

for expenses.
c. The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and
cash payments.

(15-20 min.) E 3-22A
Req. 1
Adjusting Entries
DAT CREDI
E ACCOUNT TITLES DEBIT T
a. Insurance Expense.................................... 900

Prepaid Insurance ($400+$1,200$700) 900
b. Interest Receivable................................... 1,600

Interest Revenue................................... 1,600
c. Unearned Service Revenue ($1,100 $500) 600

Service Revenue................................... 600
d. Depreciation Expense............................... 4,800

Accumulated Depreciation................... 4,800
e. Salary Expense ($18,000 3/5)................. 10,800

Salary Payable.................................... 10,800
f. Income Tax Expense ($21,000 .25)........ 5,250

Income Tax Payable........................... 5,250
Req. 2
Net income understated by omission

of:
Interest $ 1,600
revenue
Service 600
revenue....
Total $ (2,200)
understatement..
3- 25
Net income overstated by omission
of:
Insurance $ 900
expense
Depreciation 4,800
expense..
Salary 10,800
expense..
Income tax 5,250
expense.
Total 21,750
overstatement.
Overall effect net income $19,550

overstated by
(10-15 min.) E 3-23A
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 500 $ 400 1,000 $1,000
Add: Payments for
supplies
during the year 1,700 800 1,000 400
Total amount to 2,200 1,200 2,000 1,400
account for
Less: Ending (500) (500) (700) (500)
Supplies
Supplies Expense $1,700 $ 700 $1,300 $ 900

Journal entries:
Situation 1: Supplies................................. 1,700

Cash................................... 1,700
Situation 2: Supplies Expense..................... 700

Supplies............................. 700

3- 27
(10-20 min.) E 3-24A
Req. 1
Adjusting Entries
DEBI CREDI
DATE ACCOUNT TITLES T T
a. Interest Expense....................................... 9,600

Interest Payable................................. 9,600
b. Interest Receivable................................ 4,900

Interest Revenue............................. 4,900
c. Unearned Rent Revenue ($12,000 / 2 6/12) 3,000

Rent Revenue..................................... 3,000
d. Salary Expense ($1,900 3).................. 7,600

Salary Payable.................................... 7,600
e. Supplies Expense...................................... 1,800

Supplies ($3,200 $1,400)................. 1,800
f. Depreciation Expense ($80,000 / 5).......... 16,000

Accumulated Depreciation................ 16,000
Req. 2
Book value = $64,000 ($80,000 $16,000)

(10-20 min.) E 3-25A
Accounts Receivable Supplies

Bal. 1,500 Bal. 500 (a) 200
(c) 900 Bal. 300
Bal. 2,400
Salary Payable Unearned Service Revenue

(b) 400 (d) 500 Bal. 600
Bal. 400 Bal. 100
Service Revenue Salary Expense

Bal. 4,200 Bal. 1,900
(c) 900 (b) 400
(d) 500 Bal. 2,300
Bal. 5,600
Supplies Expense
(a) 200
Bal. 200

3- 29
(20-30 min.) E 3-26A
Honeyglazed Hams, Inc.

Income Statement
Year Ended December 31, 2012
Thousands
Revenues:
Sales revenue..................... $40,900
Expenses:
Cost of goods sold............. $25,000
Selling, administrative, and
general expense........... 10,300
Total expenses............... 35,300
Income before tax.................. 5,600
Income tax expense............ 2,100
Net income.............................. $ 3,500
Honeyglazed Hams, Inc..

Thousands
Retained earnings, December 31, $4,700
2011.
.
8,200
Less: (1,500)
Dividends..

2012.

3- 31
(continued) E 3-26A
Honeyglazed Hams, Inc.

Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash $ Accounts $
. 3,700 payable 7,900
Accounts 1,700 Income tax 500
receivable payable..
Inventories 1,600 Other 2,40
. liabilities.. 0
Prepaid 1,600 Total 10,800
expenses. liabilities...
Prop., plant, $ STOCKHOLDERS
equip. 6,800
Less: Accum. EQUITY
deprec. 4,000 Common 4,600
(2,800
. stock..
)
Other 9,500 Retained 6,70
assets.. earnings 0
Total stockholders 11,30
equity
Total liabilities and
Total $22,10 stockholders $22,10

assets 0 equity... 0

(10-20 min.) E 3-27A
One mechanism for solving this exercise is to prepare the

relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 220
Sales revenue 20,550 Collections 20,400
End. bal. 370
Prepaid Insurance
Beg. bal. 150
Insurance expense 42
Payment 440 0
End. bal. 170
Accrued Liabilities Payable

Beg. bal. 600
Other operating
Payments 4,300 expenses 4,400
End. bal. 700

3- 33
(10-15 min.) E 3-28A
Req. 1
Millio
ns
Income statement
Service revenue (430 80). 350
Balance sheet
Unearned service revenue... 80
Req. 2
Income statement
Service revenue (65 + 430 80).. 415
Balance sheet
Service revenue is greater in (2) because Bennett began the

year owing more phone service to customers. With collections
for the year and the amount of the ending liability unchanged,
Bennett must have earned more revenue in situation 2 than in
situation 1.
Not required but helpful:
Unearned Service Revenue

Beg. bal. 65
Earned revenue 415 Collected cash 430
3- 35
End. bal. 80

(10-20 min.) E 3-29A
Req. 1
Journal
CREDI
DATE ACCOUNT TITLES DEBIT T
Closing Entries
Dec. 31 Service Revenue............................. 23,900
Other Revenue................................. 400
Retained Earnings...................... 24,300
31 Retained Earnings........................... 22,000

Cost of Services Sold................. 11,000
Selling, General, and
Administrative
Expense................................. 6,400
Depreciation Expense................ 4,100
Income Tax Expense................... 500
31 Retained Earnings........................... 300

Dividends.................................... 300
Net income for 2012 was $2,300 ($24,300 $22,000).
Req. 2
Retained Earnings
Dec. 31, 2011 2,600
Expenses 22,000
Dividends 300 Revenues 24,30
3- 37
0
Dec. 31, 2012 4,600

(15-25 min.) E 3-30A
Journal
DEBI CREDI
DATE ACCOUNT TITLES T T
Adjusting Entries
Dec. 31 Unearned Service Revenue.................. 6,300
Service Revenue ($19,500 $13,200). 6,600
31 Salary Expense ($4,600 $4,300)........ 300

Salary Payable.................................. 300
31 Rent Expense ($1,600 $1,300)........... 300

Prepaid Rent..................................... 300
31 Depreciation Expense ($700 $0)........ 700

Accumulated Depreciation............... 700
31 Income Tax Expense ($1,500 $0)....... 1,500

Income Tax Payable.......................... 1,500
Closing Entries
31 Service Revenue................................... 19,50
0
Retained Earnings............................ 19,500
31 Retained Earnings................................. 8,400

Salary Expense................................. 4,600
Rent Expense................................... 1,600
Depreciation Expense...................... 700
Income Tax Expense........................ 1,500
31 Retained Earnings................................. 1,400

Dividends.......................................... 1,400
3- 39
(20-30 min.) E 3-31A
Req. 1
Anderson Production Company

Balance Sheet
December 31, 2012
ASSETS
Current Assets:
Cash................................................................. $14,100
Prepaid rent ($800 $300).............................. 500
Total current assets..................................... 14,600
Plant Assets:
Equipment...... $42,000
Less accumulated depreciation
($3,400 + $700). (4,100) 37,900

Total assets.......................................................... $52,500
LIABILITIES
Current:
Accounts payable............................................ $ 5,100
Salary payable ($4,600 $4,300)................. 300
Unearned service revenue ($9,100 $6,300). 2,800
Income tax payable...................................... 1,500
Total current liabilities................................ 9,700
Note payable, long-term....................................... 16,000
Total liabilities...................................................... 25,700
STOCKHOLDERS EQUITY
Common stock................................................... 8,600
3- 41
Retained earnings ($8,500 + $19,500 $4,600
$1,600
$700 $1,500 $1,400)............................ 18,200
Total stockholders equity................................. 26,800
Total liabilities and stockholders equity............. $52,500
(continued) E 3-31A
Req. 2
Current Prior
Year Year
Net = Total current assets $14,600
working - current liabilities - = $4,900 $5,00
capital $9,700 0
Current Total current assets $14,600
rat = Total current = $9,700 = 1.51 1.55
io liabilities
Both net working capital and the current ratio have decreased
indicating that the ability to pay current liabilities with current
assets has deteriorated.

Debt 0
= = = 0.49 0.30
ratio Total assets $52,50
0
The overall ability to pay total liabilities deteriorated a little.

