Nobles finman 6e sm CH04 PDF

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Chapter 4 Completing the Accounting Cycle Review Questions 1. The financial statements are prepared from the adjusted trial balance or worksheet. 2. The income statement reports revenues and expenses and calculates net income or net loss for the time period. 3. The statement of retained earnings shows how retained earnings changed during the period due to net income (or net loss) and dividends. 4. The balance sheet reports assets, liabilities, and stockholders’ equity as of the last day of the period. 5. The financial statements are prepared in a specific order because net income from the income statement is used on the statement of retained earrings to determine ending retained earnings. Ending retained earnings is then transferred to the balance sheet to determine total stockholders’ equity. The income statement is prepared first, then the statement of retained earnings, and then the balance sheet. 6. In a classified balance sheet, each asset and each liability is classified into specific categories. Assets are classified as current assets; long-term investments; property, plant, and equipment; and intangible assets. Liabilities are classified as either current or long-term liabilities. 7. Current: Cash, Accounts Receivable, Office Supplies. Property, Plant, and Equipment: Equipment, Land, Buildings. 8. Current: Accounts Payable, Salaries Payable, Interest Payable. Long-term: Mortgage Payable, Notes Payable. 9. Liquidity measures how quickly and easily an account can be converted to cash, because cash is the most liquid asset. 10. The worksheet contains columns for the income statement and the balance sheet and calculates net income. 11. The net loss amount should be entered in the credit column of the income statement (to balance out) and in the debit column of the balance sheet (to balance out).

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12. Closing the books (often referred to as the closing process) consists of journalizing and posting the closing entries in order to get the accounts ready for the next period. The closing process zeroes out all revenue accounts and all expense accounts in order to measure each period’s net income separately from all other periods. The closing process also zeroes out the dividends account. In addition, the closing process updates the Retained Earnings account balance for net income or loss during the period and any dividends paid to stockholders. 13. Temporary accounts (also known as nominal accounts) are accounts that relate to a particular accounting period and are closed at the end of that period. All temporary accounts (dividends, revenues, Income Summary and expenses) are closed (zeroed). 14. The permanent accounts (also known as real accounts)—the assets, liabilities, common stock and retained earnings—are not closed at the end of the period. Permanent account balances are carried forward into the next time period. All accounts on the balance sheet are permanent accounts. 15. The Income Summary account summarizes the net income (or net loss) for the period by collecting the sum of all the expenses (a debit) and the sum of all the revenues (a credit). The Income Summary account is like a temporary “holding tank” that shows the amount of net income or net loss of the current period. Its balance—net income or net loss—is then transferred (closed) to the Retained Earnings account (the final account in the closing process). Income Summary is a temporary account. 16. Step 1: Make the revenue accounts equal zero via the Income Summary account. This closing entry transfers total revenues to the credit side of the Income Summary account. Step 2: Make expense accounts equal zero via the Income Summary account. This closing entry transfers total expenses to the debit side of the Income Summary account. Step 3: Make the Income Summary account equal zero via the Retained Earnings account. This closing entry transfers net income (or net loss) to the Retained Earnings account. Step 4: Make the Dividends account equal zero via the Retained Earnings account. This entry transfers the dividends to the debit side of the Retained Earnings account. 17. If a business has a net loss, the closing entry to close Income Summary would be a debit to Retained Earnings and a credit to Income Summary. 18. Only assets, liabilities, and stockholders’ equity accounts including the Common Stock and Retained Earnings accounts (permanent accounts) appear on the post-closing trial balance. 19. The steps of the accounting cycle are: Step 1. Start with beginning account balances. Step 2. Analyze and journalize transactions as they occur. Step 3. Post journal entries to the accounts. Step 4. Compute the unadjusted balance in each account and prepare the unadjusted trial balance. Step 5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional). Step 6. Journalize and post adjusting entries. Step 7. Prepare the adjusted trial balance. Step 8. Prepare the financial statements. Step 9. Journalize and post the closing entries. Step 10. Prepare the post-closing trial balance.

