Chapter 4 Textbook Solutions PDF

Preview

Summary

textbook solution...

Description

Chapter 4

Completing the Accounting Cycle Questions 1.

The accounting cycle starts with the account balances in the ledger at the beginning of the period.

During the period

1.

Analyze transactions as they occur.

2.

Journalize transactions.

3.

Post journal entries to the ledger accounts.

4.

Prepare the unadjusted trial balance.

5,6. Journalize and post adjusting entries, and create adjusted trial balance. OR Enter the trial balance on the worksheet, and complete the worksheet. End of the period

7.

Using the adjusted trial balance or the full worksheet as a guide, prepare the financial statements.

8.

Journalize and post the closing entries.

9.

Prepare the post-closing trial balance. This trial balance provides the opening balances for the next period.

2.

The worksheet helps move data from the trial balance to the financial statements. It summarizes the effects of all the transactions of a particular accounting period and provides an orderly way to compute net income. It helps identify the accounts needing adjustments, and it aids the closing process by listing the adjusted balances of all the accounts. Finally, it helps the accountant discover errors.

3.

Two advantages of the worksheet over the adjusted trial balance are (1) the worksheet sorts the accounts from the adjusted trial balance to the

Copyright © 2020 Pearson Canada Inc.

4-207

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

income statement and the balance sheet and thus gives more help in preparing the financial statements and (2) the worksheet shows net income or net loss (the adjusted trial balance does not). Other answers may include that it is easier to see mistakes in the worksheet than in the ledger accounts. 4.

Entering the adjusting entries on the worksheet has no effect on the ledger accounts because the worksheet is neither a journal nor a ledger. The adjusting entries must be journalized and posted to update the accounts.

5.

The income statement is prepared first. Then the net income (or net loss) is used in the completion of the statement of owner’s equity. The balance in the capital account from that statement is then used in the balance sheet.

6.

The adjusting entries should be journalized and posted before making the closing entries in order to bring the revenue and expense accounts to their correct ending balances before closing.

7.

Revenue accounts, expense accounts, and the withdrawals account are closed. These are all known as temporary accounts.

8.

Closing prepares the accounts for recording the transactions of the next period. Closing the accounts also allows us to calculate the net income or net loss easily.

9.

The permanent accounts—the assets, liabilities, and owner’s capital—are not closed. Examples include Cash, Accounts Receivable, Prepaid Rent or Prepaid Insurance, Supplies, Property, Plant, and Equipment, Accounts Payable, Notes Payable, Salaries Payable, Unearned Revenue, and Capital. The temporary accounts—the revenues, expenses, and owner withdrawals—are closed at the end of the period. Examples include Service Revenue, Interest Revenue, Salaries Expense, Rent Expense, Supplies Expense, Amortization Expense, and Withdrawals.

10. Income Summary is a temporary account that is used only at the end of the period in the closing process. The balances of the revenue accounts and the expense accounts are closed into Income Summary before closing Income Summary’s balance into Capital.

11. Service Revenue ................................................. Income Summary .......................................

4-208

5,000 5,000

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Income Summary ...............................................

Instructor’s Solutions Manual

1,200

Salaries Expense ........................................ Income Summary ...............................................

1,200 2,000

Capital ........................................................ Capital ................................................................

2,000 2,500

Withdrawals ...............................................

2,500

12. The post-closing trial balance includes the permanent accounts. 13. The accountant should make the following correcting entry: Supplies ..............................................................

120

Inventory ....................................................

120

OR Accounts Payable ...............................................

120

Inventory ....................................................

120

and Supplies ..............................................................

120

Accounts Payable ......................................

120

14. Assets are classified as current assets or long-term assets to indicate their relative liquidity to users of the financial statements. Current assets are assets that are expected to be converted to cash, sold, or consumed during the next 12 months or within the business’s normal operating cycle, if longer than a year. All other assets are long-term assets. 15. Current assets:

Prepaid Rent, Accounts Receivable, Cash, Note Receivable (due within one year)

Long-term assets:

Building, Furniture Notes Receivable (due after one year)

16. Assets and liabilities are listed on the balance sheet in the order of their liquidity. The most liquid items are listed first and the least liquid items are listed last. 17. The friend’s statement is incorrect. A current liability is a liability that must be paid within one year or within one of the entity’s operating cycles if the cycle is longer than a year. A long-term liability is a liability not classified as current. Therefore, the classification of a liability is based on when the debt must be paid, not on the type of creditor. 18. Current ratio

Copyright © 2020 Pearson Canada Inc.

=

Total current assets Total current liabilities 4-209

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

The current ratio measures the ability to pay current liabilities with current assets. A high value of the current ratio is safer than a low value. 19. Debt ratio

=

Total liabilities Total assets

The debt ratio measures the ability to pay current and long-term liabilities. A low value of the debt ratio is safer than a high value. *20. Reversing entries ease the burden of accounting after adjusting and closing entries are completed at the end of the period. The accountant reverses the adjusting entry at the beginning of the next period and records all other transactions in the next period in the normal way.