(30 min.) E 3-32A
$50 $40 + $5
Current Debt
a. = $40 + = 1.11 = $70 + $5 = 0.60
ratio ratio
$5
The purchase of equipment on account hurts both ratios.
Current $50 $6 1.1 Debt $40 $6

b. = = = = 0.53
ratio $40 0 ratio $70 $6
The payment of long-term debt hurts the current ratio and

improves the debt ratio.
Current $50 + $5 1.2 Debt $40 + $5

c. = = = = 0.60
ratio $40 + $5 2 ratio $70 + $5
Collecting cash in advance hurts both ratios.
Current $50 1.1 Debt $40 + $2

d. = = = = 0.60
ratio $40 + $2 9 ratio $70
Accruing an expense hurts both ratios.
Current $50 + $6 1.4 $40

e. = = Debt ratio = = .53
ratio $40 0 $70 + $6
A cash sale improves both ratios.

3- 43
(5-10 min.) E 3-33B
Statement Reports (in millions)

1. Income statement Sales $4,40
revenue.. 0
Operating 1,300
expenses...
Balance sheet Accounts $ 700

receivable..
Accounts 1,200
payable..
2. Cash basis would report only the cash collections of

$4,600 from customers and the payment of operating
expenses ($1,300).The balance sheet would include
neither accounts receivable nor accounts payable.
(5-10 min.) E 3-34B
a. Cash Basis b. Accrual

Basis
Revenues.. $510,000 $500,000

.
Expenses.. 410,000 450,000
.
Net $100,000 $ 50,000
income

The accrual basis measures net income better because its
information about revenues and expenses is more complete
than the information provided by the cash basis.
(5-10 min.) E 3-35B
Millions
a. Revenue. $780
The revenue principle says to record revenue when it

has been earned, regardless of when cash is collected.
Therefore, report the amount of revenue earned,
regardless of when the company collects cash.
b. Total expense... $530
The expense recognition principle governs accounting

for expenses.
c. The income statement reports revenues and expenses.

The statement of cash flows reports cash receipts and
cash payments.

3- 45
(15-20 min.) E 3-36B
Req. 1
Adjusting Entries
DAT CREDI
E ACCOUNT TITLES DEBIT T
a. Insurance Expense....................................... 700

Prepaid Insurance ($300 + $900 $500). 700
b. Interest Receivable................................... 1,300

Interest Revenue...................................... 1,300
c. Unearned Service Revenue ($1,200 $300) 900

Service Revenue................................... 900

d. Depreciation Expense.................................. 4,400
Accumulated Depreciation...................... 4,400
e. Salary Expense ($17,000 3/5).................... 10,200

Salary Payable.......................................... 10,200
f. Income Tax Expense ($26,000 .25)........... 6,500

Income Tax Payable................................. 6,500
Req. 2
Net income understated by omission

of:
Interest $ 1,300
revenue..
Service 900
revenue.............
Total $ (2,200)
understatement
Net income overstated by omission

of:
Insurance $ 700
expense
Depreciation 4,400
expense..
Salary 10,200
expense..
Income tax 6,500
expense............
Total 21,800
overstatement...........
.
Overall effect net income $19,600

overstated by.
3- 47
(10-15 min.) E 3-37B
Missing amounts in italics.
1 2 3 4
Beginning Supplies $ 400 $ 600 $1,100 $ 900
Add: Payments for
supplies
during the year 1,600 1,100 1,500 600
Total amount to 2,000 1,700 2,600 1,500
account for
Less: Ending Supplies (200) (300) (1,000) (300)
Supplies Expense $1,800 $1,400 $1,600 $1,200
Journal entries:
Situation 1: Supplies 1,600

.
Cash.. 1,600
Situation 2: Supplies 1,400

Expense
1,400
Supplies.......

3- 49
(10-20 min.) E 3-38B
Req. 1
Adjusting Entries
DEBI
DATE ACCOUNT TITLES T CREDIT
a. Interest Expense.......................................... 9,000

Interest Payable....................................... 9,000
b. Interest Receivable...................................... 4,300

Interest Revenue...................................... 4,300
c. Unearned Rent Revenue ($13,900 / 2 6/12) 3,475

Rent Revenue........................................... 3,475
d. Salary Expense ($1,300 3)........................ 3,900

Salary Payable.......................................... 3,900
e. Supplies Expense......................................... 1,300

Supplies ($2,900 $1,600)...................... 1,300
f. Depreciation Expense ($140,000 / 5)........... 28,000

Accumulated Depreciation...................... 28,000
Req. 2
Book value = $112,000 ($140,000 $28,000)

3- 51
(10-20 min.) E 3-39B
Accounts Receivable Supplies

Bal. 1,400 Bal. 300 (a) 200
(c) 500 Bal. 100
Bal. 1,900

(b) 700 (d) 200 1,000
Bal. 700 Bal. 800
Service Revenue Salary Expense

Bal. 4,600 Bal. 2,400
(c) 500 (b) 700
(d) 200 Bal. 3,100
Bal. 5,300
Supplies Expense
(a) 200
Bal. 200

(20-30 min.) E 3-40B
Honeybee Hams, Inc.

Income Statement
Thousands
Revenues:
Sales revenue................... $42,200
Expenses:
Cost of goods sold........... $25,500
Selling, administrative,
and
general expense............ 10,000
Total expenses............ 35,500
Income before tax.................... 6,700
Income tax expense................. 2,500
Net income............................... $ 4,200
Honeybee Hams, Inc.

Thousands
2011..
Add: Net income . 4,200
8,800
Less: Dividends (1,400)

3- 53
2012..

(continued) E 3-40B
Honeybee Hams, Inc.

Balance Sheet
December 31, 2012
Thousands
ASSETS LIABILITIES
Cash $ Accounts $
. 3,400 payable. 7,700
Accounts 1,900 Income tax 600
receivable payable..
Inventories 1,700 Other 2,40
. liabilities.. 0
Prepaid 1,700 Total 10,700
expenses liabilities...
Prop., plant, $ STOCKHOLDERS
equip. 6,700
Less: Accum. EQUITY
4,200 Common 4,500
(2,500)
deprec. stock..
Other 9,700 Retained 7,40
assets.. earnings 0
equity
Total $22,60 stockholders $22,6

assets 0 equity... 00

3- 55
(10-20 min.) E 3-41B
One mechanism for solving this exercise is to prepare the

relevant T-accounts, insert the given information, and solve for
the unknown amounts, shown in italics.
Amounts in millions
Receivables
Beg. bal. 210
Sales revenue 21,010 Collections 20,900
End. bal. 320
Prepaid Insurance
Beg. bal. 160
Insurance expense 43
Payment 470 0
End. bal. 200
Accrued Liabilities Payable

Beg. bal. 640
Other operating
Payments 4,200 expenses 4,290
End. bal. 730

(10 min.) E 3-42B
Req. 1
Millions
Income statement
Service revenue (380 95).. 285
Balance sheet
Req. 2
Income statement
Service revenue (75 + 380 95) 360
Balance sheet
Service revenue is greater in (2) because Terra began the year

owing more phone service to customers. With collections for
the year and the amount of the ending liability unchanged,
Terra must have earned more revenue in situation 2 than in
situation 1.
Not required but helpful:

3- 57
Unearned Service Revenue
Beg. bal. 75
Earned revenue 360 Collected cash 380
End. bal. 95

(10-20 min.) E 3-43B
Req. 1
Journal
CREDI
Closing Entries
Dec. 31 Service Revenue................................ 24,300
Other Revenue................................. 200
Retained Earnings.......................... 24,500
31 Retained Earnings.............................. 22,500

Cost of Services Sold..................... 11,400
Selling, General, and
Administrative
Expense.................................. 6,000
Depreciation Expense.................... 4,500
Income Tax Expense...................... 600
31 Retained Earnings.............................. 400

Dividends........................................ 400
Net income for 2012 was $2,000 ($24,500 $22,500).
Req. 2
Retained Earnings
Dec. 31, 2011 2,200
Expenses 22,500
Dividends 400 Revenues 24,50
3- 59
0
Dec. 31, 2012 3,800

(15-25 min.) E 3-44B
Journal
CREDI
Adjusting Entries
Dec. 31 Unearned Service Revenue................ 6,300
Service Revenue ($19,600 $13,300) 6,300
31 Salary Expense ($5,600 $4,700)..... 900

Salary Payable............................... 900
31 Rent Expense ($2,300 $1,500)........ 800

Prepaid Rent.................................. 800
31 Depreciation Expense ($600 $0)..... 600

Accumulated Depreciation............ 600
31 Income Tax Expense ($1,200 $0).... 1,200

Income Tax Payable....................... 1,200
Closing Entries
31 Service Revenue................................ 19,600
Retained Earnings.......................... 19,600

Salary Expense.............................. 5,600
Rent Expense.............................. 2,300
Depreciation Expense.................... 600
Income Tax Expense...................... 1,200

Dividends........................................ 1,100

3- 61
(20-30 min.) E 3-45B
Req. 1
Durkin Production Company

Balance Sheet
December 31, 2011
ASSETS
Current:
Cash.... $14,200
Prepaid rent ($1,500 $800)......... 700
Total current assets 14,900
Plant:
Equipment.. $44,000
Less accumulated depreciation
($3,500 + $600). (4,100) 39,900
.......
Total assets. $54,800
LIABILITIES
Current:
Accounts payable.................................................... $ 4,700
Salary payable ($5,600 $4,700)........................... 900
Unearned service revenue ($8,400 $6,300)........ 2,100
Income tax payable................................................ 1,200
Total current liabilities....................................... 8,900
Note payable, long-term........................................... 17,000
Total liabilities.......................................................... 25,900
STOCKHOLDERS EQUITY
Common stock............................................................. 8,700
Retained earnings ($11,400 + $9,900* $1,100)........ 20,200
Total stockholders equity........................................... 28,900

Total liabilities and stockholders equity.................... $54,800
* Net income = $9,900 ($19,600 $5,600 $2,300 $600 -

$1,200)

3- 63
(continued) E 3-45B
Req. 2
Current Prior
Year Year
working - current liabilities = - = $6,000 $7,00
capital $8,900 0
rat = Total current = $8,900 = 1.67 1.70
io liabilities
Both net working capital and the current ratio have decreased
indicating that the ability to pay current liabilities with current
assets has deteriorated.