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20. The current ratio measures a company’s ability to pay its current liabilities with its current assets. This ratio is computed as follows: Current ratio = Total current assets / Total current liabilities. A.

Reversing entries are special journal entries that ease the burden of accounting for transactions in a later period. Reversing entries are the exact opposite of certain adjusting entries. Reversing entries are used in conjunction with accrual-type adjustments, such as accrued salaries expense and accrued service revenue. Generally Accepted Accounting Principles do not require reversing entries.

Short Exercises S4-1 DALTON HAIR STYLISTS Income Statement Year Ended December 31, 2018 Revenues: Service Revenue Expenses: Rent Expense Interest Expense Depreciation Expense—Equipment Supplies Expense Total Expenses Net Income

$ 13,800 $ 3,900 2,300 2,200 850 9,250 $ 4,550

S4-2 DALTON HAIR STYLISTS Statement of Retained Earnings Year Ended December 31, 2018 Retained Earnings, January 1, 2018 Net income for the year Dividends Retained Earnings, December 31, 2018

$

0 4,550 4,550 (1,400) $ 3,150

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S4-3 DALTON HAIR STYLISTS Balance Sheet December 31, 2018 Assets Cash Accounts Receivable Office Supplies Equipment $ 20,900 Less: Acc. Depr.—Equip. (2,200)

Total Assets

$ 1,300 1,500 1,800

Liabilities Accounts Payable Interest Payable Notes Payable Total Liabilities

$

400 500 3,100 4,000

18,700

$ 23,300

Stockholders’ Equity Common Stock 16,150 Retained Earnings 3,150 Total Stockholders’ Equity 19,300 Total Liabilities and Stockholders’ Equity $ 23,300

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S4-4 DALTON HAIR STYLISTS Balance Sheet December 31, 2018 Assets Current Assets: Cash Accounts Receivable Office Supplies Total Current Assets Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation—Equipment Total Property, Plant, and Equipment Total Assets

$ 1,300 1,500 1,800 $ 4,600 $ 20,900 (2,200) 18,700 $ 23,300

Liabilities Current Liabilities: Accounts Payable Interest Payable Total Current Liabilities Long-term Liabilities: Notes Payable (long-term) Total Liabilities

$ 400 500 $ 900 3,100 4,000

Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

$ 16,150 3,150

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19,300 $ 23,300

S4-5 a. current assets b. current liabilities c. stockholders’ equity d. intangible assets e. property, plant and equipment f. property, plant, and equipment g. long-term investments h. current liabilities i. long-term liabilities S4-6 1. 2. 3. 4.

Credit Revenue Expense Net Income or Net Loss

S4-7 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)

S4-8 a. $17,100 ($22,400 – $5,300) b. $56,100 ($61,400 – $5,300) c. Loss d. $5,300 e. $22,400 f. $22,400 ($17,100 + $5,300) g. $61,400 ($56,100 + $5,300)

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S4-9 a. b. c. d. e. f. g. h. i.

T P P P P T T T P

S4-10 Date Accounts and Explanation Dec. 31 Service Revenue Income Summary To close revenue.

Debit 21,900

Credit 21,900

31 Income Summary Salaries Expense Rent Expense Advertising Expense To close expenses.

13,500 6,000 4,400 3,100

31 Income Summary Retained Earnings To close Income Summary.

8,400

31 Retained Earnings Dividends To close dividends.

6,900

8,400

6,900

S4-11 Requirements 1 and 2 Retained Earnings 29,60 Adj. Bal. 0 Clos. 10,500 12,80 Clos. 0 31,90 Bal. 0 Salaries Expense Adj.Bal. 6,200 6,200 Clos.

Dividends Adj. Bal. 10,500

Service Revenue 24,500 Adj. Bal.

10,500 Clos. Bal.

