Module 3

Transactions, Adjustments, and

Financial Statements

QUESTIONS
Q3-1. The four steps in the accounting cycle are:
1) Record all transactions as they occur.
2) Adjust accounts to reflect events that have occurred but that have not been
captured as transactions.
3) Prepare the financial statements.
4) Close the books so that a new accounting cycle can begin with $0 balances in the
temporary accounts.

Q3-2. A journal entry records a transaction in a company’s “general ledger.” A general ledger
is the book of original entry for the initial recording of any type of transaction or
accounting adjustment. It contains space for dates and for accounts to be debited and
credited, columns for the amounts of the debits and credits, and a posting reference
column for numbers of the accounts that are posted. Most companies have electronic
journals but the basics are the same.

Q3-3. Posting means including the transaction amount in the affected general ledger
accounts. This procedure enables company personnel to trace amounts in the ledger
back to the originating journal entry and to determine which entries have been added to
the ledger so that account totals are updated.

Q3-4. 1. Prepaid Expenses—Allocating assets to expense to reflect expenses incurred

during the period. Example: Recording supplies used by increasing (debiting)
Supplies Expense and decreasing (crediting) Supplies or recording depreciation
expense and reducing PPE (or increasing accumulated depreciation).

2. Unearned Revenues—Adjusting unearned revenues to recognize only revenues

earned during the period. Example: Recording service fees earned by decreasing
(debiting) Unearned Service Fees, a liability, and increasing (crediting) Service
Fees Earned, an equity account.

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-1
 3. Accrued Expenses—Accruing expenses to reflect expenses incurred during the
period that are not yet paid or recorded. Example: Recording unpaid wages by
increasing (debiting) Wages Expense and increasing (crediting) Wages Payable or
recording interest owing on loans.

4. Accrued Revenues – Accruing revenues to reflect revenues earned during the

period that are not yet received or invoiced. Example: Recording commissions
earned by debiting Commissions Receivable and crediting Commissions Earned.

Q3-5. To adjust the account, we need to move 1/24th of the insurance prepayment from the
balance sheet to the income statement to reflect the fact that one month out of 24 has
elapsed and the insurance prepayment has been “used up.” The adjustment would be:

Jan. 31 Insurance Expense ......................................................... 79

Prepaid Insurance............................................... 79
To record insurance expense for January ($1,896 / 24 = $79).

Q3-6. Supplies Expense of $505 must be recorded for the period. This will reduce the asset
account and increase the expense account by $505. ($875 + $260 - $630 = $505)

a. If the adjustment is not made, Supplies Expense is understated by $505.

b. Supplies (asset) and Stockholders’ Equity are both overstated by $505 on the
January 31 balance sheet.

Q3-7.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 9,768
UR 9,768 (a) Received +9,768 = +9,768 – =
$9,768 cash Cash Unearned
Cash in advance Revenue
9,768 for
subscriptions
UR
9,768

UR 407
Sales 407 (b) Delivered = -407 +407 +407 – = +407
$407 of Unearned Retained Sales
UR magazines Revenue Earnings
407

Sales
407

© Cambridge Business Publishers, 2021

3-2 Financial Accounting for MBAs, 8th Edition
Q3-8. a. Jan. 1 Cash 9,768
Subscriptions Received in Advance (UR) 9,768
To record receipt of two-year subscriptions.

b. Jan. 31 Subscriptions Received in Advance (UR) 407

Subscriptions Revenue 407
To record subscription revenue earned during
January ($9,768 / 24 = $407).

Q3-9. Trombley needs to increase wages expense for the month of January by two work
days: January 30 and 31 and record an accrued liability. The journal entry to
accomplish this is:

Jan. 31 Wages Expense 380

Wages Payable 380
To record unpaid wages for Jan. 30–31 .........................
[($950 / 5)  2 = $380].

Q3-10. On January 31, the interest receivable account and the Interest Income account both
should be increased by $720 to reflect the fact that the company has earned interest for
one month but not yet received it. The journal entry would be as follows:

Jan. 31 Interest Receivable 720

Interest Income 720
To record interest earned during January.

Q3-11. All temporary accounts are closed at year-end. They consist of the income statement
accounts (expense and revenue accounts) and the dividend account.

Step 1) Close revenue accounts: Debit each revenue account for an amount equal
to its balance, and credit retained earnings for the total of revenues.
Step 2) Close expense accounts: Credit each expense account for an amount equal
to its balance, and debit retained earnings for the total of expenses.
Step 3) Close the dividend account: Credit the dividend account for an amount
equal to its balance, and debit retained earnings.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-3
 MINI EXERCISES

M3-12. (20 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 12,000
CS 12,000 June 1. +12,000 = +12,000 – =
Invested Cash Common
Cash $12,000 cash Stock
12,000

CS
12,000

RNTE 950
Cash 950 June 2. -950 = -950 – +950 = -950
Paid $950 cash Cash Retained Rent
RNTE for June rent Earnings Expense
950

Cash
950

PPE 6,400
AP 6,400 June 3. +6,400 = +6,400 – =
Purchased Office Accounts
PPE $6,400 of office Equipment Payable
6,400 equipment on
credit
AP
6,400

SUP 3,800
Cash 1,800 June 6. -1,800 +3,800 = +2,000 – =
AP 2,000 Purchased Cash Supplies Accounts
$3,800 of Payable
SUP supplies;
3,800 $1,800 cash,
$2,000 on
Cash
account
1,800

AP
2,000

AR 4,700
Rev 4,700 June 11. +4,700 = +4,700 +4,700 – = +4,700
$4,700 billed Accounts Retained Service
AR for services Receivable Earnings Fees
4,700 Earned
((Revenue)
Rev
4,700

continued

© Cambridge Business Publishers, 2021

3-4 Financial Accounting for MBAs, 8th Edition
 Table concluded

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 3,250
AR 3,250 June 17. +3,250 -3,250 = – =
Collect $3,250 Cash Accounts
Cash on accounts Receivable
3,250

AR
3,250

AP 5,000
Cash 5,000 June 19. -5,000 = -5,000 – =
Paid $5,000 Cash Accounts
AP on office Payable
5,000 equipment
account
Cash
5,000

DIV 900
Cash 900 June 25. -900 = -900 – =
Paid cash Cash Dividends
DIV dividend
900 of $900

Cash
900

UTE 350
Cash 350 June 30. -350 = -350 – +350 = -350
Paid $350 Cash Retained Utilities
UTE utilities Earnings Expense
350

Cash
350

WE 2,500
Cash 2,500 June 30. -2,500 = -2,500 – +2,500 = -2,500
Paid $2,500 Cash Retained Wages
WE wages Earnings Expense
2,500

Cash
2,500

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-5
M3-13. (30 minutes)

June 1 Cash 12,000

Common stock 12,000
Owner invested cash for stock.

2 Rent expense 950

Cash 950
Paid June rent.

3 Office equipment 6,400

Accounts payable 6,400
Purchased office equipment on account.

6 Supplies 3,800
Cash 1,800
Accounts payable 2,000
Purchased $3,800 of supplies; paid $1,800 cash with
balance due in 30 days.

11 Accounts receivable 4,700

Service fees earned 4,700
Billed clients for services.

17 Cash 3,250
Accounts receivable 3,250
Collections from clients on account.

19 Accounts payable 5,000

Cash 5,000
Payment on account.

25 Dividends 900
Cash 900
Paid dividends.

30 Utilities expense 350

Cash 350
Paid utilities bill for June.

30 Wages expense 2,500

Cash 2,500
Paid wages for June.

© Cambridge Business Publishers, 2021

3-6 Financial Accounting for MBAs, 8th Edition
 Cash Supplies
June 1 12,000 950 June 2 June 6 3,800
17 3,250 1,800 6
5,000 19
900 25 Office Equipment
350 30 June 3 6,400
2,500 30

Accounts Receivable Accounts Payable

June 11 4,700 3,250 June 17 June 19 5,000 6,400 June 3
2,000 June 6

Common Stock Dividends

12,000 June 1 June 25 900

Service Fees Earned Rent Expense

4,700 June 11 June 2 950

Wages Expense Utilities Expense

June 30 2,500 June 30 350

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-7
 M3-14. (40 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 9,000
CS 9,000 April 1. +9,000 = +9,000 – =
Invested Cash Common
Cash $9,000 in Stock
9,000 cash
CS
9,000

PPRNT 2,850
Cash 2,850 April 2. -2,850 +2,850 = – =
Paid $2,850 Cash Prepaid
PPRNT cash for lease Van Lease
2,850

Cash
2,850

Cash 10,000
NP 10,000 April 3. +10,000 = +10,000 – =
Borrow Cash Notes
Cash $10,000 Payable
10,000

NP
10,000

PPE 5,500
Cash 2,500 April 4. -2,500 +5,500 = +3,000 – =
AP 3,000 Purchase Cash Equipment Accounts
$5,500 Payable
PPE equipment for
5,500 $2,500 cash
with rest on
Cash
account
2,500

AP
3,000

SUP 4,300
Cash 4,300 April 5. -4,300 +4,300 = – =
Paid $4,300 Cash Supplies
SUP cash for
4,300 supplies
Cash
4,300

continued

© Cambridge Business Publishers, 2021

3-8 Financial Accounting for MBAs, 8th Edition
 Table concluded

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
AE 350
Cash 350 April 7. -350 = -350 – +350 = -350
AE Paid $350 Cash Retained Advertising
350 cash for ad. Earnings Expense

Cash
350

AR 3,500
Rev 3,500 April 21. +3,500 = +3,500 +3,500 – = +3,500
AR Billed $3,500 Accounts Retained Cleaning
3,500 for services Receivable Earnings Fees
Earned
Rev (Revenue)
3,500

AP 3,000
Cash 3,000 April 23. -3,000 = -3,000 – =
AP Paid $3,000 Cash Accounts
3,000 cash on Payable
account
Cash
3,000

Cash 2,300
AR 2,300 April 28. +2,300 -2,300 = – =
Cash Collect Cash Accounts
2,300 $2,300 on Receivable
account
AR
2,300

DIV 1,000
Cash 1,000 April 29. -1,000 = -1,000 – =
DIV Paid $1,000 Cash Dividends
1,000 cash dividend

Cash
1,000

WE 2,750
Cash 2,750 April 30. -2,750 = -2,750 – +2,750 = -2,750
WE Paid $2,750 Cash Retained Wages
2,750 cash for Earnings Expense
wages
Cash
2,750

OE 995
Cash 995 April 30. -995 = -995 – +995 = -995
OE Paid $995 Cash Retained Van Fuel
995 cash for gas Earnings Expense

Cash
995

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-9
M3-15. (30 minutes)

April 1 Cash 9,000

Common stock 9,000
Owner invested cash for stock.

2 Prepaid van lease 2,850

Cash 2,850
Paid six months' lease on van.

3 Cash 10,000
Notes payable 10,000
Borrowed money from bank for one year; interest rate
is 10%.

4 Equipment 5,500
Cash 2,500
Accounts payable 3,000
Purchased $5,500 of equipment; paid $2,500 cash with
balance due in 30 days.

5 Supplies 4,300
Cash 4,300
Purchased supplies for cash.

7 Advertising expense 350

Cash 350
Paid for April advertising.

21 Accounts receivable 3,500

Cleaning fees earned 3,500
Billed customers for services.

23 Accounts payable 3,000

Cash 3,000
Payment on account.

28 Cash 2,300
Accounts receivable 2,300
Collections from customers on account.

29 Dividends 1,000
Cash 1,000
Paid cash dividends.

30 Wages expense 2,750

Cash 2,750
Paid wages for April.

30 Van fuel expense 995

Cash 995
Paid for gasoline used in April.