Debt 0
= = = 0.47 0.40
ratio Total assets $54,80
0
The overall ability to pay total liabilities deteriorated a little.

(30 min.) E 3-46B
$60 $70 +
Current Debt $8
a. = = 1.03 = = 0.80
ratio $50 + ratio $90 +
$8 $8
The purchase of equipment on account hurts both ratios.
$60 $70
Current $5 Debt $5
b. = = 1.10 = = 0.76
ratio $50 ratio $90
$5
The payment of long-term debt hurts the current ratio and

improves the debt ratio.
$60 + $70 +
Current $4 Debt $4
c. = = 1.19 = = 0.79
ratio $50 +$4 ratio $90 +
$4
Collecting cash in advance hurts both ratios.
$60 $70 +
Current Debt $4
d. = = 1.11 = = 0.82
ratio $50 + ratio $90
$4
Accruing an expense hurts both ratios.

3- 65
$60 + $70
Current $8 Debt
e. = = 1.36 = = 0.71
ratio $50 ratio $90 +
$8
A cash sale improves both ratios.

Serial Exercise
(3 hours) E 3-47
Reqs. 1, 2, 5, and 7
Cash Accounts Receivable

Jan. 11,000 Jan. 2 700 Jan. 18 1,500 Jan. 28 1,500
2
9 1,000 3 3,900 Bal. 0
21 2,400 12 200 Adj. 2,000
28 1,500 26 400 Bal. 2,000
31 1,200
Bal. 9,500
Supplies Equipment
Jan. 5 400 Adj. 200 Jan. 3 3,900
Bal. 200 Bal. 3,900
Equipment Furniture
Adj. 65 Jan. 4 4,700
Bal. 65 Bal. 4,700
Furniture Accounts Payable
Adj. 78 Jan. 26 400 Jan. 4 4,700
Bal. 78 5 400

3- 67
Bal. 4,700

(continued) E 3-47
Reqs. 1, 2, 5, and 7

Adj. 500 Adj. 800 Jan. 21 2,400
Bal. 500 Bal. 1,600
Common Stock Retained Earnings

Jan. 2 11,00 Clo. 1,743 Clo. 5,300
0
Bal. 11,00 Clo. 1,200
0
Bal. 2,357
Dividends Service Revenue

Jan. 31 1,200 Clo. 1,200 Jan. 9 1,000
18 1,500
Bal. 2,500
Adj. 2,000
Adj. 800
Clo. 5,300 Bal. 5,300
Rent Expense Utilities Expense

Jan. 2 700 Clo. 700 Jan. 12 200 Clo. 200
Salary Expense Equipment
Adj. 500 Clo. 500 Adj. 65 Clo. 65

3- 69
Furniture Supplies Expense
Adj. 78 Clo. 78 Adj. 200 Clo. 200

(continued) E 3-47
Req. 1
January 2 through 18 entries are repeated from Solution to E 2-36.

Journal
DATE ACCOUNT TITLES DEBIT CREDIT
Jan. 2 Cash................................................ 11,000
Common Stock............................. 11,000
2 Rent Expense................................. 700

Cash............................................. 700
3 Equipment................................... 3,900
Cash............................................. 3,900
4 Furniture......................................... 4,700
Accounts Payable........................ 4,700
5 Supplies.......................................... 400
Accounts Payable........................ 400
9 Cash................................................ 1,000
Service Revenue.......................... 1,000
12 Utilities Expense............................ 200

Cash............................................. 200
18 Accounts Receivable...................... 1,500

Service Revenue.......................... 1,500
21 Cash................................................. 2,400
Unearned Service Revenue.......... 2,400
21 No entry; no transaction yet
26 Accounts Payable............................ 400

3- 71
Cash.............................................. 400
28 Cash................................................. 1,500
Accounts Receivable.................... 1,500
31 Dividends......................................... 1,200
Cash............................................ 1,200

(continued) E 3-47
Reqs. 3 and 4
Steve Ruiz, Certified Public Accountant, P.C.
Adjusted Trial Balance
January 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
ACCOUNT TITLE DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Cash 9,500 9,500
Accounts receivable (a) 2,000 2,000
Supplies 400 (c) 200 200
Equipment 3,900 3,900
Accumulated depr. equip. (d1) 65 65
Furniture 4,700 4,700
Accumulated depr. furn. (d2) 78 78
Accounts payable 4,700 4,700
Salary payable (e) 500 500
Unearned service revenue 2,400 (b) 800 1,600
Common stock 11,000 11,000
Retained earnings
Dividends 1,200 1,200
Service revenue 2,500 (a)2,000 5,300
(b) 800
Rent expense 700 700
Utilities expense 200 200
Salary expense (e) 500 500
Depreciation expense (d1) 65 65
equip.
Chapter 3 Accrual Accounting & Income 3- 73
Depreciation expense furn. (d2) 78 78
Supplies expense (c) 200 200
20,600 20,600 3,643 3,643 23,243 23,243

(continued) E 3-47
Req. 5
Journal
Adjusting Entries
(a) Jan. 31 Accounts Receivable...................... 2,000
Service Revenue.......................... 2,000
(b) 31 Unearned Service Revenue............ 800

Service Revenue.......................... 800
(c) 31 Supplies Expense ($400 $200).... 200

Supplies....................................... 200
(d1) 31 Depreciation Expense Equipment 65

Accumulated Depreciation 65
Equip...............................................
(d2) 31 Depreciation Expense Furniture.. 78

Accumulated Depreciation Furn 78
(e) 31 Salary Expense............................... 500

Salary Payable............................. 500

3- 75
(continued) E 3-47
Req. 6

Income Statement
Month Ended January 31, 2012
Revenues:
Service revenue $5,30
0
Expenses:
Rent expense $700
Salary expense 500
Supplies expense 200
Utilities expense 200
Depreciation expense furniture 65
Depreciation expense equipment 78
Total expenses 1,743
Net income $3,55
7

Month Ended January 31, 2012
Retained earnings, January 1, 2012 $ 0
3,557
Retained earnings, January 31, 2012 $ 2,357

3- 77
(continued) E 3-47
Req. 6

Balance Sheet
January 31, 2012
ASSETS LIABILITIES
Current assets: Current liabilities:
Cash $ Accounts payable $
9,500 4,700
Accounts 2,000 Salary payable 500
receivable
Supplies 20 Unearned service
0
Total current revenue 1,600
assets 11,70
0
Plant assets: Total current 6,800
liabilities
Equipment
$3,900
Less: accum. STOCKHOLDERS EQUITY
depr. 3,835 Common stock 11,000
(65)
Retained earnings 2,357
Furniture Total stockholders 13,357
$4,700 equity
Less: accum.
depr. 4,62 Total liabilities and ______
(78) 2
Total assets $20,15 stockholders' $20,15

7 equity 7

3- 79
(continued) E 3-47
Req. 7
Journal
CREDI
Closing Entries
Jan. 31 Service Revenue 5,300
Retained Earnings.. 5,300
31 Retained Earnings 1,743

Rent Expense 700
Utilities 200
Expense..
Salary Expense 500
Depreciation Expense 65
Equipment...
Depreciation Expense 78
Furniture..
Supplies 200
Expense.......
31 Retained Earnings 1,200

Dividends.. 1,200

(continued) E 3-47
Req. 8

working - current liabilities - = $4,900
capital $6,800
Current
= = 0 = 1.72
ratio
Total current liabilities $6,800
Total liabilities $6,800 0.3

Debt ratio = = =
Total assets $20,157 4
The company has an excess of current assets over its current

liabilities. The current and debt ratios indicate an excellent
financial position. The business has $1.72 in current assets for
every $1.00 of current liabilities. The debt ratio of 34% is not
too high, which suggests that, overall, the business should be
able to pay its debts.