4-210

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

Starters (10 min.) S4-1 SCISSORS HAIR STYLISTS Preparation of Adjusted Trial Balance December 31, 2020

Account Title Cash Supplies Equipment Accumulated amortization—equipment Accounts payable Interest payable Note payable Suzanne Byrd, capital Service revenue Rent expense Supplies expense Amortization expense Interest expense

Unadjusted Trial Balance Debit Credit 600 800 16,200 1,100 500 0 2,900 5,300 13,000 4,800 0 0 400

22,800

4-232

22,800

Adjustments Debit Credit

(a) (b) (c)

(a)

500

(b)

1,100

(c)

700

500 1,100 700

2,300

Copyright © 2020 Pearson Canada Inc.

2,300

Adjusted Trial Balance Debit Credit 600 300 16,200 2,200 500 700 2,900 5,300 13,000 4,800 500 1,100 1,100

24,600

24,600

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(5 min.) S4-2 a. b. c. d. e. f. g. h. i. j.

3 4 2 1 1 2 4 2 4 2 (5 min.) S4-3

a. b. c. d. e. f.

$16,475 ($24,850 – $8,375) Income $8,375 $24,850 ($16,475 + $8,375) $211,325 $211,325 ($202,950 + $8,375)

(5 min.) S4-4 a. b. c. d. e. f. g.

$17,100 ($22,400 – $5,300) $56,100 ($61,400 – $5,300) Loss $5,300 $22,400 $22,400 ($17,100 + $5,300) $61,400 ($56,100 + $5,300)

Copyright © 2020 Pearson Canada Inc.

4-233

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(5 min.) S4-5 1.

Owner’s Capital–credit balance

2.

Income statement account with a credit balance–Service Revenue, or any other revenue account

3.

Income Statement accounts with a debit balance–all the expenses (Rent Expense, Salaries Expense, Supplies Expense, Amortization Expense, Utilities Expense, and so on)

4.

Revenues–Expenses=Net income, which is closed into the Owner’s Capital account. Revenues and Expenses are first closed to the Income Summary account, which is in turn closed into the Owner’s Capital account. (5-10 min.) S4-6

Income Summary = $40,000 – $21,000 = $19,000 Capital account: Opening balance Add Income Summary Deduct Withdrawals Ending balance

$ 20,000 + 19,000 – 8,000 $ 31,000 (5-10 min.) S4-7

4-234

P

Furniture

T

Service Revenue

T

Interest Expense

P

Salaries Payable

P

Accounts Receivable

P

Equipment

P

Accumulated Amortization

P

Notes Payable

T

P. Norwood, Withdrawals

P

P. Norwood, Capital

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(10-15 min.) S4-8

Journal Date 2020 a. Dec.

b.

c.

d.

Account Titles and Explanations 31

31

31

31

Service Revenue Income Summary To close the revenue account and create the Income Summary account.

Post. Ref.

Debit 15,000

15,000

Income Summary Salaries Expense Rent Expense Advertising Expense To close the expense accounts.

8,000

Income Summary Renee Van Etten, Capital To close the Income Summary account ($15,000 – $8,000).

7,000

Renee Van Etten, Capital R. Van Etten, Withdrawals To close the Withdrawals account and transfer the Withdrawals amount to the Capital account.

3,200

Copyright © 2020 Pearson Canada Inc.

Credit

3,500 2,000 2,500

7,000

3,200

4-235

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(10-15 min.)

S4-9

1. Renee Van Etten, Capital Clo. 3,200 Bal. 10,500 Clo. 7,000 Bal. 14,300 Service Revenue Clo. Bal. 15,000 15,000

Renee Van Etten, Withdrawals Bal. 3,200 Clo. 3,200

Bal.

Salaries Expense 3,500 Clo. 3,500

Clo. Clo.

Income Summary 8,000 Clo. 15,000 7,000 Bal. 7,000

Bal.

Rent Expense 2,000 Clo. 2,000

Advertising Expense Clo. 2,500 Bal. 2,500

2.

Renee Van Etten, Capital ending balance = $14,300 ($10,500 + $15,000 – $8,000 – $3,200) (10-15 min.) S4-10

Journal Date May

Account Titles and Explanations 31 Revenues Income Summary

Post. Ref.

Debit

Credit

28,596 28,596

To close the revenue account and create the Income Summary account. 31 Income Summary

2,816

Interest Expense

726

Amortization Expense —Equipment

2,090

To close the expense accounts. 31 Income Summary O. Currie , Capital

25,780 25,780

To close the Income Summary account. (28,596 – 2,816)

4-236

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(5 min.)

S4-11

(5-10 min.)