© Cambridge Business Publishers, 2021

3-10 Financial Accounting for MBAs, 8th Edition
 Cash Accounts Receivable
April 1 9,000 2,850 April 2 April 21 3,500 2,300 April 28
3 10,000 2,500 4
28 2,300 4,300 5
350 7 Prepaid Van Lease
3,000 23 April 2 2,850
1,000 29
2,750 30
995 30 Equipment
April 4 5,500

Supplies Notes Payable

April 5 4,300 10,000 April 3

Accounts Payable Dividends

April 23 3,000 3,000 April 4 April 29 1,000

Common Stock Cleaning Fees Earned

9,000 April 1 3,500 April 21

Advertising Expense Wages Expense

April 7 350 April 30 2,750

Van Fuel Expense

April 30 995

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-11
 M3-16. (10 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 26,100
UR 26,100 Received +26,100 = +26,100 – =
$26,100 in Cash Unearned
Cash advance for Revenue
26,100 contract work

UR
26,100

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
UR 4,350
Rev 4,350 Adjusting entry = -4,350 +4,350 +4,350 – = +4,350
for work Unearned Retained Revenue
UR completed by Revenue Earnings
4,350 Jan. 31*

Rev
4,350

* $26,100/6 = $4,350

c.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Net

Transaction + = + + – Expen-ses =
Asset Assets ities Capital Capital enues Income
AR 570
Rev 570 Adjusting entry +570 = +570 +570 – = +570
for fees earned Fees Retained Revenue
AR but not billed Receivable Earnings
570

Rev
570

* $19 per hour × 30 hours = $570

© Cambridge Business Publishers, 2021

3-12 Financial Accounting for MBAs, 8th Edition
 M3-17. (10 minutes)

Jan. 1 Cash 26,100

Unearned service fees 26,100
To record cash received for service fees.

Jan. 31 Unearned service fees 4,350

Service fees earned 4,350
To reflect January service fees earned on contract
($26,100/6 = $4,350).

Jan. 31 Fees receivable 570

Service fees earned 570
To record unbilled service fees earned at January 31
($19 × 30 = $570).

M3-18. (25 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INSE 135
PPI 135 Adjusting entry -135 = -135 – +135 = -135
for prepaid Prepaid Retained Insurance
INSE insurance Insurance Earnings Expense
135

PPI
135

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
SUPE 830
SUP 830 Adjusting entry -830 = -830 – +830 = -830
for supplies Supplies Retained Supplies
SUPE used Earnings Expense
830

SUP
830

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-13
 c.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
DE 65
AD 65 Adjusting entry -65 = -65 – +65 = -65
for equipment Accum. Retained Depre-
DE depreciation Deprecia- Earnings ciation
65 tion Expense

AD
65

d.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
UR 925
Rev 925 Adjusting entry = -925 +925 +925 – = +925
for rent Unearned Retained Rent
UR revenue Rent Earnings Revenue
925 earned Revenue

Rev
925

e.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Expen- Net

Transaction + = + + Rev-enues – =
Asset Assets ities Capital Capital ses Income
SE 490
SP 490 Adjusting entry = +490 -490 – +490 = -490
for accrued Salaries Retained Salaries
SE salaries Payable Earnings Expense
490

SP
490

© Cambridge Business Publishers, 2021

3-14 Financial Accounting for MBAs, 8th Edition
 M3-19. (25 minutes)

Jan. 31 Insurance Expense 135

Prepaid Insurance 135
To record January insurance expense ($3,240/24 = $135).

Jan. 31 Supplies Expense 830

Supplies 830
To record January supplies expense ($1,540 − $710 = $830).

Jan. 31 Depreciation Expense—Office Equipment ................................ 65

Accumulated Depreciation—Office Equipment ................ 65
To record January depreciation on office equipment
($6,240 / 96 = $65).

Jan. 31 Unearned Rent Revenue 925

Rent Revenue 925
To record portion of advance rent earned in January.

Jan. 31 Salaries Expense 490

Salaries Payable 490
To accrue salaries at January 31.

M3-20. (25 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INV 909,380
AP Inventory +909,380 = +909,380 – =
909,380 purchased on Inventory Accounts
account (credit Payable
INV
purchases)
909,380

AP
909,380

b. $212,731 + $909,380 – $251,657 = Payments = $870,454. This is the amount in cash

payments derived using the information in the Accounts Payable account and the
purchases provided in the problem.

c.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
COGS 908,404
INV 908,404 To record cost of -908,404 = -908,404 – +908,404 = -908,404
goods sold for Inventory Retained COGS*
COGS
the year Earnings
908,404

INV
908,404

* $123,895 + $909,380 – $124,871 = COGS = $908,404

© Cambridge Business Publishers, 2021
Solutions Manual, Module 3 3-15
M3-21. (15 minutes)

a. Various dates
Inventories ........................................................................................ 909,380
Accounts payable ....................................................................... 909,380
To record total purchases made during the year.

b. Various dates
Accounts payable ............................................................................. 870,454
Cash ........................................................................................... 870,454
To record total payments made to suppliers during the year.

c. Various dates
Cost of goods sold (COGS) .............................................................. 908,404
Inventories .................................................................................. 908,404
To record cost of goods sold during the year.

M3-22. (15 minutes)

LEUZ ARCHITECT SERVICES

Statement of Stockholders’ Equity
For Year Ended December 31, 2020
Total
Common Retained Stockholders’
Stock Earnings Equity
Balance at December 31, 2019 .................... $30,000 $18,000 $48,000
Stock issuance ........................................... 6,000 6,000
Dividends ................................................... (9,700) (9,700)
Net income................................................. ______ 27,900 27,900
Balance at December 31, 2020 .................... $36,000 $36,200 $72,200

© Cambridge Business Publishers, 2021

3-16 Financial Accounting for MBAs, 8th Edition
M3-23. (20 minutes)

($ millions)
Date Description Debit Credit

1. June 30 Net sales 4,036,701

Retained earnings 4,036,701
To close the revenue account.

2. June 30 Retained Earnings 3,234,436

Cost of sales 1,447,369
SG&A expense and other 1,019,025
Interest expense, net 114,376
Income tax expense 653,666
To close the expense accounts.

The balance of Retained Earnings after the closing entries above are posted (but before
dividends and other items that close to Retained Earnings) is a $1,650,722 credit (normal)
balance calculated as: $848,457 + $4,036,701 - $3,234,436.

Net Sales Retained Earnings

(1) June 30 4,036,701 4,036,701 Bal. 848,457 Bal.
0 Bal. (2) June 30 3,234,436 4,036,701 (1) June 30
1,650,722 Bal June 30

Cost of Sales SG&A Expense

Bal. 1,447,369 1,447,369 (2) June 30 Bal. 1,019,025 1,019,025 (2) June 30
Bal. 0 Bal. 0

Interest Expense, net Income Tax Expense

Bal 114,376 114,376 (2) June 30 Bal. 653,666 653,666 (2) June 30
Bal. 0 Bal. 0

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-17
 M3-24. (20 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INV 49,569
AP 49,569 Purchase of +49,569 = +49,569 – =
inventory on Inventory Accounts
INV account Payable
49,569

AP
59,569

b. Payments to suppliers during the year totaled $49,060. This is calculated using the
accounts payable balances and the purchases from part a. as follows:
$5,124 + $49,569 – $5,633 = $49,060.

c.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
COGS 49,022
INV 49,022 Record cost -49,022 = -49,022 – +49,022 = -49,022
of goods sold Inventory Retained COGS*
COGS for the year Earnings
49,022

INV
49,022

*We calculate COGS using the information in the inventory account and the purchases, given.
$8,911 + $49,569 - $9,458 = $49,022.

© Cambridge Business Publishers, 2021

3-18 Financial Accounting for MBAs, 8th Edition
M3-25. (20 minutes)

1. Dec. 31 Service fees earned 80,300

Retained earnings 80,300
To close the revenue account.

2. Dec. 31 Retained earnings 85,300

Rent expense 20,800
Salaries expense 48,700
Supplies expense 5,600
Depreciation expense 10,200
To close the expense accounts.

Service Fees Earned Retained Earnings

(1) 80,300 80,300 Bal. 67,000 Bal.
0 Bal. (2) 85,300 80,300 (1)
62,000 Bal.

Rent Expense Salaries Expense

Bal. 20,800 20,800 (2) Bal. 48,700 48,700 (2)
Bal. 0 Bal. 0

Supplies Expense Depreciation Expense

Bal. 5,600 5,600 (2) Bal. 10,200 10,200 (2)
Bal. 0 Bal. 0

After the accounts are closed, the balance in Retained Earnings is $62,000.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-19
M3-26. (20 minutes)

a. Net income computation

Service revenue (record when earned) ......................................... $200,000

Wages expense (record when incurred, even if unpaid) ................. (40,000) ($25,000 + $15,000)
Net income .....................................................................................
$160,000

b. Net cash flow computation

Cash inflow from services rendered................................................ $50,000 ($30,000 + $20,000)

Cash outflow for wages paid ........................................................... (25,000)
Net cash inflow ...............................................................................
$25,000

Cash inflow from services rendered will be $150,000 less than service revenue per the
income statement because Penno only collected $50,000 of revenues in cash but
reported $200,000 as revenue. Cash outflow for wages paid will be $15,000 less than
wages expense on the income statement because $15,000 remained unpaid at year-
end. The combined effects of these two items yields an overall difference of $135,000
between net income and net cash inflow [$160,000 net income and $25,000 net cash
inflows].

M3-27. (15 minutes)

2019 2020
Revenues ........................................................................... $350,000 $ 0
Expenses ........................................................................... 225,000 0
Net income ......................................................................... $125,000 $ 0

Explanation: All of the revenue is reported in 2019 when it is earned—per the revenue
recognition principle. Likewise, the wages expense is reported in 2020 when it is incurred,
that is when the liability to pay the wages arises. The receipt or payment of cash does not
affect the recording of revenues, expenses, and net income. There are no revenues or
expenses in 2020.

© Cambridge Business Publishers, 2021

3-20 Financial Accounting for MBAs, 8th Edition
 M3-28. (20 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 1,000
CS 1,000 a. Issue stock +1,000 = +1,000 – =
Cash for $1,000 Cash Common
1,000 cash Stock

CS
1,000
INV 500
Cash 500 b. Purchase -500 +500 = – =
INV inventory for Cash Inventory
500 $500 cash

Cash
500

AR 3,000
Sales 3,000 c. Sell +3,000 = +2,500 +3,000 – +500 = +2,500
COGS 500 inventory in Accounts Retained Sales Cost of
INV 500 transaction b Receivable Earnings Goods
AR for $3,000 on Sold
3,000 credit -500
Inventory
Sales
3,000

COGS
500

INV
500

Cash 2,000
AR 2,000 d. Receive +2,000 -2,000 = – =
Cash $2,000 on Cash Accounts
2,000 account Receivable
receivable in
AR transaction c
2,000

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-21
 EXERCISES

E3-29. (30 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
DE 720
AD 720 a. Adjusting -720 = -720 – +720 = -720
DE entry for Accum. Retained Deprecia-
720 depreciation of Deprecia- Earnings tion
equipment tion Expense
AD
720

SUPE 2,770
SUP 2,770 b. Adjusting -2,770 = -2,770 – +2,770 = -2,770
SUPE entry for Supplies Retained Supplies
2,770 supplies Earnings Expense
expense
SUP
2,770

UE 430
UP 430 c. Adjusting = +430 -430 – +430 = -430
UE entry for Utilities Retained Utilities
430 utilities Payable Earnings Expense
expense
UP
430

RNTE 800
PPRNT 800 d. Adjusting -800 = -800 – +800 = -800
RNTE entry for rent Prepaid Retained Rent
800 expense Rent Earnings Expense