3- 81
Quiz
Q3-48 b
Q3-49 b
Q3-50 c
Q3-51 d
Q3-52 a
Q3-53 b
Q3-54 b
Q3-55 a
Q3-56 b ($3,000 9/12 = $2,250)
Q3-57 d ($5,000 + $22,000 $15,000 = revenue of $12,000)
Q3-58 b
Q3-59 a
Q3-60 b
Q3-61 d
Q3-62 d Current = $29,700 / = 1.183
ratio $25,100
$25,100 + $113,000
Debt ratio = = .633
$29,700 + $188,500
Q3-63 $7,965 ($8,000 $510 $125 + $800 $200)
Q3-64 d Salary Payable
Beg. bal. 20,000
Payment 136,000 Salary exp. 122,000
End. bal. 6,000

Problems
(15-20 min.) P 3-65A
(All amounts in millions)
1. $40 x = $6 ; x = $34
2. Revenues.. $40
Expenses.. (34)
Net income... $ 6
3. Beginning receivables.. $ 10
Add: Revenues 40
Less: Collections... (25)
Ending receivables $25
Balance sheet
ASSETS
Current assets:
Receivables. $ 25
4. Beginning accounts payable. $ 7

Add: Expenses.. 34
Less: Payments.... (37)
Ending accounts payable $ 4
Balance sheet
LIABILITIES
Current liabilities:
Accounts payable $ 4
3- 83
(20-30 min.) P 3-66A
Req. 1
Masters Consulting
Amount of Revenue (Expense) for July
Date Cash Basis Accrual
Basis
July 1 Expense $(2,000) $ 0
4 Expense (1,000) 0
5 Revenue 800 800
8 Expense (700) (700)
11 Revenue 0 3,400
19 0 0
24 Revenue 3,400 0
26 Expense (2,000) 0
29 Expense (1,500) (1,500)
31 Expense 0 $2,000 5 (400)
=
31 Revenue 0 1,000
ReReq. 2 Income (loss) before $ (3,000) $2,600

tax
Req. 3
The accrual-basis measure of net income is preferable because it
accounts for revenues and expenses when they occur, not when
they are received or paid in cash. For example, on July 11, the
company earned $3,400 of revenue and increased its wealth as a
result. The accrual basis records this revenue, but the cash basis
ignores it. On July 24, the business collected the receivable that
3- 85
was created by the revenue earned on account at July 11. The
accrual basis records no revenue on July 24 because the
companys increase in wealth occurred back on July 11. The cash
basis waits until cash is received, on July 24, to record the
revenue. This is too late.
(10-20 min.) P 3-67A
Journal
Dec. 31 a. Insurance Expense. 4,650*

Prepaid Insurance.. 4,650
To record insurance expense.
31 b. Salary Expense ($5,800 2/5) 2,320

..
Salary Payable 2,320
To accrue salary expense.
31 c. Interest Receivable. 600

Interest Revenue 600
To accrue interest revenue.
31 d. Supplies Expense..
6,300**
Supplies.. 6,300
31 e. Unearned Service Revenue

($12,100 60%)... 7,260
Service Revenue 7,260
To record revenue collected in advance.

31 f. Depreciation Expense Office 3,000
Furniture
Depreciation Expense 6,300
Equipment..
Office Furniture.. 3,000
Equipment 6,300
To record depreciation expense.
_____
* $1,050 + $4,800 $1,200 = $4,650
** $2,300 + $6,100 $2,100 = $6,300

3- 87
(45-60 min.) P 3-68A
Req. 1
Lady, Inc.
July 31, 2012
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL
BALANCE
Cash 8,800 8,800
Accounts receivable 1,600 (a) 1,700 3,300
Prepaid rent 3,000 (b 1,000* 2,000
Supplies 2,100 (c) 1,630 470
Furniture 90,000 90,000
Accumulated 3,000 (d) 4,500
depreciation 1,500**
Salary payable (e) 3,000
3,000***
Retained earnings 75,060 75,060
Service revenue 17,000 (a) 1,700 18,700
Salary expense 2,400 (e) 5,400
3,000***
Rent expense (b) 1,000
1,000*
Depreciation expense (d) 1,500
1,500**
Supplies expense (c) 1,630 _____ 1,630
112,26 112,260 8,830 8,830 118,460 118,460
0
_____
* $3,000 3 = $1,000
** $90,000 5 = $18,000 12 = $1,500
*** $5,000 3/5 = $3,000

(continued) P 3-68A
Req. 2
Lady, Inc.
Income Statement
Month Ended July 31, 2012
Revenues:
Expenses:
Salary expense $5,400
Supplies expense 1,630
Depreciation expense 1,500
Rent expense 1,000
Net income $ 8,710
Lady, Inc.
Month Ended July 31, 2012
Retained earnings, July 1, 2012 $75,060
83,770
Retained earnings, July 31, 2012 $79,870

(continued) P 3-68A
Req. 2 (continued)
Lady, Inc.
Balance Sheet
July 31, 2012
ASSETS LIABILITIES
8,800 3,200
Accounts receivable 3,300 Salary payable 3,00
0
Prepaid rent 2,000 Total current 6,200
liabilities
Supplies 470
Total current 14,570
assets
Furniture $90,000 STOCKHOLDERS EQUITY
Less: Accum. Common stock 14,000

deprec. 85,500 Retained earnings 79,87
(4,500) 0
equity
Total assets $100,0 stockholders equity $100,07

70 0

3- 91
(10-20 min.) P 3-69A
Req. 1
Journal
CREDI
DATE ACCOUNT TITLES AND EXPLANATION DEBIT T
Apr. 30 Accounts Receivable ($6,830 530

$6,300)..........
Rental 530
Revenue.
To accrue rental revenue.
30 Interest Receivable ($500 $0) 500

..
Interest Revenue ($1,300 $800). 500

30 Supplies Expense ($400 $0) 400

Supplies ($1,200 $400) 400

30 Insurance Expense ($1,400 $0) 1,400

..
Prepaid Insurance ($2,400 $1,000) 1,400
..
30 Depreciation Expense ($1,900 $0) 1,900

.
($11,000 $9,100) 1,900

..
30 Wage Expense ($2,300 $1,600) 700

.........
Wages Payable ($700 $0). 700
..
To accrue wage expense.
30 Unearned Rental Revenue ($1,700 400

$1,300)..
Rental Revenue*.. 400
To record revenue that was collected in advance.
_____
* ($20,630 - $19,700 - $530)

3- 93
(continued) P 3-69A
Req. 2
Total assets = $80,230 ($8,200 + $6,830 + $500 +

$4,900 +
$800 + $1,000 + $69,000 $11,000)
Total liabilities = $8,800 ($6,800 + $700 + $1,300)
Net income = $15,230 ($20,630 + $1,300 $1,900

$400
$100 $2,300 $600 $1,400)
Total equity = $71,430 ($80,230 $8,800) or ($19,000 +

$41,000 + $15,230 - $3,800)

(20-30 min.) P 3-70A
Req. 1
Simpson Corporation
Income Statement
Year Ended March 31, 2012
Revenues:
0
Expenses:
Rent expense 10,100
Insurance expense 4,000
Interest expense 2,700
Depreciation expense 1,300 60,30
0
Income before tax 45,200
Income tax expense 7,00
0
Net income $
38,200
Simpson Corporation
Year Ended March 31, 2012
Retained earnings, March 31, 2011 $ 2,000
40,200
3- 95
Retained earnings, March 31, 2012 $17,200
(continued) P 3-70A
Req. 1 (continued)
Simpson Corporation
Balance Sheet
March 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $ 3,100
1,700
Accounts receivable 8,800 Interest payable 700
Supplies 2,000 Unearned service 800
revenue
Prepaid rent 1,700 Income tax payable 2,400
Note payable 18,400
Equipment $36,00 Total liabilities 25,400
0
Less:
Accum.
deprec. (4,60 31,400 STOCKHOLDERS EQUITY
0)
Common stock 3,000

00
equity

0
Req. 2
$25,400
Debt ratio: = 0.56
$45,600
Simpson is in compliance with its debt agreement, which

requires the company to maintain a debt ratio no higher than
0.60.

3- 97
(20 min.) P 3-71A
Req. 1
Journal
Closing Entries
Mar. 31 Service 94,100
Revenue..
Retained 94,100
Earnings.........
31 Retained 35,200
Earnings..
Advertising 11,000
Expense
Depreciation 1,000
Expense..
Interest Expense.. 300
.
Salary 17,900
Expense..
Supplies 5,000
Expense.
31 Retained 32,500
Earnings..
32,500
Dividends........
Req. 2
Retained Earnings
Mar. 31, 2012 Expenses 35,20 Mar. 31, 2011 Bal. 19,50
0 0

Mar. 31, 2012 Dividends 32,50 Mar. 31, 2012 Revenues 94,10
0 0
Mar. 31, 2012 Bal. 45,90
0
Net income = $58,900 ($94,100 - $35,200)
Req. 3
Retained Earnings increased during the year because net

income of $58,900 exceeded dividends of $32,500.