S4-12

a. Y b. N c. Y d. N e. N f. Y g. N h. Y i. Y

WATTS HOME SERVICES Post-Closing Trial Balance March 31, 2020 Account Title

Debit

Cash

$

Accounts receivable Supplies Equipment

Credit

800 4,000 300 8,500

Accumulated amortization—equipment Other assets

$ 2,000 1,600

Accounts payable

1,800

Unearned service revenue Long-term liabilities

1,600

Will Watts, capital Total

Copyright © 2020 Pearson Canada Inc.

900 .

8,900

$15,200

$15,200

4-237

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(10 min.)

S4-13

Journal Date Oct.

Account Titles and Explanations

Post. Ref.

22 Cash

Debit

Credit

465

Salaries Expense

465

To reverse incorrect journal entry. 22 Telephone Expense

645

Cash

645

To record payment of the telephone bill.

Teaching note: It is not recommended to just correct the cash by $180 because that will make the bank reconciliation (Chapter 8) too difficult. (10 min.)

S4-14

Yes, this is an error.

Journal Date

Account Titles and Explanations

Post. Ref.

Debit

Credit

SINGLE ENTRY CORRECTION: Mar.

31 Accounts Payable

175

Accounts Receivable

175

To correct a previous journal entry. Accounts Receivable had been debited in error. IF TWO ENTRIES ARE USED: Mar.

31 Cash Accounts Receivable

175 175

To reverse an incorrect journal entry. 31 Accounts Payable

175

Cash

175

To record payment on account for supplies purchased earlier in the month.

4-238

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(5-10 min.)

S4-15

Journal Date

Account Titles and Explanations

Post. Ref.

Debit

Credit

1 - SINGLE ENTRY CORRECTION: Nov.

30 Service Revenue Other Revenue

110,000 10,000

Income Summary

120,000

To correct a previous journal entry that had been made to close the revenue accounts.* 2 - IF TWO ENTRIES ARE USED: Nov.

30 Other Revenue Service Revenue

5,000 55,000

Income Summary

60,000

To reverse an incorrect journal entry. 30 Other Revenue Service Revenue Income Summary

5,000 55,000 60,000

To correctly close the revenue accounts. * The amounts in this correcting entry are double the original account balances. This is because the original entry had to be reversed then journalized again to record the correct amounts in the correct accounts.

Copyright © 2020 Pearson Canada Inc.

4-239

Horngren’s Accounting, 11Ce

1. 2. 3. 4. 5. 6. 7. 8.

Chapter 4

Instructor’s Solutions Manual

(5 min.)

S4-16

(10 min.)

S4-17

b c d b c a b a

1. & 2.

Current assets:

Current liabilities:

Cash

Accounts Payable

Accounts Receivable

Salaries Payable

Prepaid Expenses Supplies Long-term assets:

Long-term liabilities:

Land

None

Building Accumulated Amortization—Building (Long-term contra asset) 3. a.

Total current assets = $600 + $500 + $250 +1,050 = $2,400

b.

Book value of building = $4,000 – $2,400 = $1,600

c.

Total current liabilities = $550 + $300 = $850

d.

Total long-term liabilities = nil

4-240

Copyright © 2020 Pearson Canada Inc.

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(10-15 min.)

S4-18

Current ratio: Current assets divided by current liabilities: 35,000 / 17,400 = 2.0 Debt ratio: Total liabilities divided by total assets: 17,400 / 58,400 = 0.30

(10-15 min.) Total current assets Total current liabilities

Current ratio =

Debt ratio

=

$12,500 + $6,500 + $4,000 + $3,000 $8,700 + $4,200

=

Total liabilities Total assets

=

= 2.02

$8,700 + $18,000 + $4,200 = 0.74 $12,500 + $6,500 + $24,000 – $8,000 + $4,000 + $3,000

(10-15 min.) 1.

S4-19

S4-20

For every dollar of current liabilities, Prime Developments has $1.80 of current assets.

2. The current ratio measures the ability of a business to pay its short-term debt obligations. 3.

57% of Prime Developments’ total assets are financed with debt.

(5 min.)

S4-21

1.

Companies following IFRS may report their balance sheet using: • Accounts in order of liquidity (or current then non-current). • Accounts in reverse order of liquidity (or non-current then current).

2.

Items on a balance sheet are listed in a non-current then current order in which the items that are the most liquid are shown at the bottom of the list of accounts.

3.

Another name for the balance sheet is Statement of Financial Position.

Copyright © 2020 Pearson Canada Inc.

4-241

Horngren’s Accounting, 11Ce

Chapter 4

Instructor’s Solutions Manual

(5-10 min.)

S4-22

Journal Account Titles and Explanations

Date Dec.

Jan.

Jan.

31

1

15

Post. Ref.

Debit

Accounts Receivable Service Revenue To accrue service revenue.

8,500

Service Revenue Accounts Receivable To reverse the revenue adjusting entry.

8,500

Cash Service Revenue To record receipt of revenue.

Credit

8,500

8,500

14,500 14,500

Exercises (15-20 min.) E4-1 Reqs. 1 & 2

...