PPRNT
800

UR 1,404
Rev 1,404 e. Adjusting = -1,404 +1,404 +1,404 – = +1,404
UR entry for Unearned Retained Premium
1,404 premium Premium Earnings Revenue
revenues Revenue
Rev
1,404

WE 965
WP 965 f. Adjusting = +965 -965 – +965 = -965
WE entry for Wages Retained Wages
965 wages Payable Earnings Expense
expense
WP
965

continued

© Cambridge Business Publishers, 2021

3-22 Financial Accounting for MBAs, 8th Edition
 Table concluded

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
AR 300
OI 300 g. Adjusting +300 = +300 +300 – = +300
AR entry for Interest Retained Interest
300 interest Receivable Earnings (Other)
earned Income
OI
300

E3-30. (30 minutes)

a. Depreciation Expense—Equipment .................................................. 720

Accumulated Depreciation—Equipment .................................. 720
To record depreciation for the period.

b. Supplies Expense ............................................................................. 2,770

Supplies ................................................................................... 2,770
To record supplies expense for the period ($3,870 − $1,100 = $2,770).

c. Utilities Expense ............................................................................... 430

Utilities Payable ....................................................................... 430
To record accrued utilities expense.

d. Rent Expense ................................................................................... 800

Prepaid Rent ............................................................................ 800
To record rent expense for the month ($3,200 / 4 = $800).

e. Unearned Revenue........................................................................... 1,404

Revenue .................................................................................. 1,404
To record premium revenue earned [($1,872/ 12)  9 = $1,404].

f. Wages Expense ............................................................................... 965

Wages Payable ....................................................................... 965
To accrue wages at the end of the period.

g. Interest Receivable ........................................................................... 300

Interest Income ........................................................................ 300
To accrue interest earned but not yet received.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-23
 E3-31. (15 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
SE 4,700
SP 4,700 Adjusting entry = +4,700 -4,700 – +4,700 = -4,700
for salaries Salaries Retained Salaries
SE owed at Payable Earnings Expense
4,700 December 31

SP
4,700

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
SE 10,300
SP 4,700 Record -15,000 = -4,700 -10,300 – +10,300 = -10,300
Cash 15,000 salaries paid Cash Salaries Retained Salaries
SE on January 9 Payable Earnings Expense
10,300

SP
4,700

Cash
15,000

E3-32. (15 minutes)

Dec. 31 Salaries Expense 4,700

Salaries Payable 4,700
To record accrued salaries payable.

Dec. 31 Retained Earnings 390,000

Salaries Expense 390,000*
To close the Salaries Expense account.
*Oakmont pays every two weeks, there are 26 such two-week periods per year. If Oakmont pays
$15,000 every two weeks, total for the year is $15,000 × 26 = $390,000.

Following year:
Jan. 9 Salaries Payable 4,700
Salaries Expense 10,300
Cash 15,000
To record payment of salaries.

© Cambridge Business Publishers, 2021

3-24 Financial Accounting for MBAs, 8th Edition
 E3-33. (15 minutes)

a. Balance, January 1 = $960 + $900 − $620 = $1,240.

b. Amount of premium = $82  12 = $984. Therefore, five months' premium ($984 − $574 =
$410) has expired by January 31. The policy term began on September 1 of the previous
year.

c. Wages paid in January = $3,200 − $700 = $2,500.

d. Monthly depreciation expense = $8,700 / 60 months = $145. Bloomfield has owned the
truck for 18 months ($2,610 / $145 = 18).

E3-34. (25 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Net

Transaction + = + + – Expen-ses =
Asset Assets ities Capital Capital enues Income
RNTE 575
PPRNT 575 a. 7/31 - 575 = -575 – +575 = -575
RNTE Adjusting Prepaid Retained Rent
575 entry for Rent Earnings Expense
rent
expense
PPRNT
575

AE 210
PPDA 210 b. 7/31 - 210 = -210 – +210 = -210
AE Adjusting Prepaid Retained Advertis-
210 entry for Advertising Earnings ing
advertising Expense
PPDA expense
210

SUPE 1,900
SUP 1,900 c. 7/31 -1,900 = -1,900 – +1,900 = -1,900
SUPE Adjusting Supplies Retained Supplies
1,900 entry for Earnings Expense
supplies
SUP expense
1,900

AR 800
Rev 800 d. 7/31 +800 = +800 +800 – = +800
AR Adjusting Fees Retained Refinish.
800 entry for (Accounts) Earnings Fees
fees Receivable Revenue
Rev revenue
800

UR 300
Rev 300 e. 7/31 = -300 +300 +300 – = +300
UR Adjusting Unearned Retained Refinish.
300 entry for Refinish. Earnings Fees
fees Fees Revenue
Rev revenue
300

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-25
E3-35. (25 minutes)

a. July 31 Rent expense 575

Prepaid rent 575
To record July rent expense ($6,900 / 12 = $575).

b. July 31 Advertising expense 210

Prepaid advertising 210
To record July advertising expense ($630 / 3 = $210).

c. July 31 Supplies expense 1,900

Supplies 1,900
To record supplies expense for July
($3,000 − $1,100 = $1,900).

d. July 31 Fees receivable (Accounts receivable) 800

Refinishing fees revenue 800
To record unbilled revenue earned during July.

e. July 31 Unearned refinishing fees 300

Refinishing fees revenue 300
To record portion of advance fees earned in July
($600 / 2=$300).

Prepaid Rent Rent Expense

Bal. 6,900 575 (a) (a) 575
Bal. 6,325

Prepaid Advertising Advertising Expense

Bal. 630 210 (b) (b) 210
Bal. 420

Supplies Supplies Expense

Bal. 3,000 1,900 (c) (c) 1,900
Bal. 1,100

Fees Receivable Refinishing Fees Revenue

(d) 800 2,500 Bal.
800 (d)
300 (e)
Unearned Refinishing Fees 3,600 Bal.
(e) 300 600 Bal.
300 Bal.

© Cambridge Business Publishers, 2021

3-26 Financial Accounting for MBAs, 8th Edition
 E3-36. (15 minutes)

a. We calculate COGS using the opening and closing inventory balances and the purchases
during 2013, as follows: $1,997 + $10,392 - $2,131 = $10,258.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues -ses Income
COGS 10,258
INV 10,258 Record cost -10,258 = -10,258 – +10,258 = -10,258
of goods sold Inventory Retained COGS
COGS Earnings
10,258

INV
10,258

b. We calculate cash paid to suppliers using the opening and closing accounts payable
balances and the inventory purchases during the year, as follows: $1,181 + $10,392–
$1,126 = $10,447.

Balance Sheet Income Statement

Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction Cash Asset + = + + – =
Assets ities Capital Capital enues ses Income
AP 10,447
Cash 10,447 Record cash -10,447 = -10,447 – =
paid to Cash Accounts
AP
suppliers Payable
10,447

Cash
10,447

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-27
E3-37. (10 minutes)

Various dates
Cost of goods sold 10,258*
Inventory 10,258
To recognize the cost of goods sold
*$1,997 + $10,392 - $2,131 = $10,258

Various dates
Accounts payable 10,447**
Cash 10,447
To record cash paid to suppliers.
**$1,181 + $10,392– $1,126 = $10,447

E3-38. (20 minutes)

1. Feb. 2 Net sales 16,580

Retained earnings 16,580
To close the revenue accounts.

2. Feb. 2 Retained earnings 15,577

Cost of goods sold 10,258
Operating expenses 4,960
Interest expense, net 40
Income tax expense 319
To close the expense accounts.

Retained Earnings Net Sales

3,081 Bal. (1) 16,580 16,580 Bal.
(2) 15,577 16,580 (1) 0 Bal.
4,084 Bal.

Cost of Goods Sold Interest Expense, Net

Bal. 10,258 10,258 (2) Bal. 40 40 (2)
Bal. 0 Bal. 0

Operating Expenses Income Tax Expense

Bal. 4,960 4,960 (2) Bal. 319 319 (2)
Bal. 0 Bal. 0

After the temporary accounts are closed, the balance in the Retained Earnings account is
$4,084 ($3,081 + $16,580 - $15,577).

© Cambridge Business Publishers, 2021

3-28 Financial Accounting for MBAs, 8th Edition
 E3-39 (20 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 3,268
UR 3,268 Record cash +3,268 = +3,268 – =
received for Cash Deferred
Cash membership Membership
3,268 fees Income

UR
3,268

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues -ses Income
COGS 123,152
INV 123,152 Recognize cost -123,152 = -123,152 – +123,152 = -123,152
of goods sold Inventory Retained Cost of
COGS Earnings Goods
123,152 Sold

INV
123,152

c. We can calculate the inventory purchases using the opening and closing balances from the
inventory account and the COGS during the year, as follows: $123,152 - $11,040 + $9,834
= $124,358

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INV 124,358
AP 124,358 Record inventory +124,358 = +124,358 – =
purchases Inventory Accounts
INV Payable
124,358

AP
102,962

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-29
E3-40. (20 minutes)

a. Cash............................................................................................... 3,268
Deferred membership income .............................................. 3,268
To record cash received for membership fees during the year.

b. Cost of goods sold ..........................................................................123,152

Inventory ............................................................................. 123,152
To recognize the cost of goods sold.

c. Inventory.........................................................................................124,358
Accounts payable ................................................................ 124,358
To record inventory purchases during the year
$123,152 - $11,040 + $9,834 = $124,358.

E3-41. (40 minutes)

a.
BENEISH CORPORATION
Income Statement
For Year Ended December 31
Service fees earned ............................................................................................... $75,000
Rent expense ........................................................................................................ (18,000)
Salaries expense ................................................................................................... (37,100)
Depreciation expense ............................................................................................ (7,000)
Net income ............................................................................................................ $12,900

BENEISH CORPORATION
Statement of Stockholders’ Equity
For Year Ended December 31
Total
Common Retained Stockholders’
Stock Earnings Equity
Balance at January 1 ................................... $43,000 $20,600 $63,600
Stock issuance ..........................................
Dividends .................................................. (8,000) (8,000)
Net income ................................................ 12,900 12,900
Balance at December 31 ............................. $43,000 $25,500 $68,500

continued

© Cambridge Business Publishers, 2021

3-30 Financial Accounting for MBAs, 8th Edition
 a. continued

BENEISH CORPORATION
Balance Sheet
December 31
Cash ...................................... $ 8,000 Notes payable ....................... $10,000
Accounts receivable............... 6,500 Total liabilities ....................... 10,000
Equipment, gross ................... 78,000
Accumulated depreciation...... (14,000) Common stock ...................... 43,000
Equipment, net ...................... 64,000 Retained earnings ................. 25,500
Total assets ........................... $78,500 Total liabilities and equity ...... $78,500

b.
1. Service fees earned ........................................................................
75,000
Retained earnings .............................................................. 75,000

2. Retained earnings...........................................................................
18,000
Rent expense ..................................................................... 18,000

3. Retained earnings...........................................................................
37,100
Salaries expense ................................................................ 37,100

4. Retained earnings...........................................................................
7,000
Depreciation expense ......................................................... 7,000

5. Retained earnings...........................................................................
8,000
Dividends ........................................................................... 8,000

c. Note: Only those accounts affected by the closing process are shown here.