3- 99
(25-40 min.) P 3-72A
Req. 1
Mountain Lodge Service, Inc.
Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash $
7,500
Accounts receivable
16,600
Prepaid expenses 5,000
Supplies
3,700
Total current assets
32,800
Plant assets:
Equipment $42,500
Less: Accumulated depreciation (6,700) 35,800
Other assets 13,700
Total assets $82,300
LIABILITIES
Current portion of note payable $ 400
Accounts payable 14,100
Salary payable 2,500
Unearned service revenue 3,700
Total current liabilities 20,700
Note payable, long-term 5,700
Total liabilities 26,400

STOCKHOLDERS EQUITY
Common stock 10,000
Retained earnings 45,900*
Total stockholders equity 55,900
Total liabilities and stockholders equity $82,300
(continued) P 3-72A
Req. 1 (continued)
*Retained earnings, March 31, 2011. $19,500

Add: Net income ($94,100 $11,000 $1,000
$300 $17,900 $5,000). 58,900
78,400
Less: Dividends........... (32,500)
Retained earnings, March 31, 2012 $45,900
Req. 2
2012 2011
working - current liabilities - = $12,100$11,800
capital $20,70
0
Current 1.2
= Total current = $20,700 = 1.58
ratio 0
liabilities

3- 101
The increase in both working capital and the current ratio
indicate that the ability to pay current liabilities with current
assets improved during 2012.
2012
2011
Debt ratio = = = 0.32 0.25
The overall debt position deteriorated a little during 2012. The

improvement in the current ratio is greater than the
deterioration in the debt ratio. However, Mountain Lodges
overall debt position is strong because a debt ratio of .32 is not
troublesome.

(45-60 min.) P 3-73A
Req. 1
Total current assets $15.

Current 8
= = = 1.84
ratio Total current $8.6
liabilities
$13.9
Total liabilities $8.6 + $5.3

Debt ratio = = = 0.43
Total assets $32.1
Req. 2
Current Ratio Debt Ratio
$15.8 ($8.6 1/2) $13.9 ($8.6 1/2)

a. = 2.67 = 0.35
($8.6 1/2) $32.1 ($8.6 1/2)
$15.8 + $2.0 $13.9 + $2.0

b. = 2.07 = 0.47
$8.6 $32.1 + $2.0
$15.8 + $2.4 $13.9

c. = 2.12 = 0.40
$8.6 $32.1 + $2.4
$15.8 $.7 $13.9

d. = 1.75 = 0.44
$8.6 $32.1 $.7
$15.8 $13.9 + $0.5

e. = 1.74 = 0.45
$8.6 + $0.5 $32.1

3- 103
$15.8 $1.5 $13.9 + $2.5
f. = 1.66 = 0.47
$8.6 $32.1 + $4.0 $1.5
$15.8 $13.9
g. = 1.84 = 0.44
$8.6 $32.1 $0.4

(continued) P 3-73A
Req. 3
a. Revenues usually increase the current ratio.

b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as it is for
Harrington, paying off a current liability will always increase
the current ratio.
f. Borrowing money on long-term debt will always increase the
current ratio and increase the debt ratio.

3- 105
(15-20 min.) P 3-74B
1. $37 x = $7; x = $30
2. Revenues.. $37
Expenses.. 30
Net income... $ 7
3. Beginning $ 11
receivables.........
Add: 37
Revenues
Less: Collections.. (20)
Ending $ 28
receivables
Balance sheet
ASSETS
Current assets:
Receivables $ 28
4. Beginning accounts payable.. $ 6

Add: Expenses 30
Less: Payments..... (35)
Ending accounts payable. $ 1
Balance sheet
LIABILITIES
Accounts payable $1

(20-30 min.) P 3-75B
Req. 1
Healthy Hearts Consulting

Amount of Revenue (Expense) for December
Date Cash Basis Accrual Basis
Dec. 1 Expense $ (3,500) Expense 0
4 Expense $(900) Expense 0
5 Revenue $500 Revenue $500
8 Expense $(200) Expense $(200)
1 Revenue 0 Revenue $3,100
1
1 Expense 0 Expense 0
9
2 Revenue $3,100 Revenue 0
4
2 Expense $(1,800) Expense 0
6
2 Expense $(800) Expense $(800)
9
3 Expense 0 Expense $(700)
1
3 Revenue 0 Revenue $400
1
Req. 2 Income
(loss)
before tax $(3,600) Income before $2,300
tax
Req. 3

3- 107
The accrual-basis measure of net income is preferable because it
accounts for revenues and expenses when they occur, not when
they are received or paid in cash. For example, on Dec. 11, the
company earned $3,100 of revenue and increased its wealth as a
result. The accrual basis records this revenue, but the cash basis
ignores it. On Dec. 24, the business collected the receivable that
was created by the revenue earned on account at Dec. 11. The
accrual basis records no revenue on Dec. 24 because the
companys increase in wealth occurred back on Dec. 11. The
cash basis waits until cash is received, on Dec. 24, to record the
revenue. This is too late.
(10-20 min.) P 3-76B
Journal
CREDI
Dec. 31 a. Insurance Expense................... 3,500*

Prepaid Insurance................. 3,500
To record insurance expense
31 b. Salary Expense ($6,200 1/5)... 1,240

Salary Payable................... 1,240
31 c. Interest Receivable................... 500

Interest Revenue................... 500
31 d. Supplies Expense...................... 6,800**

Supplies................................ 6,800

31 e. Unearned Service Revenue

($11,900 70%)......................... 8,330
Service Revenue................... 8,330
To record revenue that was collected
in advance.
31 f. Depreciation Expense Office .

Furniture............................ 3,500
Depreciation Expense 5,800
Equipment..
Office Furniture................. 3,500
Equipment......................... 5,800
_____
* $800 + $3,600 $900 = $3,500
** $2,700 + $6,400 $2,300 = $6,800

3- 109
(45-60 min.) P 3-77B
Req. 1
Princess, Inc.
August 31, 2012
ADJUSTED
TRIAL BALANCE ADJUSTMENTS TRIAL BALANCE
Cash 8,300 8,300
Accounts receivable 1,900 (a) 2,100 4,000
Prepaid rent 2,100 (b) 700* 1,400
Supplies 2,400 (c) 2,090 310
Furniture 63,000 63,000
Accumulated 3,700 (d) 5,450
depreciation 1,750**
Salary payable (e) 3,060
3,060***
Retained earnings 53,430 53,430
Service revenue 11,000 (a) 2,100 13,100
Salary expense 2,600 (e) 5,660
3,060***
Rent expense (b) 700* 700

Depreciation expense (d) 1,750
1,750**
Supplies expense (c) 2,090 _____ 2,090
85,130 85,130 9,700 9,700 92,040 92,040
* $2,100 3 = $700
** $63,000 3 = $21,000 12 = $1,750
*** $5,100 3/5 = $3,060

(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Income Statement
Month Ended August 31, 2012
Revenues:
Expenses:
Depreciation expense 1,750
Rent expense 700
Net income $2,370
Princess, Inc.
Month Ended August 31, 2012
Retained earnings, August 1, 2012 $53,430
55,800
Retained earnings, August 31, 2012 $51,500
3-112 Financial Accounting 9/e Solutions Manual

(continued) P 3-77B
Req. 2 (continued)
Princess, Inc.
Balance Sheet
August 31, 2012
ASSETS LIABILITIES
Cash $8,30 Accounts payable $
0 4,000
Accounts 4,000 Salary payable 3,06
receivable 0
Prepaid rent 1,400 Total current liabilities 7,060
Supplies 3
10
Total current assets 14,010
Furniture $63,000 STOCKHOLDERS EQUITY
Less: Accum. Common stock 13,000
deprec. 57,550 Retained earnings 51,500
(5,450)
equity
______ Total liabilities and ______
60 0
Chapter 3 Accrual Accounting and 3-113

Income
(10-20 min.) P 3-78B
Req. 1
Journal
CREDI
Apr. 30 Accounts Receivable ($6,800 $6,300) 500

.
Rental 500
Revenue.
To accrue rental revenue.
30 Interest Receivable ($400 $0). 400

Interest Income ($400 $0) 400
.........
30 Supplies Expense ($700 $0) 700

..........
Supplies ($1,300 $600) 700
.......
30 Insurance Expense ($1,500 $0) 1,500

..
Prepaid Insurance ($2,400 $900) 1,500
..
30 Depreciation Expense ($1,400 $0) 1,400

....
($10,200 $8,800) 1,400


30 Wage Expense ($2,500 $1,300) 1,200
.
Wages Payable ($1,200 $0).. 1,200
.
30 Unearned Rental Revenue ($2,000 200

$1,800).
Rental 200
Revenue*..
To record revenue that was collected in
advance.
_____
* ($15,700 - $15,000 - $500)

Income
(continued) P 3-78B
Req. 2
Total assets = $75,200 ($8,400 + $6,800 + $400 +

$5,300 + $600 + $900 + $63,000
$10,200)
Total liabilities = $9,300 ($6,300 + $1,200 + $1,800)
Net income = $9,200 ($15,700 + $700 $1,400 $700

$400
$2,500 $700 $1,500)
Total equity = $65,900 ($75,200 $9,300) or ($9,300 +

$46,200
+ $9,200 - $3,500)