Retained Earnings Service Fees Earned

20,600 Bal. (1) 75,000 75,000 Bal.
(2) 18,000 75,000 (1) 0 Bal.
(3) 37,100
(4) 7,000 Rent Expense
(5) 8,000 Bal. 18,000 18,000 (2)
25,500 Bal. Bal 0

Depreciation Expense Dividends

Bal. 7,000 7,000 (4) Bal. 8,000 8,000 (5)
Bal 0 Bal. 0

Salaries Expense
Bal. 37,100 37,100 (3)
Bal. 0

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-31
 E3-42. (35 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net
Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 100,000
PPE, net 20,000 a Issued +100,000 +20,000 = +120,000 – =
CS 120,000
stock for Cash PPE, net Common
Cash $100,000 Stock
100,000 cash and
PPE, net PPE of
20,000 $20,000.
CS
120,000
RNTE 3,200
Cash 3,200 b Paid -3,200 = -3,200 – +3,200 = -3,200
RNTE $3,200 Cash Retained Rent
3,200
for rent. Earnings Expense
Cash
3,200
Cash 4,000
Rev 4,000 c. Performed +4,000 = +4,000 +4,000 – = +4,000
Cash services Cash Retained Revenue
4,000
for $4,000 Earnings
Rev cash.
4,000
AR 24,000
Rev 24,000 d. Performed +24,000 = +24,000 +24,000 – = +24,000
AR services Accounts Retained Revenue
24,000 for Receivable Earnings
$24,000 on
Rev account.
24,000
WE 4,800
Cash 4,800 e. Paid -4,800 = -4,800 – +4,800 = -4,800
WE $4,800 Cash Retained Wages
4,800 cash for Earnings Expense
wages.
Cash
4,800
Cash 10,000
AR 10,000 f. Received +10,000 -10,000 = – =
Cash $10,000 Cash Accounts
10,000 cash on Receivable
receivable.
AR
10,000
RE 935
Cash 935 g. Paid -935 = -935 – =
RE dividends Cash Retained
935 of $935. Earnings

Cash
935

© Cambridge Business Publishers, 2021

3-32 Financial Accounting for MBAs, 8th Edition
 E3-43. (20 minutes)

CARTER COMPANY
Income Statement
For Month Ended March 31
Sales revenue .................................................................... $28,000 ($4,000 + $24,000)
Expenses ...........................................................................
Rent expense .....................................................................
$3,200
Wage expense ...................................................................
4,800 8,000
Net income ......................................................................... $20,000

E3-44. (20 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Net
Transaction + = + + – Expen-ses =
Asset Assets ities Capital Capital enues Income
WE 500
WP 500 a. $500 of = +500 -500 – +500 = -500
WE wages are Wages Retained Wages
500 earned by Payable Earnings Expense
employees
WP
but not yet
500
paid

INV 2,000
AP 2,000 b. $2,000 of +2,000 = +2,000 – =
INV inventory is Inventory Accounts
2,000 purchased Payable
on credit
AP
2,000

AR 4,000
Sales 4 ,000 c. The inventory +4,000 = +2,000 +4,000 – +2,000 = +2,000
COGS 2,000
INV 2,000
purchased in Accounts Retained Sales Cost of
transaction b Receivable Earnings Goods
AR is sold for Sold
4,000
$4,000 on -2,000
Sales credit Inventory
4,000

COGS
2,000

INV
2,000

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-33
 Table continued
Balance Sheet Income Statement
Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net
Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income

d. Collected +3,000 -3,000 = – =

Cash 3,000
AR 3,000
$3,000 cash Cash Accounts
Cash from Receivable
3,000 transaction c.

AR
3,000

e. $5,000 -5,000 +5,000 = – =

PPE, net 5,000
Cash 5,000
equipment Cash PPE,
PPE, net is acquired net
5,000
for cash

Cash
5,000

DE 1,000 f. Record -1,000 = -1,000 – +1,000 = -1,000

PPE, net 1,000
depreciation PPE, net Retained Deprec-
DE
Earnings iation
1,000
Expense
PPE,net
1,000

g. Paid -10,000 = -10,000 – =

NP 10,000
Cash 10,000
$10,000 Cash Note
NP cash on a Payable
10,000 note payable
that came due
Cash
10,000

IE 2,000 h. Paid $2,000 -2,000 = -2,000 – +2,000 = -2,000

Cash 2,000
IE
cash interest Cash Retained Interest
2,000 on borrowings Earnings Expense

Cash
2,000

© Cambridge Business Publishers, 2021

3-34 Financial Accounting for MBAs, 8th Edition
 PROBLEMS
P3-45 (40 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
SE 1,440
SP 1,440 1. Accrue = +1,440 -1,440 – +1,440 = -1,440
SE salaries Salaries Retained Salaries
1,440
expense Payable Earnings Expense
SP
1,440
IE 200 +200
IP 200 2. Accrue = Interest -200 – +200 = -200
IE Interest Payable Retained Interest
200 expense Earnings Expense
IP
200

AR 900
Rev 900 3. Accrue fees +900 = +900 +900 – = +900
AR receivable Fees Retained Printing
900 (Accounts) Earnings Revenue
Receivable
Rev
900

OE 400 +400
PPD 400 4. Record -400 = -400 – Mainten- = -400
OE mainten- Prepaid Retained ance
400 ance Mainten- Earnings (Operating)
expense ance Expense
PPD
400

AE 300
PPDA 300 5. Record -300 = -300 – +300 = -300
AE advertising Prepaid Retained Adver-
300 expense Advertising Earnings tising
Expense
PPDA
300

RNTE 320
RNTP 320 6. Accrue rent = +320 -320 – +320 = -320
RNTE expense Rent Retained Rent
320
Payable Earnings Expense
RNTP
320
AR 38
OI 38 7. Accrue +38 = +38 +38 – = +38
AR interest Interest Retained Interest
38 revenue (Accounts) Earnings (Other)
Receivable Income
OI
38

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-35
 Table continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
DE 2,175
AD 2,175 8. Record -2,175 = -2,175 – +2,175 = -2,175
DE depreciation Accum. Retained Deprec-
2,175 expense Deprec- Earnings iation
iation Expense
AD
2,175

P3-46. (20 minutes)

Date Description Debit Credit

Dec 31 Salaries expense 1,440
Salaries payable 1,440
To accrue salaries at December 31 ($3,600  2/5 = $1,440).

Dec 31 Interest expense 200

Interest payable 200
To accrue interest expense at December 31.

Dec 31 Fees receivable 900

Printing revenue 900
To record revenue earned but not yet billed.

Dec 31 Maintenance expense 400

Prepaid maintenance 400
To record December maintenance expense.

Dec 31 Advertising expense 300

Prepaid advertising 300
To record December advertising expense ($900  1/3 = $300).

Dec 31 Rent expense 320

Rent payable 320
To accrue one-half month's rent expense
[(800  $0.80) / 2 = $320].

Dec 31 Interest receivable 38

Interest income 38
To accrue interest earned in December.

Dec 31 Depreciation expense—equipment 2,175

Accumulated depreciation—equipment ...................... 2,175
To record annual depreciation on equipment.

© Cambridge Business Publishers, 2021

3-36 Financial Accounting for MBAs, 8th Edition
 P3-47 (35 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
AE 400
PPDA 400 1. Recognize -400 = -400 – +400 = -400
advertising Prepaid Retained Advertising
AE expense Advertising Earnings Expense
400

PPDA
400

WE 2,600
WP 2,600 2. Accrue wage = +2,600 -2,600 – +2,600 = -2,600
expense Wages Retained Wages
WE Payable* Earnings Expense
2,600

WP
2,600

INSE 1,140
PPI 1,140 3. Recognize -1,140 = -1,140 – +1,140 = -1,140
insurance Prepaid Retained Insurance
INSE expense Insurance Earnings Expense
1,140

PPI
1,140

UR 2,400
Rev 2,400 4. Recognize = -2,400 +2,400 +2,400 – = +2,400
service fees Unearned Retained Service
UR earned Service Earnings Fees
2,400 Fees Earned
Rev
2,400

AR 1,000
Rev 1,000 5. Recognize +1,000 = +1,000 +1,000 – = +1,000
rent revenue Accounts Retained Rent
AR Receivable Earnings Income
1,000

Rev
1,000

* Assumes wages earned had not been accrued or recognized yet as an expense.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-37
 b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
WE 2,200
WP 2,600 1. Pay wages -4,800 = -2,600 -2,200 – +2,200 = -2,200
Cash 4,800 in following Cash Wages Retained Wages
WE year Payable Earnings Expense
2,200

WP
2600

Cash
4,800

Cash 1,000
AR 1,000 2. Receipt of +1,000 -1,000 = – =
Cash
rent Cash Accounts
1,000
revenue in Receivable
AR the following
1,000 year

P3-48. (25 minutes)

Date Description Debit Credit

Dec. 31 Advertising expense 400
Prepaid advertising 400
To record advertising expense ($1,200 − $800 = $400).
Dec. 31 Wages expense 2,600
Wages payable 2,600
To record accrued wages.
Dec. 31 Insurance expense 1,140
Prepaid insurance 1,140
To record insurance expense ($3,420 − $2,280 = $1,140).
Dec. 31 Unearned service fees 2,400
Service fees earned 2,400
To recognize fees earned ($5,400 − $3,000 = $2,400).
Dec. 31 Accounts receivable 1,000
Rental income 1,000
To record rent earned but not yet recorded.
Jan. 4 Wages payable 2,600
Wages expense 2,200
Cash 4,800
To record payment of wages.
Jan. 4 Cash 1,000
Accounts receivable 1,000
To record collection of rent.

© Cambridge Business Publishers, 2021

3-38 Financial Accounting for MBAs, 8th Edition
P3-49 (45 minutes)

a. The T-accounts follow the journal below (See Part c). (In this problem we have credited
depreciation to a contra asset (XA) account titled Accumulated Depreciation. Crediting the
asset would not be incorrect, but reporting the contra asset account provides more
information to financial statement users.)

b.
Date Description Debit Credit
Apr. 1 Cash 11,500
Common stock 11,500
Owner invested cash.
Apr. 2 Truck 6,100
Cash 6,100
Purchased used truck for $6,100 cash.
Apr. 2 Equipment 6,200
Cash 1,000
Accounts payable 5,200
Purchased equipment.
Apr. 3 Prepaid insurance 2,880
Cash 2,880
Paid two-year premium on insurance policy.
Apr. 5 Supplies 1,200
Accounts payable 1,200
Purchased supplies on account.
Apr. 5 Cash 1,800
Unearned roofing fees 1,800
Received advance payment for services.
Apr. 12 Accounts receivable 5,500
Roofing fees earned 5,500
Billed customers for services.
Apr. 18 Cash 4,900
Accounts receivable 4,900
Collection on account from customers.
Apr. 29 Fuel expense 675
Cash 675
Paid truck fuel bill for April.
Apr. 30 Advertising expense 100
Cash 100
Paid for April newspaper advertising.
Apr. 30 Wages expense 4,500
Cash 4,500
Paid wages.
Apr. 30 Accounts receivable 4,000
Roofing fees earned 4,000
Recorded fees earned.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-39
 c. These T-accounts reflect entries from Part b (above) as well as the adjustments from Part e
(below).

Cash Accounts Receivable

Apr. 1 11,500 6,100 Apr. 2 Apr. 12 5,500 4,900 Apr. 18
5 1,800 1,000 2 30 4,000
18 4,900 2,880 3 Bal. 4,600
675 29
100 30 Supplies
4,500 30 Apr. 5 1,200
Bal. 2,945 Unadj. bal 1,200 1,000(e) Apr. 30
Adj. bal 200

Prepaid Insurance Trucks

Apr. 3 2,880 Apr. 2 6,100
Unadj. bal 2,880 120 (e) Apr. 30 Bal. 6,100
Adj Bal 2,760

Equipment Accounts Payable

Apr. 2 6,200 5,200 Apr. 2
Bal. 6,200 1,200 5
6,400 Bal.

Depreciation Expense - Trucks Unearned Roofing Fees

Apr. 30 (e) 125 1,800 Apr. 5
Adj Bal 125 1,800 Unadj. bal
Apr. 30 (e) 450 1,350 Adj. Bal

Roofing Fees Earned Common Stock

5,500 Apr. 12 11,500 Apr. 1
4,000 30 11,500 Bal.
9,500 Unadj. bal
450(e) 30 Fuel Expenses
9,950 Adj. Bal. Apr. 29 675
Bal. 675

Advertising Expense Wages Expense

Apr. 30 100 Apr. 30 4,500
Bal. 100 Bal. 4,500

continued

© Cambridge Business Publishers, 2021

3-40 Financial Accounting for MBAs, 8th Edition
 c. continued

Depreciation Expense-Equipment Accumulated Depreciation-Equipment

Apr. 30 (e) 35 35 (e) Apr. 30
Adj. Bal 35 35 Adj. Bal

Supplies Expense Accumulated Depreciation -Trucks

Apr. 30 (e) 1,000 125 (e) Apr. 30
Adj. Bal 1,000 125 Adj. Bal

Insurance Expense
Apr. 30 (e) 120
Adj. Bal 120

d.
Date Description Debit Credit

April 30 Insurance expense 120

Prepaid insurance 120
To record April insurance expense
($2,880 / 24 months = $120).

April 30 Supplies expense 1,000

Supplies 1,000
To record April supplies expense
($1,200 − $200 = $1,000).

April 30 Depreciation expense—trucks 125

Accumulated depreciation—trucks 125
To record April depreciation on trucks.

April 30 Depreciation expense—equipment 35

Accumulated depreciation—equipment 35
To record April depreciation on equipment.

April 30 Unearned roofing fees 450

Roofing fees earned 450
To record portion of advance payment earned in April
($1,800 / 4 = $450).

e. Adjusting entries are posted in the T-accounts, Part c, above.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-41
 P3-50. (25 minutes)

a.
Balance Sheet Income Statement

Cash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + Noncash Assets = + + – =
Asset ities Capital Capital enues ses Income
Cash 11,500
CS 11,500 Apr. 1. +11,500 = +11,500 – =
Cash received Cash Common
Cash for stock stock
11,500

CS
11,500

PPE 6,100
Cash 6,100 Apr. 2. -6,100 + 6,100 = – =
Purchase Cash Truck
PPE truck for
6,100 cash
Cash
6,100
PPE 6,200
AP 5,200 Apr. 2. -1,000 +6,200 = + 5,200 – =
Cash 1,000 Purchase Cash Equipment Accounts
equipment Payable
PPE
6,200

AP
5,200

Cash
1,000

PPI 2,880
Cash 2,880 Apr. 3. -2,880 +2,880 = – =
Purchase Cash Prepaid
PPI liability Insurance
2,880 insurance
Cash
2,880

SUP 1,200
AP 1,200 Apr. 5. + 1,200 = +1,200 – =
Purchase Supplies Accounts
SUP supplies on Payable
1,200 credit
AP
1,200

Cash 1,800
UR 1,800 Apr. 5. Cash +1,800 = +1,800 – =
in advance for Cash Unearned
Cash roofing repairs Roofing
1,800 Fees
UR
1,800

continued

© Cambridge Business Publishers, 2021

3-42 Financial Accounting for MBAs, 8th Edition
 a. table continued
Income Statement
Balance Sheet

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Rev-enues – Expen-ses =
Asset Assets ities Capital Capital Income
AR 5,500 =
Rev 5,500 Apr. 12. +5,500 +5,500 +5,500 – = +5,500
Bill customers Accounts Retained Roofing
AR for services Receivable Earnings Fees
5,500 Earned

Rev
5,500

Cash 4,900
AR 4,900 Apr. 18. +4,900 -4,900 = – =
Cash Cash Accounts
Cash collected Receivable
4,900 on account
AR
4,900

OE 675
Cash 675 Apr. 29. -675 = -675 – +675 = -675
Paid cash Cash Retained Fuel
OE for fuel Earnings (Operating)
675 Expense

Cash
675

AE 100
Cash 100 Apr. 30. -100 = -100 – +100 = -100
Paid cash Cash Retained Advertising
AE for ads Earnings Expense
100

Cash
100

WE 4,500
Cash 4,500 Apr. 30. -4,500 = -4,500 – +4,500 = -4,500
Paid cash Cash Retained Wages
WE wages Earnings Expense
4,500

Cash
4,500

AR 4,000
Rev 4,000 Apr. 30. +4,000 = +4,000 +4,000 – = +4,000
Bill customers Accounts Retained Roofing
AR for services Receivable Earnings Fees
4,000 Earned

Rev
4,000

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-43
 P3-50. concluded

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INSE 120
PPI 120 1. Recognize -120 = -120 – +120 = -120
one month Prepaid Retained Insurance
INSE of insurance Insurance Earnings Expense
120 expense

PPI
120

SUPE 1,000
SUP 1,000 2. Recognize -1,000 = -1,000 – +1,000 = -1,000
supplies Supplies Retained Supplies
SUPE expense Earnings Expense
1,000

SUP
1,000

DE 125
AD 125 3. Recognize -125 = -125 – +125 = -125
depreciation Accum. Retained Deprec-
DE expense - Depr’n Earnings iation
125 Trucks --Trucks* Expense

AD
125

DE 35
AD 35 4. Recognize -35 = -35 – +35 = -35
depreciation Retained Deprec-
DE expense - Earnings iation
Accum.
35 Equipment Expense
Depr’n
--Equipment*
AD
35

UR 450
Rev 450 5. Recognize = -450 +450 +450 – = +450
roofing fees Unearned Retained Roofing
UR earned Roofing Earnings Fees
450 Fees Earned

Rev
450

© Cambridge Business Publishers, 2021

3-44 Financial Accounting for MBAs, 8th Edition
 P3-51. (25 minutes)

a.
POWNALL PHOTOMAKE COMPANY
December 31
Debit Credit
Cash .................................................................................. $ 4,300
Accounts receivable........................................................... 3,800
Prepaid rent ....................................................................... 12,600
Prepaid insurance .............................................................. 2,970
Supplies ............................................................................. 4,250
Equipment ......................................................................... 22,800
Accounts payable .............................................................. $ 4,060
Unearned photography fees .............................................. 2,600
Common stock................................................................... 24,000
Photography fees earned .................................................. 34,480
Wages expense ................................................................. 11,000
Utilities expense................................................................. 3,420 _______
Totals ................................................................................. $65,140 $65,140

b.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Net

Transaction + = + + – Expen-ses =
Asset Assets ities Capital Capital enues Income
AR 1,850
Rev 1,850 1. Fees earned +1,850 = +1,850 +1,850 – = +1,850
but not Fees Retained Photo-
AR received (Accounts) Earnings graphy
1,850 Fees
Receivable Earned
Rev
1,850

DE 2,280
AD 2,280 2. Recognize -2,280 = -2,280 – +2,280 = -2,280
depreciation Accum. Retained Deprec-
DE expense for Depreciation Earnings iation
2,280 one year Equipment Expense
AD
2,280

OE 400
UP 400 3. Recognize = +400 -400 – +400 = -400
utilities Utilities Retained Utilities
OE expense Payable Earnings Expense
400

UP
400

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-45
 b. continued
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
RNTE 6,300
PPRNT 6,300 4. Recognize -6,300 = -6,300 – +6,300 = -6,300
rent expense Prepaid Retained Rent
RNTE for year Rent Earnings Expense
6,300

PPRNT
6,300

UR 2,600
Rev 2,600 5. Recognize = -2,600 +2,600 +2,600 – = +2,600
photo Unearned Retained Photo-
UR revenues Photo Earnings graphy
2,600 Fees Fees
Earned
Rev
2,600

INSE 990
PPI 990 6. Recognize -990 = -990 – +990 = -990
insurance Prepaid Retained Insurance
INSE expense Insurance Earnings Expense
990

PPI
990

SUPE 3,230
SUP 3,230 7. Recognize -3,230 = -3,230 – +3,230 = -3,230
supplies Supplies Retained Supplies
SUPE expense Earnings Expense
3,230

SUP
3,230

WE 375
WP 375 8. Recognize = +375 -375 – +375 = -375
wages Wages Retained Wages
WE expense Payable Earnings Expense
375

WP
375

© Cambridge Business Publishers, 2021

3-46 Financial Accounting for MBAs, 8th Edition
P3-52. (30 minutes)

a.

Date Description Debit Credit

Dec. 31 Fees receivable 1,850

Photography fees earned 1,850
To record revenue earned but not billed.

Dec. 31 Depreciation expense 2,280

Accumulated depreciation—equipment 2,280
To record depreciation for the year
($22,800 / 10 years = $2,280).

Dec. 31 Utilities expense 400

Utilities payable 400
To record estimated December utilities expense.

Dec. 31 Rent expense 6,300

Prepaid rent 6,300
To record rent expense for the year
($12,600 / 2 years = $6,300).

Dec. 31 Unearned photography fees 2,600

Photography fees earned 2,600
To record advance payments earned.

Dec. 31 Insurance expense 990

Prepaid insurance 990
To record insurance expense for the year
($2,970 / 3 years = $990).

Dec. 31 Supplies expense 3,230

Supplies 3,230
To record supplies expense for the year
($4,250 − $1, 020 = $3,230).

Dec. 31 Wages expense 375

Wages payable 375
To record unpaid wages at December 31.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-47
 b.

Cash Accounts Payable

Unadj. bal 4,300 4,060 Unadj. bal
Adj. Bal. 4,300 4,060 Adj. Bal.

Accounts Receivable Unearned Photo Fees

Unadj. bal 3,800 Dec. 31 (5) 2,600 2,600 Unadj. bal
Adj. Bal. 3,800 0 Adj. Bal.

Fees Receivable Utilities Payable

Dec. 31 (1)1,850 400 (3) Dec.31
Adj. Bal. 1,850 400 Adj. Bal.

Prepaid Rent Wages Payable

Unadj. bal 12,600 6,300 (4) Dec.31 375 (8) Dec.31
Adj. Bal. 6,300 375 Adj. Bal.

Prepaid Insurance Common Stock

Unadj. bal 2,970 990 (6) Dec.31 24,000 Unadj. bal
Adj. Bal. 1,980 24,000 Adj. Bal.

Supplies Photo Fees Earned

Unadj. bal 4,250 3,230 (7) Dec.31 34,480 Unadj. bal
Adj. Bal. 1, 020 1,850 (1) Dec.31
2,600 (5) Dec.31
38,930 Adj. Bal.
Equipment Wages Expense
Unadj. bal 22,800 Unadj. bal 11,000
Adj. Bal. 22,800 Dec.31 (8) 375
Adj. Bal. 11,375

Accum. Depreciation - Equip Utilities Expense

2,280 (2) Dec.31 Unadj. bal 3,420
2,280 Adj. Bal. Dec.31 (3) 400
Adj. Bal. 3,820

Supplies Expense Depreciation Expense - Equip

Dec. 31 (7) 3,230 Dec.31 (2) 2,280
Adj. Bal. 3,230 Adj. Bal. 2,280

Insurance Expense Rent Expense

Dec. 31 (6) 990 Dec.31 (4) 6,300
Adj. Bal. 990 Adj. Bal. 6,300

© Cambridge Business Publishers, 2021

3-48 Financial Accounting for MBAs, 8th Edition
 P3-53. (40 minutes)
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
AE 1,540
PPDA 1,540 1. Recognize -1,540 = -1,540 – +1,540 = -1,540
advertising Prepaid Retained Adver-
AE
expense Advertising Earnings tising
1,540
Expense
PPDA
1,540

DE 5,280
AD 5,280 2. Recognize -5,280 = -5,280 – +5,280 = -5,280
depr’n Accum. Retained Deprec-
DE expense Depr. Earnings iation
5,280 Equipment Expense

AD
5,280

OE 325
UP 325 3. Recognize = +325 -325 – +325 = -325
utilities Utilities Retained Utilities
OE
expense Payable Earnings Expense
325

UP
325

WE 2,400
WP 2,400 4. Accrue = +2,400 -2,400 – +2,400 = -2,400
wages Wages Retained Wages
WE expense Payable Earnings Expense
2,400

WP
2,400

SUPE 4,750 5. Record -4,750 = -4,750 – +4,750 = -4,750

SUP 4,750 supplies Supplies Retained Supplies
SUPE expense Earnings Expense
4,750

SUP
4,750

IE 450
IP 450 6. Accrue = +450 -450 – +450 = -450
interest Interest Retained Interest
IE expense Payable Earnings Expense
450

IP
450
RNTE 645 =
AP 645 7. Recognize = +645 -645 – +645 -645
rent Accounts Retained Rent
RNTE
expense* Payable Earnings Expense
645

AP
645

* (0.75%  $86,000 = $645). The rent for the year ($6,900 = $575 × 12) has already been recognized in the accounts. See the
beginning balances given in the problem statement.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-49
P3-54. (35 minutes)

a.
Date Description Debit Credit

Dec. 31 Advertising expense 1,540

Prepaid advertising 1,540
To record 11 months' advertising expense
($1,680  11/12 = $1,540)

Dec. 31 Depreciation expense 5,280

Accumulated depreciation 5,280
To record depreciation for the year
($42,240 / 8 years = $5,280)

Dec. 31 Utilities expense 325

Utilities payable 325
To record estimated December utilities expense.