(20-30 min.) P 3-79B
Req. 1
Nicholl Corporation
Income Statement
Year Ended May 31, 2012
Revenues:
Expenses:
Rent expense 10,300
Insurance expense 3,600
Interest expense 2,600
Depreciation expense 1,200 60,400
Income before tax 37,400
Income tax expense 7,100
Net income $30,300
Nicholl Corporation
Year Ended May 31, 2012
Retained earnings, May 31, 2011 $ 4,000
34,300
Retained earnings, May 31, 2012 $14,300

Income
(continued) P 3-79B
Req. 1 (continued)
Nicholl Corporation.
Balance Sheet
May 31, 2012
ASSETS LIABILITIES
1,500 3,700
Accounts receivable 8,600 Unearned service
Supplies 2,200 revenue
900
Prepaid rent 1,800 Interest payable
500
Income tax payable 2,100
Equipment $37,300 Note payable 18,800
Less: Total liabilities 26,000
Accum.
deprec. (4,100) 33,200
STOCKHOLDERS EQUITY
Common stock
7,000
equity
Total assets $47,30 stockholders $47,300
0 equity

Income
Req. 2
$26,000
Debt ratio: = 0.55
$47,300
Nicholl Corporations debt ratio of 0.55 is in compliance with

the lenders debt restriction.
(20 min.) P 3-80B

Req. 1
Journal
Closing Entries
Mar. 31 Service Revenue 91,500
Retained Earnings 91,500
31 Retained Earnings. 36,300

Salary Expense.. 17,700
Supplies Expense. 4,800
Advertising Expense 11,400
Depreciation Expense. 2,000
Interest Expense... 400
31 Retained Earnings. 32,500

Dividends 32,500
Req. 2

Retained Earnings
Mar. 31, 2012 Expenses 36,30 Mar. 31, 2011 Bal. 20,00
0 0
Mar. 31, 2012 Dividends 32,50 Mar. 31, 2012 Revenues 91,50
0 0
Mar. 31, 2012 Bal. 42,70
0
Net income = $55,200 ($91,500 - $36,300)
Req. 3
Retained Earnings increased during the year because net

income of $55,200 exceeded dividends of $32,500.

Income
(30-40 min.) P 3-81B
Req. 1
Cool River Service, Inc.

Balance Sheet
March 31, 2012
ASSETS
Current assets:
Cash.......................................................... $ 7,400
Accounts receivable................................. 17,000
Prepaid expenses...................................... 3,000
Supplies..................................................... 5,500
Total current assets.............................. 32,900
Plant assets:
Equipment $42,800
Less: accumulated (6,900) 35,900
depreciation
Other assets.................................................. 14,000
Total assets................................................... $82,800
LIABILITIES
Accounts payable...................................... $14,400
Current portion of note payable................ 700
Salary payable........................................... 2,600
Unearned service revenue........................ 3,600
Total current liabilities.......................... 21,300
Note payable, long-term................................ 5,600
Total liabilities............................................... 26,900
STOCKHOLDERS EQUITY
Common stock............................................... 13,200

Retained earnings ...................................... 42,700*
Total stockholders equity.......................... 55,900
Total liabilities and stockholders equity...... $82,800

Income
(continued) P 3-81B
Req. 1 (continued)
_____
*Computation:
Retained earnings, March 31, 2011.. $ 20,000
Add: Net income ($91,500 $11,400 $2,000
$400 $17,700 $4,800).......... 55,200
75,200
Less: Dividends.. (32,500)
Retained earnings, March 31, 2012.. $42,700
Req. 2
2012 2011
working - current liabilities - = $11,600
capital $21,30 $11,000
0
= = = 1.54 1.30
ratio Total current liabilities $21,300
The increase in both working capital and the current ratio

indicate that the ability to pay current liabilities with current
assets improved during 2012.

Debt ratio = = = 0.32 0.35
Cool River Services overall debt position improved a bit from

2011 to 2012.

(45-60 min.) P 3-82B
Req. 1
Current Total current assets $15.4

= = = 1.64
ratio Total current liabilities $9.4
$14.9
Total liabilities $9.4 + $5.5 0.4

Debt ratio = = =
Total assets $31.2 8
Req. 2
Current Ratio Debt Ratio
$15.4 ($9.4 1/2) $14.9 ($9.4

2.2 1/2)
a. = = 0.38
($9.4 1/2) 8 $31.2 ($9.4
1/2)
$15.4 + $3.0 1.9 $14.9 + $3.0

b. = = 0.52
$9.4 6 $31.2 + $3.0
$15.4 + $2.4 1.8 $14.9 0.4

c. = =
$9.4 9 $31.2 + $2.4 4
$15.4 $.6 1.5 $14.9

d. = = 0.49
$9.4 7 $31.2 $.6
$15.4 1.5 $14.9 + $0.3

e. = = 0.49
$9.4 + $0.3 9 $31.2
$15.4 $2.0 $14.9 + $2.9

1.4
f. $9.4 = $31.2 + $4.9 = 0.52
3
$2.0

Income
g $15.4 1.6 $14.9
= = 0.49
. $9.4 4 $31.2 $0.9

(continued) P 3-82B
Req. 3
a. Revenues usually increase the current ratio.

b. Revenues usually decrease the debt ratio.
c. Expenses usually decrease the current ratio.
Note: Depreciation is an exception to this rule.
d. Expenses usually increase the debt ratio.
e. If a companys current ratio is greater than 1.0, as for
Hiaport, paying off a current liability will always increase
the current ratio.
f. Borrowing money on long-term debt will always increase the
current ratio and increase the debt ratio.

Income
Challenge Exercises and Problem
(20-25 min.) E 3-83
(Dollar amounts in thousands)
December 31, 2011

Current assets = $11,100 ($1,500 + $5,900 + $2,700 + $1,000)
Current liabilities = $6,100 ($2,600 + $1,600 + $1,900)
Net working capital = $5,000 ($11,100 - $6,100)
Current $11,100
= = 1.82
ratio $6,100
December 31, 2012

Current assets = $10,700 ($9001 + $6,8002 + $2,7003 + $3004)
Current liabilities = $5,200 ($1,2005 + $1,6006 + $2,4007)
Net working capital = $5,500 ($10,700 - $5,200)
Current $10,70
= 0 = 2.06
ratio $5,200
_____
Computations of December 31, 2012 balances:
1
Cash = $1,500 $7,300 + $8,100 $1,400 = $900
2
Receivables = $5,900 + $9,000 $8,100 = $6,800
3
No change in the Inventory balance.
4
Prepaid expenses = $1,000 $700 = $300
5
Accounts payable = $2,600 $1,400 = $1,200
6
No change in the Unearned Revenues balance.
7
Accrued expenses payable = $1,900 + $500 = $2,400
Conclusion: Valley Forges net working capital and current
ratio improved during 2012. The companys
current ratio is very strong.
(60 min.) E 3-84
a. Net income:
Service revenue:
($161,000 + $1,650 + $32,200) $194,85
. 0
Expenses:
Salary ($37,000 + $3,500) $
. 40,500
Depreciation 2,600
building 3,100
Supplies... 1,500
Insurance.
7,300
Advertising..
2,000
Utilities.
57,000
$137,850
Net income..
b. Total assets:
Cash $ 7,300
Accounts receivable ($7,500 + $32,200) 39,700
1,500
Supplies ($4,600 $3,100) 2,000

$110,00
Prepaid insurance ($3,500 $1,500) 0
.

Income
Building (18,200 91,800
Less: Accum. Depr. )
53,00
($15,600 + $2,600). 0
. $195,300
Land
Total assets.

(continued) E 3-84
c. Total liabilities:
Accounts payable............................... $ 6,100

Salary payable.................................... 3,500
Unearned service revenue
($5,500 $1,650)............................ 3,850
Total liabilities.................................... $ 13,450
d.
Total stockholders equity:
Common stock.................................... $ 14,000

Retained earnings, beginning............ $
Add: Net income................................ 46,000
Less: Dividends................................. 137,850

Total stockholders equity..................
197,850
(16,0 167,850
00)
$181,850
e. Total = Total liabilities + Total stockholders equity

assets
$195,300 = $13,450 + $181,850

Income
(20 min.) P 3-85
Express Detail Inc.
Balance Sheet
December 31, 2012
ASSETS LIABILITIES
Cash (a) $ Accounts payable (g) $ 3,000
15,300
Accounts receivable 1,400 Advertising 500
(c) payable(h)
Supplies (d) 1,000 Salary payable (i)
500
Total current 17,700 Unearned gift
assets certificate revenue 1,200
(b)
5,200
Equipment (e) Total liabilities
$35,000
23,000
Less: Accum.
deprec.(f)
(12,000)
STOCKHOLDERS EQUITY
Common stock (j) 18,000
Retained earnings (k) 17,500
equity
$40,70 stockholders
0 equity

(continued) P 3-85
Supporting computations
(a) Cash
Bal. 12/31/2011 1,300
Cash collections from 12,50 Salaries paid
customers 0 Dividends paid
31,00
Issuance of common stock 0 500 Purchase of equipment
8,000 5,000
5,500 Payments of accounts
payable
1,500 Advertising paid
1,500
Bal. 1/31/2012 15,30

0
(b) Unearned Gift Certificate Revenue
800 Bal. 12/31/2011

Gift certificate revenue 600 1,000 Sale of gift certificates
earned
1,200 Bal. 1/31/2012 (given)
(c) Accounts Receivable
Bal. 12/31/2011 2,000

Revenue on account 29,40 30,00 Collections from
0 0 customers*
Bal. 1/31/2012 1,400
* Excludes the $1,000 for gift certificates which was received in advance,
not on account
(d) Supplies
Bal. 12/31/2011 1,500

Purchase of supplies 3,500 4,000 Supplies expense
Bal. 1/31/2012 1,000

Income
(e) Equipment -- $35,000 ($30,000 + $5,000)
(f) Accumulated depreciation -- $12,000 ($6,000 + $6,000)

(continued) P 3- 85
(g) Accounts payable
5,000 Bal. 12/31/2011

Payments on account 5,500 3,500 Purchase of supplies
3,000 Bal. 1/31/2012
(h) $2,000 Advertising expense - $1,500 advertising paid
(i) Salary Payable
1,000 Bal. 12/31/2011

Salaries paid 12,50 12,00 Salary expense
0 0
500 Bal. 1/31/2012
(j) Common Stock--$18,000 ($10,000 + $8,000)
(k) Retained Earnings
12,00 Bal. 12/31/2011

0
Dividends 500 6,000 Net income
17,500 Bal. 1/31/2012

Income
Decision Cases
(25 min.) Decision Case 1
Req. 1 Unadjusted trial balance:

Debit Credit
Cash.. $ 8,000
Accounts receivable. 4,200
Supplies... 800
Prepaid rent 1,200
Land.. 43,000
Accounts payable.. $12,000
Salary payable 0
Unearned service revenue.. 700
Note payable, due in 3 years.. 23,400
Common stock.. 5,000
Retained earnings. 9,300
Service revenue. 9,100
Salary expense... 3,400
Rent expense.. 0
Advertising expense. 900
Supplies expense.. 0
Totals $61,500 $59,500
Out of balance
$2,000

(continued) Decision Case 1
Req. 2 Adjusted trial balance:

Debit Credit
Cash... $8,000
Accounts receivable.. 4,200
Supplies ($800 - $400)... 400
Prepaid rent ($1,200 x 11/12) 1,100
Land ($41,000 + $2,000). 43,000
Accounts payable... 12,000
Salary payable. 1,000
Unearned service revenue ($700 - $500) 200
..
Note payable, due in 3 years... 25,400
Common stock 5,000
Retained earnings.. 9,300
Service revenue ($9,100 + $500). 9,600
Salary expense ($3,400 + $1,000) 4,400
Rent expense ($1,200 x 1/12).. 100
Advertising expense.. 900
Supplies expense... 400
Total $62,500 $62,50

0
Req. 3

Income
$8,000 + $4,200 + $400 +
Current ratio = $1,100
$12,000 + $1,000 + $200
$13,70
0
= = 1.04
$13,20
0
We might have trouble sleeping at night with a current ratio of

1.04. To be safe, the current ratio should be around 1.50 or
higher.

(20-30 min.) Decision Case 2
Eagle Restaurant, Inc.

Income Statement
Month Ended October 31, 2012
Sales revenue................................. $32,000
Cost of goods sold.......................... $12,000
Wages expense.............................. 5,000
Rent expense................................. 4,000
Insurance expense......................... 1,000
Depreciation expense.................... 1,000 23,000
Net income..................................... $ 9,000

Month Ended October 31, 2012
Retained earnings, October 1, 2012........ $ 0
Add: Net income...................................... 9,000
Less: Dividends....................................... (3,000)
Retained earnings, October 31, 2012...... $6,000

Income

Balance Sheet
October 31, 2012
ASSETS LIABILITIES
Cash $ Accounts payable $ 7,000
8,000
Food inventory 5,000 Unearned revenue 3,000
Prepaid insurance 1,000 10,000
Dishes, silver 4,000
Fixtures OWNERS EQUITY
$24,000
Less: Accum. Common stock $25,00
0
deprec. 23,00 Retained 6,00 31,00
(1,000) 0 earnings 0 0
Total assets $41,00 Total liabilities and $41,00
0 equity 0
Recommendation: Do not expand the business. It is not

meeting Marks goals for net income or for
total assets.

(30-40 min.) Decision Case 3
Req. 1 (your highest price)
Advertising revenue ($22,000 + $26,000

$4,000)
Expenses:
Salary $4,000
Utilities 900
Other (unrecorded) 1,100
Salary of your manager 5,000 11,000
Your expected monthly net income $15,000
Multiplier to compute price X 16
Your highest price $240,000
Req. 2 (Williams asking price)
SW Advertising, Inc.
Statement of Retained Earnings and Common Stock
June 30, 2012
Beginning retained earnings $ 93,000
Add: Net income
Revenue ($22,000 + $4,000) $26,000
Less: Expenses ($4,000 +
$900 + $1,100) 20,000

(6,000)
113,000
Less: Dividends
(9,000)
Ending retained earnings $104,000
Common stock 50,000
Stockholders equity, June 30, 2012 $154,000
Income
Multiplier to compute price X 2__
Williams asking price $308,000

Req. 3
You may start by offering Williams approximately $225,000 for

the business. His asking price is $308,000 so you are starting
out quite far apart. If Williams appears especially eager to sell
out, you may be able to buy the firm for closer to your highest
price of $240,000. However, if he is not so eager to sell and if
you want the business badly enough, you may have to pay
somewhere between $240,000 and $308,000. It might pay to
hire an expert to value the businesss assets. You may find
that Williams price is inflated based on the value of its assets.
You can always raise your offer, but you cannot decrease it, so
start the negotiating process with an offer around $225,000.

Income
Ethical Issues
Ethical Issue 1
1. The journal entry to record the revenue is:
Dec. Accounts Receivable... XXX

Sales Revenue.. XXX
The debit to Accounts Receivable will increase total current

assets and, as a result, increase (improve) the current ratio.
The credit to Sales Revenue will increase total owner equity

and, as a result, decrease (improve) the debt ratio.
2. a. c. The issue is whether it is ethical to record the

revenue in the current year. The contract has been signed,
but the implication is that the company will not have done
everything it needs to do in order to earn the revenue in the
current year. The stakeholders are the company, the bank,
the stockholders, and the companys other creditors. From
an economic standpoint, the entry would obviously improve
the companys short term financial position. However, the
advantage would probably be short-lived. When the bank
finds out about this entry, they will likely protest, and
demand immediate payment, so the longer-term economic
impact will likely be negative. From a legal standpoint, to
record this transaction in December violates GAAP by
violating the revenue principle. In this case Cross Timbers
has not made the sale (has not delivered the merchandise)
to the customer and, therefore, has not earned the revenue
prior to December 31 of the current year. From an ethical
standpoint, recording this revenue violates the banks rights
for proper disclosure of the companys income and assets.
Revenue should be recorded no earlier than when it is
earned. Cross Timbers expects to earn the revenue in

January of next year. Cross Timbers clearly cannot record
this revenue until it is earned. To do so is not in their best
economic, legal (GAAP) or ethical best interests.
(continued) Ethical Issue 1
3. The authors would suggest either of two actions. Cross

Timbers can either:
a. Report the current ratio of 1.47 and the debt ratio of .51
because these are the true values. Then tell the bank of
the signed contract for additional work and the hope for a
better set of ratio values next year. In some cases, banks
will agree to sign a waiver of the terms of loan covenants,
meaning that, although the company is in violation, the
bank will not move to enforce the covenant. They may
give Cross Timbers a grace period to cure the violation
in the covenant.
b. Pay off some current liabilities before year end. This will
improve both the current ratio and the debt ratio. This may
enable Cross Timbers to bring its ratio values into
compliance with the banks requirements.

Income
Ethical Issue 2
1. These transactions overstate the reported income of the

company by $21,000 ($10,000 + $10,000 + $1,000).
2. It appears that Almond wants to improve the companys

reported income in order to borrow on favorable terms. Her
action is unethical and probably illegal as well because she
is deliberately overstating the companys reported income.
Almond appears to be letting the potential short term
economic advantage of these deliberate misstatements take
precedence. She needs to remember that these
misstatements violate GAAP, and that, depending on what
use is made of the financial statements, could subject the
company to civil or criminal legal proceedings. If this
happens, the short term economic gains ($21,000) would not
even come close to the long-term economic costs
associated with the legal actions, not to mention the
negative publicity. The business will need a bank loan, and
perhaps the money would be used to pay bills, expand the
business, and so on. However, based on Almonds lack of
integrity, the money may be destined for her own use.
Regardless of its use, the money is obtained under false
pretenses and cannot be headed for a good outcome.