Dec. 31 Wages Expense 2,400

Wages Payable 2,400
To record unpaid wages at December 31.

Dec. 31 Supplies expense 4,750

Supplies 4,750
To record supplies expense for the year
($6,270 − $1,520 = $4,750)

Dec. 31 Interest expense 450

Interest payable 450
To accrue interest expense at December 31

Dec. 31 Rent expense 645

Accounts payable 645
To record additional rent owed under lease
(0.75% × $86,000 = $645)

© Cambridge Business Publishers, 2021

3-50 Financial Accounting for MBAs, 8th Edition
 b. Note: Only those T-accounts required are shown here.

Accounts Payable Prepaid Advertising

2,700 Bal. Bal. 1,680
645 7. 1,540 1.
3,345 Bal. Bal. 140

Accumulated Depreciation Equipment Supplies

5,280 2. Bal. 6,270 4,750 5.
Bal. 1,520

Interest Payable Advertising Expense

450 6. 1. 1,540
450 Bal. Bal. 1,540

Depreciation Expense Rent Expense

2. 5,280 Bal. 6,900
Bal. 5,280 7. 645
Bal. 7,545

Wages Payable Wages Expense

2,400 4. Bal. 38,800
2,400 Bal. 4. 2,400
Bal. 41,200

Utilities Payable Utilities Expense

325 3. Bal. 3,020
325 Bal. 3. 325
Bal. 3,345

Supplies Expense Interest Expense

5. 4,750 6. 450
Bal. 4,750

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-51
P3-55. (35 minutes)

a.

Date Description Debit Credit

Mar. 31 Rent expense 795

Prepaid rent 795
To record March rent expense ($4,770 / 6 months = $795)

Mar. 31 Supplies expense 2,340

Supplies 2,340
To record March supplies expense
($3,700 − $1,360 = $2,340)

Mar. 31 Depreciation expense—equipment 335

Accumulated depreciation—equipment 335
To record March depreciation
($36,180 / 108 months = $335)

Mar. 31 Wages expense 1,560

Wages payable 1,560
To record unpaid wages at March 31

Mar. 31 Utilities expense 390

Accounts payable 390
To record estimated March utilities expense

Mar. 31 Unearned service revenue 500

Service revenue 500
To record portion of revenue received in advance that was
earned in March.

Continued next page

© Cambridge Business Publishers, 2021

3-52 Financial Accounting for MBAs, 8th Edition
P3-55. continued

b. Only the affected T-accounts are included here. The closing entries required in Part d are
referenced by 1d, 2d etc.

Accounts Payable Prepaid Rent

3,510 Bal. Bal. 4,770 795 1.
390 5. Bal. 3,975
3,900 Bal.

Acc Depreciation - Equipment Supplies

335 3. Bal. 3,700 2,340 2.
335 Bal. Bal. 1,360

Service Revenue Unearned Service Revenue

1d. 12,860 12,360 Bal. 6. 500 1,000 Bal.
500 6. 500 Bal.

Depreciation Expense Rent Expense

3. 335 335 3d. 1. 795 795 6d.

Utilities Expense Supplies Expense

5. 390 390 5d. 2. 2,340 2,340 2d.

Wages Payable Wages Expense

1,560 4. Bal. 3,900
4. 1,560 5,460 4d.

Retained Earnings
12,860 1d.
2d. 2,340
3d. 335
4d. 5,460
5d. 390
6d. 795
3,540 Bal.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-53
 c.
WYSOCKI WHEELS
Income Statement
For Month Ended March 31
Service revenues ................................................................... $12,860
Expenses
Utilities expense ............................................................... $ 390
Supplies expense ............................................................. 2,340
Wage expense ................................................................. 5,460
Depreciation expense....................................................... 335
Rent expense ................................................................... 795 9,320
Net income ............................................................................ $ 3,540

WYSOCKI WHEELS
BALANCE SHEET
MARCH 31
Cash ......................................... $ 2,900 Wages payable .......................................
$ 1,560
Accounts receivable.................. 3,820 Accounts payable ...................................
3,900
Prepaid rent .............................. 3,975 Unearned service revenue ...................... 500
Supplies .................................... 1,360 Total liabilities .........................................
5,960
Equipment, cost ........................ 36,180
Less accumulated depreciation. (335) Common stock ........................................
38,400
Equipment, net ......................... 35,845 Retained earnings ...................................
3,540
Total assets .............................. $47,900 Total liabilities and equity ........................
$47,900

d. 1d. Service revenue ...............................................................................

12,860
Retained earnings ...................................................................... 12,860

2d. Retained earnings ............................................................................

2,340
Supplies expense....................................................................... 2,340

3d. Retained earnings ............................................................................335

Depreciation expense ................................................................ 335

4d. Retained earnings ............................................................................

5,460
Wages expense ......................................................................... 5,460

5d. Retained earnings ............................................................................390

Utilities expense ......................................................................... 390

6d. Retained earnings ............................................................................795

Rent expense............................................................................. 795

The closing journal entries are shown in the T- accounts above.

© Cambridge Business Publishers, 2021

3-54 Financial Accounting for MBAs, 8th Edition
 P3-56 (30 minutes)

a.

Balance Sheet Income Statement

Cash Noncash = Liabil- Contrib. Earned Rev- – Expen- = Net

Transaction Asset + Assets ities + Capital + Capital enues ses Income
Beginning bal. 0 0 = 0 0 0 – =

Cash 150,000
NP 100,000 1. Sefcik +150,000 = +100,000 +50,000 – =
CS 50,000
invested Cash Note Common
Cash $50,000 in Payable Stock
150,000 exchange for
common
NP
stock;
company
100,000
borrowed
$100,000
CS
from a bank
50,000

PPE, net 95,000

INV 40,000 2. Sefcik -95,000 +95,000 = +40,000 – =
Cash 95,000
AP 40,000
purchased Cash PPE, net Accounts
equipment Payable
PPE, net for $95,000 +40,000
95,000 cash and Inventory
inventory of
INV $40,000 on
credit
40,000

Cash
95,000

AP
40,000

Cash 50,000
COGS 30,000 3. Sefcik Co. +50,000 -30,000 = +20,000 +50,000 – +30,000 = +20,000
Sales 50,000
INV 30,000
sold Cash Inventory Retained Sales Cost o
inventory Earnings Goods
CASH costing Sold
50,000 $30,000 for
$50,000
COGS cash
30,000

Sales
50,000

INV
30,000

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-55
 a. Table continued

Balance Sheet
Income Statement

Cash Noncash = Liabil- Contrib. Earned Rev- – Expen- = Net

Transaction Asset + Assets ities + Capital + Capital enues ses Income
Beginning bal. 0 0 = 0 0 0 – =

WE 12,000
Cash 12,000 4. Sefcik Co. -12,000 = -12,000 – +12,000 = -12,000
WE paid $12,000 Cash Retained Wage
cash for Earnings Expense
12,000
wages owed
employees
Cash for October
12,000 work

IE 1,000
Cash 1,000 5. Sefcik Co. -1,000 = -1,000 – +1,000 = -1,000
IE paid interest Cash Retained Interest
1,000 on the bank Earnings Expense
loan of
Cash $1,000 cash
1,000

DE 500
PPE, net 500 6. Sefcik Co. -500 = -500 – +500 = -500
DE recorded PPE, net Retained Deprec.
500 $500 Earnings Exp
depreciation
expense
PPE, net related to
500 equipment

RE 2,000
Cash 2,000 7. Sefcik Co. -2,000 = -2,000 – =
RE paid $2,000 Cash Retained
2,000 cash Earnings
dividend
Cash
2,000

Ending balance 90,000 + 104,500 = 140,000 + 50,000 + 4,500 50,000 – 43,500 = 6,500

© Cambridge Business Publishers, 2021

3-56 Financial Accounting for MBAs, 8th Edition
 b.
SEFCIK CO.
Income Statement
For Month of October
Sales revenue ...........................................................................................................
$50,000
Total expenses ..........................................................................................................
43,500
Net income ................................................................................................................
$ 6,500

SEFCIK CO.
Retained Earnings Reconciliation
For Month of October
Retained earnings, October 1..................................................................................
$ 0
Add: Net income ................................................................................................6,500
Less: Dividends ..................................................................................................
(2,000)
Retained earnings, October 31................................................................................$ 4,500

SEFCIK CO.
Balance Sheet
October 31
Cash ...........................................
$ 90,000 Liabilities ....................................................................................
$140,000
Noncash assets........................... 104,500
Contributed capital .....................................................................
50,000
Retained earnings......................................................................
4,500
________ Total equity ................................................................................
54,500
Total assets.................................
$194,500 Total liabilities and equity ...........................................................
$194,500

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-57
P3-57 (30 minutes)

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

= – =
Transaction Asset + Assets ities + Capital + Capital enues ses Income
Cash 10,000
CS 10,000 1. Shareholder +10,000 = +10,000 – =
Cash s contribute Cash Common
10,000 $10,000 Stock
cash to the
CS business in
exchange
10,000
for common
stock
WE 500
WP 500 2. Employees = +500 -500 – +500 = -500
WE earn $500 Wages Retained Wages
500 in wages Payable Earnings Expense
that have
WP not been
paid at
500
period-end

INV 3,000
AP 3,000 3. Inventory of +3,000 = +3,000 – =
INV $3,000 is Inventory Accounts
3,000 purchased Payable
on credit
AP
3,000

AR 4,500
COGS 3,000 4. The +4,500 = +4,500 +4,500 – +3,000 = +1,500
Sales 4,500
INV 3,000
inventory Accounts Retained Sales Cost of
purchased Receivable Earnings Goods
AR
in Sold
4,500
transaction
3 is sold for -3,000 -3,000
COGS
$4,500 on Inventory Retained
3,000
credit Earnings
Sales
4,500

INV
3,000

Cash 4,500
AR 4,500 5. The +4,500 -4,500 = – =
Cash company Cash Accounts
4,500 collected Receivable
the $4,500
AR owed to it
per
4,500
transaction
4

continued

© Cambridge Business Publishers, 2021

3-58 Financial Accounting for MBAs, 8th Edition
 Table continued

Balance Sheet Income Statement

Cash Noncash = Liabil- Contrib. Earned Rev- – Expen- = Net

Transaction Asset + Assets ities + Capital + Capital enues ses Income
PPE, net 5,000
Cash 5,000 6. Equipment is -5,000 +5,000 = – =
PPE, net purchased Cash PPE, net
5,000 for $5,000
cash
Cash
5,000