The bank is harmed by Almonds and Lails actions.
Lending money to Almond under false pretenses may lead
the bank to charge an unrealistically low interest rate that
robs the banks owners of interest revenue. In the extreme,
the public is robbed if taxpayers wind up financing the
bailout of a failed institution.
3. Personal advice will vary from student to student. The
purpose of asking this question is to challenge students to
take the high road of ethical conduct by having nothing to do
with Almonds scheme. The authors would advise Lail, the
accountant, to take these actions, in order:
a. Refuse to take any part in Almonds scheme, explaining
that the result is overstatement of reported income. This
is both illegal and unethical, and will ultimately have a
negative economic impact on the company, as well.
Accountants are bound to standards of ethical conduct
that these actions violate. The can go to prison when
caught falsifying financial statements.
b. To remain ethical, the accountant must be willing to lose
his/her job. It is better to protect ones reputation even if
that causes a short-term hardship.

Income
Focus on Financials: Amazon.com, Inc.
(15-20 min.)
Req. 1
Accrued expenses are expenses that have been incurred but

that have not yet been paid as of the balance sheet date. The
accrual and matching concepts require that all expenses be
recognized (recorded) during the period in which they are
incurred in order to earn revenue, regardless of when they are
paid.
Req. 2 and Req. 4 (balances in millions at December 31, 2008)
Accrued expenses and other

Beg. Bal. $1,759
(a) 1,759 (b) 2,321
End. Bal. $2,321

(continued) Focus on Financials: Amazon.com, Inc.
Req. 3 (amounts in millions)
Journal
a. Accrued expenses and other. 1,759

Cash.. 1,759
b. Operating expenses.. 6,237

Cash..... 3,916
Accrued expenses and other 2,321
The balance of Accrued Expenses and Other agrees with the

financial statements at December 31, 2010.

Income
(continued) Focus on Financials: Amazon.com, Inc.
Req. 5
Current ratio:
2010 2009
(Dollar amounts in millions)
Total current assets $13,747 $9,797
1.3
Total current = $10,372 = 1.33 $7,364 =
3
liabilities
Working Capital:
2010 2009
Current Assets $13,747- $3,37 $9,797 - $2,43
= = =
Current liabilities $10,372 5 $7,364 3
Debt ratio:
2010 2009
Total liabilities $11,933* $8,556**
= = 0.64 = 0.62
Total assets $18,797 $13,813
*10,372 + 1,561
**7,364 + 1,192
The current ratio did not change, working capital increased

substantially, and the debt ratio slightly worsened during 2010.
This reveals slightly weakening leverage but with sustained
liquidity. Also, the size of the firm overall has increased
(indicated by total assets) and its working capital has
increased as well to support Amazon.com now that it is a
larger firm.

Focus on Analysis: RadioShack, Corp.
(15-20 min.)
Req. 1
The beginning balance of Accounts Receivable, $322.5 million

represents revenue earned in fiscal 2009 but not received until
fiscal 2010 The ending balance of Accounts Receivable, $377.5
million, represents revenue earned in fiscal 2010 but not
received until fiscal 2011.
According to footnote 3, the receivables are due from vendors,

trade accounts receivables, and other receivables. The
amount due from vendors likely represents deposits made by
RadioShack whereas the trade accounts receivables are likely
due from customers.
Req. 2
Since Deferred Income Taxes is a current asset, it is most likely similar to a
prepaid asset, meaning taxes have been paid but will be expensed sometime
in the future. When the taxes are expensed in the future, the asset, Deferred
Income Taxes will decrease as in the following entry:
Journal
DATE ACCOUNT TITLES AND EXPLANATION DEBIT CREDIT
Income Tax Expense... 8
Deferred Income Taxes.... 8
Income
Req. 3
Since depreciation expense increases Accumulated
Depreciation $70 million, a decrease of $49 million ($799 + $70
- $820) must have occurred
(continued) Focus on Analysis
as well. The decrease is most likely from the sale of property,

plant, and equipment.
Req. 4
Accrued Advertising Payable represents an accrued liability
account. When the company incurs advertising expense, this
current liability account is credited. When the company pays
the advertising company, these amounts are debited to
Accrued Advertising Payable.
The expense relating to this accrued advertising was recorded

in the year the expense was incurredwhen the advertising
first takes place (Note 2) Accordingly, the $26.9 million
accrued advertising represents advertising incurred in fiscal
2010 but not paid until fiscal 2011.

From 2009 to 2010, RadioShack, Corp.s advertising expense
increased from $193 million to $206 million.(Note 2). By
reconstructing the accrued liability account, the amount
RadioShack paid for advertising during fiscal 2010 can be
derived.
Accrued Advertising Expense (Payable)

Beg. Bal. $31.4
Adv. Paid $211.6 Adv. Exp. 206.1
End. Bal. 26.9

Income
Group Project
(45 min.)
Req. 1
Trozo Lawn Service, Inc.

Income Statement
Four Months Ended August 31
Service revenue ($5,600 + $600) $6,200
Expenses:
Wage expense ($1,900 + $200) $2,100
Rent expense ($600 4/6) 400
Supplies expense ($400 $50) 350
Repair expense 300
Depreciation expense ($300 1/3) 100
Net income $2,950

(continued) Group Project
Req. 2

Balance Sheet
August 31
ASSETS LIABILITIES
Current: Current:
Cash $2,640 Wages payable $
200
Accounts receivable 600 Total current liabilities
200
Receivable from
Ludwig
(or Prepaid rent) 200
Supplies 50 STOCKHOLDERS
Total current assets 2,890 EQUITY
Long-term: Common stock 1,060
Trailer $300 Retained earnings
Less ($2,950 $460) 2,49
accum. 0
deprec. (100) 200 Total stockholders 2,890
equity
Total assets $3,690 stockholders $3,69

equity 0

Income
(continued) Group Project
Req. 3

Statement of Cash Flows
Four Months Ended August 31
Cash flows from operating activities:
Collections from $ 5,600
customers
Payments:
For supplies...................................... $ 400
To employees.................................... 1,900
For rent............................................. 600
For repairs........................................ 300 3,200
Net cash provided by operating activities 2,400
Cash flows from investing activities:

Purchase of trailer............................ $(300)
Net cash used for investing activities (300)
Cash flows from financing activities:

Issued note payable to father.......... $ 1,500
Repayment of loan to father (1,500)
Payment of dividends....................... (460)
Issuance of common stock.............. 1,000
Net cash used for financing 540
activities...................................................
Net increase in cash... $ 2,640
Cash balance, beginning.. -0-
Cash balance, ending $ 2,640

Req. 4
Matt was successful because his lawn service was profitable

and had a positive cash flow from operating activities. Matt
was also able to pay off his loan and pay a dividend.

Income

Horngren 9th Edition Solutions Ch3

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Horngren 9th Edition Solutions Ch3

Uploaded by

Copyright:

Available Formats

Chapter 3

Accrual Accounting & Income

(10 min.) S 3-1

(10 min.) S 3-2

Statement Reports (Amounts in millions)

Balance sheet Notes payable ($4.1 + $1.7 $1.6) $4.2

Chapter 3 Accrual Accounting & Income

3-2 Financial Accounting 9/e Solutions

At the end of each accounting period, the business reports

The accrued salaries, which are owed to the employees but

Chapter 3 Accrual Accounting & Income

The large auto manufacturer should record sales revenue when

When the large auto manufacturer records the revenue from

(10 min.) S 3-5

Depreciation is the periodic allocation of the cost of a tangible

Chapter 3 Accrual Accounting & Income

3-6 Financial Accounting 9/e Solutions

b. The Time Period Concept

c. The Revenue Principle

d. The Revenue Principle

e. The Expense Recognition Principle

(10 min.) S 3-7

Oct. 31 Rent Expense ($3,000 1/6) 500

Prepaid Rent Rent Expense

Oct. 31 Supplies Expense ($950 $400) 550

Supplies Supplies Expense

(10 min.) S 3-8

(a) Jan. Computer Equipment. 50,00

(b) Dec. Depreciation Expense

3-8 Financial Accounting 9/e Solutions

Jan. 50,00 Dec. 10,00 Dec. 10,00

Bal. 50,00 Bal. 10,00 Bal. 10,00

Computer equipment. $50,000

Chapter 3 Accrual Accounting & Income

Income statement: 2012

Balance sheet: 2012

(10 min.) S 3-10

Nov. 30 Interest Expense.. 250

Dec. 31 Interest Expense... 250

3-10 Financial Accounting 9/e Solutions

Dec. 31 Interest 750

(10 min.) S 3-11

Oct. 31 Interest Receivable 250

Nov. 30 Interest Receivable 250

Dec. 31 Interest Receivable 250

Chapter 3 Accrual Accounting & Income

Dec. 31 Cash. 750

3-12 Financial Accounting 9/e Solutions

Unearned revenues are liabilities because The World Star has

b. Unearned Subscription 40,000

(5-10 min.) S 3-13

Prepaid Rent at December 31:

Chapter 3 Accrual Accounting & Income

3-14 Financial Accounting 9/e Solutions

Unearned Service 7,000

(15-30 min.) S 3-15

Sparrow Sporting Goods Company

Sparrow Sporting Goods Company

3-16 Financial Accounting 9/e Solutions

Sparrow Sporting Goods Company

Chapter 3 Accrual Accounting & Income

3-18 Financial Accounting 9/e Solutions

Retained Earnings ending balance agrees with the amount