DE 1,000
PPE, net 1,000 7. Depreciation -1,000 = -1,000 – +1,000 = -1,000
DE of $1,000 is PPE, net Retained Deprec.
1,000 recorded on Earnings Expense
the
PPE, net equipment
1,000 from
transaction 6
SUPE 3,000
SUP 3,000 8. Supplies -3,000 = -3,000 – +3,000 = -3,000
SUPE account had Supplies Retained Supplies
3,000 a $3,800 Earnings Expense
balance at
SUP
beginning of
3,000
this period;
a physical
count at
period-end
shows $800
of supplies
still available.
No supplies
were
purchased
this period.
NP 12,000
IE 500 9. The company -12,500 = -12,000 -500 – +500 = -500
Cash 12,500
paid $12,000 Cash Note Retained Interest
NP cash toward Payable Earnings Expense
12,000 the principal
on a note
IE payable;
500 also, $500
cash is paid
Cash to cover this
12,500 note’s
interest
expense for
the period
Cash 8,000
UR 8,000 10. The company +8,000 = +8,000 – =
Cash receive Cash Unearned
8,000 $8,000 cash Revenue
in advance
UR for services
8,000 to be
delivered
next period

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-59
 P3-58 (25 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
Cash 155,000
NP 55,000 1. Received +155,000 = +55,000 +100,000 – =
CS 100,000
$100,000 Cash Notes Common
Cash cash for Payable Stock
155,000 common
stock and
borrowed
NP $55,000
55,000 cash

CS
100,000

PPE, net 50,000

NP 40,000 2. Purchased -10,000 +50,000 = +40,000 – =
Cash 10,000
$50,000 of Cash PPE, net Notes
PPE, net equipment, Payable
50,000 for $10,000
cash and
NP $40,000
40,000 note
payable
Cash
10,000

INV 80,000
Cash 80,000 3. Purchased -80,000 +80,000 = – =
INV $80,000 of Cash Inventory
80,000 inventory
for cash
Cash
80,000

Cash 60,000
AR 40,000 4. Sold +60,000 +40,000 = +30,000 +100,000 – +70,000 = +30,000
COGS 70,000
Sales 100,000
Inventory Cash Accounts Retained Sales Cost of
INV 70,000 for $60,000 Receivable Earnings Goods
cash and Sold
AR
$40,000 on -70,000
40,000
credit, cost Inventory
of
Cash
inventory
60,000
$70,000
COGS
70,000

Sales
100,000

INV
70,000

continued

© Cambridge Business Publishers, 2021

3-60 Financial Accounting for MBAs, 8th Edition
 a. Table continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
PPDA 10,000
Cash 10,000
5. Paid -10,000 +10,000 = – =
PPDA $10,000 Cash Prepaid
10,000 cash for Advertising
future
advertising
Cash
time
10,000

AE 7,500
PPDA 7,500
6. $7,500 of -7,500 = -7,500 – +7,500 = -7,500
AE advertising Prepaid Retained Adver-
7,500 time in Advertising Earnings tising
transaction Expense
5 is aired
PPDA
7,500
WE 17,000
Cash 17,000
7. Employees -17,000 = -17,000 – +17,000 = -17,000
WE paid Cash Retained Wages
17,000 $17,000 Earnings Expense
cash in
wages
Cash
17,000

WE 1,000
WP 1,000
8. Employees = +1,000 -1,000 – +1,000 = -1,000
WE earn $1,000 Wages Retained Wages
1,000 in wages Payable Earnings Expense
not yet paid
WP
1,000

DE 2,000
PPE, net 2,000
9. Record -2,000 = -2,000 – +2,000 = -2,000
DE depreciation PPE, net Retained Deprec-
of $2,000 on Earnings iation
2,000 equipment* Expense

PPE, net
2,000

Ending
98,000 + 100,500 = 96,000 + 100,000 + 2,500 100,000 – 97,500 = 2,500
Balances

*PPE, net = Equipment, gross less Accumulated Depreciation.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-61
 b.
ANIFOODS, INC.
Income Statement
For Month Ended March 31
Sales .....................................................................................................................
$100,000
Cost of goods sold ................................................................................................. (70,000)
Gross profit ............................................................................................................
30,000
Advertising expense .............................................................................................. (7,500)
Wages expense ..................................................................................................... (18,000)
Depreciation expense ............................................................................................ (2,000)
Net income ............................................................................................................
$ 2,500

ANIFOODS, INC.
Balance Sheet
March 31
Cash .........................................
$ 98,000 Wages payable ....................... $ 1,000
Accounts receivable.................. 40,000 Note payable (to owner) .......... 55,000
Inventory ................................... 10,000 Note payable (to vendor) ......... 40,000
Prepaid advertising ................... 2,500 Total liabilities.......................... 96,000
Equipment, gross ...................... 50,000
Less: Accum depreciation ......... (2,000) Common stock ........................ 100,000
Equipment, net ......................... 48,000 Retained earnings ................... 2,500
Total assets ..............................$198,500 Total liabilities and equity ........ $198,500

© Cambridge Business Publishers, 2021

3-62 Financial Accounting for MBAs, 8th Edition
 P3-59. (45 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
Beginning
80,000 135,000 = 70,000 110,000 35,000 – =
bal.

SUP 5,000
Cash 5,000 1. The -5,000 +5,000 = – =
company Cash Supplies
SUP
purchased
5,000 supplies for
$5,000
Cash cash; none
5,000 were used
this month
AR 2,500
REV 2,500
2. Services of +2,500 = +2,500 +2,500 – = +2,500
AR $2,500 were Accounts Retained Revenues
2,500 performed Receivable Earnings
this month
REV on credit
2,500
Cash 10,000
REV 10,000
3. Services +10,000 = +10,000 +10,000 – = +10,000
Cash were Cash Retained Revenues
10,000 performed Earnings
for $10,000
REV cash this
month
10,000
PPDA 8,000
Cash 8,000
4. The -8,000 +8,000 = – =
PPDA company Cash Prepaid
8,000 purchased Advertising
advertising
Cash for $8,000
cash; the
8,000
ads will run
next month

Cash 1,200 5. The +1,200 -1,200 = – =

AR 1,200 company Cash Accounts
Cash received Receivable
$1,200 cash
1,200
as partial
payment on
AR accounts
1,200 receivable
from
transaction
2
AP 3,400
Cash 3,400
6. The -3,400 = -3,400 – =
AP company Cash Accounts
3,400 paid $3,400 Payable
cash toward
Cash accounts
payable.
3,400

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-63
 a. Tabl continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
WE 3, 500
Cash 3,500
7. Paid $3,100 -3, 500 = -3, 500 – +3, 500 = -3, 500
WE cash toward Cash Retained Wages
3,500 this month’s Earnings Expense
wages
Cash expenses
3,500

RE 500
Cash 500
8. The -500 = -500 – =
RE company Retained
500 declared Cash Earnings
and paid
Cash dividends of
$500 cash
500

Ending
70,800 + 149,300 = 66,600 + 110,000 + 43, 500 12,500 – 3, 500 = 9, 000
balance

b.
HANLON ADVERTISING COMPANY
Income Statement
For Current Month
Sales revenue............................................................................................................
$12,500
Wages expense .........................................................................................................
3,500
Net income ................................................................................................................
$ 9,000

HANLON ADVERTISING COMPANY

Retained Earnings Reconciliation
For Current Month
Retained earnings, beginning of month.................................................................... $ 35,000
Add Net income ....................................................................................................
9,000
Less: Dividends ......................................................................................................
(500)
Retained earnings, end of month .............................................................................$ 43,500

HANLON ADVERTISING COMPANY

Balance Sheet
Month-End
Cash ............................................
$ 70,800 Liabilities .................................................................................
$ 66,600
Noncash assets ........................... 149,300
Contributed capital ..................................................................
110,000
Retained earnings ...................................................................
43,500
________ Total equity .............................................................................
153,500
Total assets .................................
$220,100 Total liabilities and equity ........................................................
$220,100

© Cambridge Business Publishers, 2021

3-64 Financial Accounting for MBAs, 8th Edition
 P3-60. (35 minutes)

a.
Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
Beginning
30,000 225,000 = 90,000 45,000 120,000 – =
balance

SUP 6,000
AP 6,000
1. The +6,000 = +6,000 – =
company Supplies Accounts
SUP purchased Payable
6,000 $6,000 of
supplies on
AP credit
6,000

Cash 8,000
UR 8,000
2. The +8,000 = +8,000 – =
Cash company Cash Unearned
8,000 received Revenues
$8,000 cash
UR from a new
8,000 customer for
services to
be
performed
next month
RNTE 3,000
PPRNT 3,000
Cash 6,000 3. The -6,000 +3,000 = -3,000 – +3,000 = -3,000
company Cash Prepaid Retained Rent
RNTE
paid $6,000 Rent Earnings Expense
3,000 cash to
cover office
PPRNT rent for two
3,000 months (the
current
Cash month and
6,000 the next)
AR 25,000
REV 25,000
4. The +25,000 = +25,000 +25,000 – = +25,000
AR company Accounts Retained Revenues
25,000 billed clients Receivable Earnings
for $25,000
REV of work
25,000 performed

WE 6,000
Cash 6,000
5. The -6,000 = -6,000 – +6,000 = -6,000
WE company Cash Retained Wages
6,000 paid Earnings Expense
employees
Cash $6,000 cash
6,000 for work
performed

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-65
 P3-60. continued

a. continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Net

Transaction + = + + Revenues – Expenses =
Asset Assets ities Capital Capital Income
Cash 25,000
AR 25,000
6. The +25,000 -25,000 = – =
Cash company Cash Accounts
25,000 collected Receivable
$25,000
AR cash from
accounts
25,000
receivable in
trabsaction
4
DE 4,000
PPE, net 4,000
7. The -4,000 = -4,000 – +4,000 = -4,000
DE company PPE, net Retained Deprec-
4,000 recorded Earnings iation
$4,000 Expense
PPE, net depreciation
on its
4,000
equipment

8. At month- -4,000 = -4,000 – +4,000 = -4,000

end, $2,000 Supplies Retained Supplies
of supplies Earnings Expense
SUPE 4,000 purchased
SUP 4,000 in
SUPE transaction
4,000 1 are still
available; no
supplies
SUP
were
4,000 available
when the
month
began

Ending
51,000 + 226,000 = 104,000 + 45,000 + 128,000 25,000 – 17,000 = 8,000
balance

© Cambridge Business Publishers, 2021

3-66 Financial Accounting for MBAs, 8th Edition
 b.
WERNER REALTY COMPANY
Income Statement
For Current Month
Sales revenue..........................................................................................................
$ 25,000
Total expenses ........................................................................................................
17,000
Net income ..............................................................................................................
$ 8,000

WERNER REALTY COMPANY

Retained Earnings Reconciliation
For Current Month
Retained earnings, beginning of month.................................................................... $120,000
Add: Net income .....................................................................................................
8,000
Less: Dividends ....................................................................................................... 0
Retained earnings, end of month .............................................................................$128,000

WERNER REALTY COMPANY

Balance Sheet
Current Month-End
Cash ............................................
$ 51,000 Liabilities ..................................................................................
$104,000
Noncash assets ........................... 226,000
Contributed capital ...................................................................
45,000
Retained earnings ....................................................................
128,000
________ Total equity ..............................................................................
173,000
Total assets .................................
$277,000 Total liabilities and equity .........................................................
$277,000

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-67
 IFRS APPLICATIONS

I3-61. (20 minutes)

1. Close all revenue accounts

Total passenger and freight revenue 17,060
Retained earnings 17,060

2. Close all expense accounts

Retained earnings 4,300
Manpower and staff related 4,300
Retained earnings 3,232
Fuel 3,232
Retained earnings 3,596
Aircraft operating variable 3,596
Retained earnings 1,528
Depreciation and amortisation 1,528
Retained earnings 2,831
Other expenses 2,831
Retained earnings 182
Finance costs 182
Retained earnings 411
Income tax expense 411

Total Passenger Manpower

Retained Earnings
and Freight Revenue and Staff Related
17,060 4,300 1,084 (bal)
4300 17,060
3232
Depreciation
Finance Costs 3596
and Amortization
182 1,528 1528
2831
182
Fuel Other Expenses 411
3,232 2,831 2,064 (bal)

Income Tax Expense Aircraft Operating Variable

411 3,596

The balance in Retained earnings is AUD 2,064 million.

© Cambridge Business Publishers, 2021

3-68 Financial Accounting for MBAs, 8th Edition
 I3-62. (15 minutes)

Balance Sheet Income Statement

Cash Noncash Contrib. Earned Net

Transaction Asset + Assets = Liabilities + Capital + Capital Revenues - Expenses = Income

AR 18,485
Rev 18,485
Record sales +18,485 = +18,485 +18,485 – = +18,485
revenue for Accounts Retained
AR
2018. Receivable Earnings
18,485

Revenue
18,485

DE 4,015
PPE 4,015 Record -4,015 = -4,015 – +4,015 = -4,015
DE depreciation PPE Retained Depreciation
and Earnings and
4,015
amortization amortizatoin
PPE expense for expense
4,015 2018.

TE 4,242 Record taxes -4,242 = -4,242 – +4,242 = -4,242

Cash 4,242 paid for 2018. Retained Tax
TE Earnings expense
4,242

Cash
4,242

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-69
 MANAGEMENT APPLICATIONS

MA3-63. (60 minutes)

a. The financial statement effects template first shows the initial cash deposits and checks.
These are entries i through viii. Entries 1—6 are the adjusting entries required at the end of
the third month. We assume that expenditures for rent and salaries were initially debited to
expense accounts.

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
Cash 50,000
CS 50,000
i. Cash +50,000 = +50,000 – =
Cash investment Cash Common
50,000 Stock

CS
50,000

Cash 81,000
Rev 81,000
ii. Collect from +81,000 = +81,000 +81,000 – = +81,000
Cash customers Cash Retained Sales
81,000 Earnings Revenues

Rev
81,000

Cash 10,000
NP 10,000
iii. Bank +10,000 = +10,000 – =
Cash borrowing Cash Notes
10,000 Payable

NP
10,000

PPRNT 24,000
Cash 24,000
iv. Paid rent -24,000 +24,000 = – =
RNTE Cash Prepaid
24,000 Rent

Cash
24,000

PPE 25,000
Cash 25,000
v. Purchase -25,000 +25,000 = – =
PPE equipment Cash Equipment
25,000

Cash
25,000

continued

© Cambridge Business Publishers, 2021

3-70 Financial Accounting for MBAs, 8th Edition
 a. Table continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Expen- Net

Transaction + = + + – =
Asset Assets ities Capital Capital enues ses Income
INV 62,000
Cash 62,000 vi. Purchase -62,000 +62,000 = – =
INV inventory Cash Inventory
62,000

Cash
62,000

SE 8,000
Cash 8,000 vii. Pay -8,000 = -8,000 – +8,000 = -8,000
SE salaries Cash Retained Salaries
8,000 Earnings Expense

Cash
8,000

OE 13,000
Cash 13,000 viii. Pay other -13,000 = -13,000 – +13,000 = -13,000
OE expenses Cash Retained Other
13,000 Earnings (Oper-
ating)
Cash Expenses
13,000

AR 9,000
Rev 9,000 1. Recognize +9,000 = +9,000 +9,000 – = +9,000
AR credit sales A/R Retained Sales
9,000 Earnings Revenue

Rev
9,000

PPRNT 12,000
RNTE 12,000 2. Adjust rent -12,000 = -12,000 – 12,000 = -12,000
PPRNT expense Prepaid Retained Rent
12,000 Rent Earnings Expense

RNTE
12,000

SE 4,000
SP 4,000 3. Accrue = +4,000 -4,000 – +4,000 = -4,000
SE salaries Salaries Retained Salaries
4,000 expense Payable Earnings Expense

SP
4,000

continued

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-71
 a. Table continued

Balance Sheet Income Statement

Cash Noncash Liabil- Contrib. Earned Rev- Net

Transaction Asset + Assets = ities + Capital + Capital enues – Expenses = Income
COGS 34,000
INV 34,000
4. Recognize -34,000 = -34,000 – +34,000 = -34,000
COGS cost of goods Inventory Retained Cost of
34,000 sold Earnings Goods
Sold
INV
34,000

DE 1,250
AD 1,250
5. Accrue - 1,250 = -1,250 – +1,250 = -1,250
DE depreciation Accum. Retained Deprec-
1,250 expense Deprec- Earnings iation
iation Expense
AD
1,250

IE 300
IP 300
6. Accrue = +300 -300 – +300 = -300
IE interest Interest Retained Interest
300 expense Payable Earnings Expense

IP
300

Journal entries are shown in the financial statements effects template, above. We repeat
below, the journal entries for the adjustments 1 through 6.

1. Accounts Receivable .............................................................. 9,000

Sales Revenue ................................................................. 9,000
To recognize sales on account.

2. Rent Expense ......................................................................... 12,000

Prepaid Rent ..................................................................... 12,000
To recognize rent expense ½ of $24,000.

3. Salaries Expense .................................................................... 4,000

Salaries Payable ............................................................... 4,000
To recognize prepaid salaries for September.

4. Cost of Goods Sold................................................................. 34,000

Merchandise Inventory ..................................................... 34,000
To recognize cost of sales. ($62,000 - $28,000)

continued

© Cambridge Business Publishers, 2021

3-72 Financial Accounting for MBAs, 8th Edition
 a. continued

5. Depreciation Expense............................................................. 1,250

Accumulated Depreciation ................................................ 1,250
To accrue depreciation on the fixtures and equipment. ..........
($25,000 / 5 years × 3 months /12)

6. Interest Expense ..................................................................... 300

Interest Payable ................................................................ 300
To accrue interest on bank loan. ($10,000) × 0.12 × 3/12

The balances shown are the amounts in the accounts prior to the entry of the adjustments
described in items 1 through 6. The cash balance represents the deposits made ($141,000)
less the checks drawn ($132,000).

Cash Inventory
Bal. 9,000 Bal. 62,000 34,000 (4)

Fixtures & Equipment Prepaid Rent

Bal. 25,000 Bal. 24,000 12,000 (2)

Accumulated Depreciation-Equipment Salaries Payable

1,250 (5) 4,000 (3)

Accounts Receivable Common Stock

(1) 9,000 50,000 Bal.

Sales Revenue Cost of Goods Sold

81,000 Bal. (4) 34,000
9,000 (1)
Rent Expense Depreciation Expense
(2) 12,000 (5) 1,250

Other Expenses Bank Loan Payable

Bal. 13,00 10,000 Bal.
0

Interest Expense Interest Payable

(6) 300 300 (6)

Salaries Expense
Bal. 8,000
(3) 4,000

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-73
 b.
STOCKEN SURF SHOP
Income Statement
For Three Months Ended September 30
Sales Revenues $90,000
Cost of Goods Sold 34,000
Gross Margin 56,000
Expenses
Rent Expense $12,000
Salaries Expense 12,000
Depreciation Expense 1,250
Interest Expense 300
Other Expenses 13,000 38,550
Net Income $17,450

STOCKEN SURF SHOP

Balance Sheet
September 30
Assets
Current assets
Cash ...............................................................................................................................
$ 9,000
Accounts receivable .......................................................................................................
9,000
Inventory .........................................................................................................................
28,000
Prepaid rent ....................................................................................................................
12,000
Total current assets........................................................................................................
58,000

Fixtures and equipment, net ..............................................................................................

23,750
Total assets ........................................................................................................................
$ 81,750

Liabilities and equity

Current liabilities
Salaries payable .............................................................................................................
$ 4,000
Bank loan payable..........................................................................................................
10,000
Interest payable ..............................................................................................................
300
Total current liabilities ....................................................................................................
14,300

Contributed capital ............................................................................................................

50,000
Retained earnings ..............................................................................................................
17,450
Total stockholders' equity ..................................................................................................
67,450
Total liabilities and equity ...................................................................................................
$ 81,750

© Cambridge Business Publishers, 2021

3-74 Financial Accounting for MBAs, 8th Edition
 c. Module 1 introduced the return on assets ratio as a simple performance measure that
can be used to evaluate how well a business is doing. The return on assets is
calculated as the ratio of net profit to assets. The return on assets for the three-month
period (based on average assets) was almost 43% ($17,450 / [$0 + $81,750] / 2). This
is a very good return for a three-month period. However, the favorable performance
evaluation should be tempered by a few caveats:

(1) Retail businesses are notoriously seasonal. That is, sales (and profits) fluctuate from
season to season. A business such as this one would likely have its highest sales in
the second and third quarters. This seasonality must be considered when we try to
annualize quarterly results like these. Once the business has operated for a year or
two, the owner would likely have a better idea about how seasonal fluctuations affect
sales and returns and would be better able to interpret quarterly performance
measures.

(2) Stocken’s cash position is precarious. The firm has burned through most of the $60,000
cash raised to begin the business ($50,000 from the owner and the $10,000 loan) and
is likely to have trouble replacing its inventory as well as paying its bills. Perhaps they
can convince lenders to come to their rescue. If not, the firm will not last another three
months.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-75
MA3-64. (15 minutes)

a. The following analysis shows how the additional information from Kadous affects total
assets, liabilities, and equity of the company:

Assets Liabilities Equity

Per original balance sheet $88,500 $45,900 $42,600

1. Recognition of insurance expense

($6,500  1/2 = $3,250) (3,250) (3,250)

2. Depreciation correction
(5%  $68,500 = $3,425) 3,425 3,425

3. No adjustments necessary

4. Unbilled services performed 8,000 8,000

5. Advance consulting fee earned

($11,300  1/2 = $5,650) (5,650) 5,650

6. Recognition of supplies expense

($13,200 − $4,800 = $8,400) (8,400) ______ (8,400)

Revised totals $88,275 $40,250 $48,025

Original debt-to-equity ratio: $45,900 / $42,600 = 1.08

Revised debt-to-equity ratio: $40,250 / $48,025 = 0.84

b. Based on the analysis above, the loan agreement has not been violated.

© Cambridge Business Publishers, 2021

3-76 Financial Accounting for MBAs, 8th Edition
MA3-65. (15 minutes)

a. Beatty must weigh the following ethical considerations:

1. Balancing the long-run interests of the firm (securing the international contract) against
the short-run requirements to present accurately the financial data of the company for
the current year (recording $150,000 adjusting entry).

2. Compromising the confidentiality of the contract negotiations (by disclosing the contract
negotiations to additional persons) versus compromising her professional
responsibilities (by omitting a significant year-end adjusting entry).

3. Jeopardizing her position with the firm (by revealing information the president wants
kept secret) versus risking possible future legal action by parties relying on the firm's
financial statements (by not revealing a significant accrued expense and accrued
liability in the financial statements).

b. Beatty should consider that outside auditors frequently access confidential data and
disclosing the contract negotiations to the auditor should not represent a significant breach
of confidentiality. Perhaps Beatty can achieve a reasonable solution to her dilemma by
suggesting that an adjusting entry be recorded and described in very general terms (for
example, labeling the liability Payable to Consultants and indicating it is for marketing
research and development). Such an adjustment would be factually correct, not misleading,
and permit the disclosure of the significant liability without revealing important details to
anyone else within or outside the company.

© Cambridge Business Publishers, 2021

Solutions Manual, Module 3 3-77