0

Rent Expense Adj.Bal. 3,500 3,500

Clos. 24,500 0

Clos.

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Bal.

Advertising Expense Adj.Bal. 2,000 2,000 Clos.

Bal.

0

Bal.

0

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Bal.

0

S4-11, cont. Requirements 1 and 2, cont. Income Summary Clos. 11,700 24,500 12,800 Clos. 12,800 0

Clos. Bal. Bal.

Requirement 3 Ending balance of Retained Earnings: $31,900

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S4-12 a. Y b. N c. Y d. N e. N f. Y g. N h. Y i. Y S4-13 1. 2. 3. 4.

Start with beginning account balances. Yes, completing the worksheet is optional. Journalizing the transactions and posting to the accounts. Preparing worksheet (optional), adjusting the accounts, preparing the financial statements, and closing the accounts. 5. Prepare the post-closing trial balance. S4-14 Requirement 1 Current ratio = Total current assets / Total current liabilities = ($2,500 + $1,300 + $6,600 + $3,500) / ($2,600 + $3,600) = $13,900 / $6,200 = 2.24 Requirement 2 End of the Line Montana Refrigeration has $2.24 in current asssets for every $1.00 of current liabilities that it owes. S4A-15 Requirement 1 Date Accounts and Explanation Dec. 31 Accounts Receivable Service Revenue To accrue service revenue.

Debit 8,500

Date Jan. 1

Debit 8,500

Credit 8,500

Requirement 2 Accounts and Explanation Service Revenue Accounts Receivable To reverse the revenue adjusting entry.

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Credit 8,500

S4A-15, cont. Requirement 3 Date Jan. 15

Accounts and Explanation Cash Service Revenue To record receipt of revenue.

Exercises E4-16 Requirement 1 GREEN ADVERTISING SERVICES Income Statement Year Ended December 31, 2018 Revenues: Service Revenue Expenses: Salaries Expense Advertising Expense Supplies Expense Depreciation Expense—Building Depreciation Expense—Furniture Total Expenses Net Loss

$ 49,800 $ 28,600 13,500 8,400 2,900 1,300 54,700 $ (4,900)

Requirement 2 GREEN ADVERTISING SERVICES Statement of Retained Earnings Year Ended December 31, 2018 Retained Earnings, January 1, 2018 Net loss for the year Dividends Retained Earnings, December 31, 2018

$ 31,400 (4,900) 26,500 (18,300) $ 8,200

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Debit 14,500

Credit 14,500

E4-16, cont. Requirement 3 GREEN ADVERTISING SERVICES Balance Sheet December 31, 2018 Assets Current Assets: Cash Accounts Receivable Office Supplies Total Current Assets Property, Plant and Equipment: Land Building Less: Accumulated Depreciation—Building Furniture Less: Accumulated Depreciation—Furniture Total Property, Plant, and Equipment Total Assets

$ 14,000 15,800 6,500 $ 36,300 18,400 $ 47,900 (36,100) 19,600 (14,100)

11,800 5,500 35,700 $ 72,000

Liabilities Current Liabilities: Accounts Payable Salaries Payable Unearned Revenue Total Current Liabilities

$ 10,600 7,200 16,000 $ 33,800

Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders’ Equity

30,000 8,200

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38,200 $ 72,000

E4-17 a. b. c. d. e. f. g. h.

Property, Plant, and Equipment Property, Plant, and Equipment Stockholders’ Equity X Long-Term Investments Current Assets Property, Plant, and Equipment Property, Plant, and Equipment

i. j. k. l. m. n. o. p.

Long-Term Liabilities Current Liabilities Current Assets Current Liabilities Current Assets X Long-Term Investments X

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E4-18 Requirement 1 MELANIE O’MALLIE DANCE STUDIO COMPANY Balance Sheet August 31, 2018 Assets Current Assets: Cash Office Supplies Prepaid Rent Total Current Assets Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation—Equipment Total Property, Plant, and Equipment Total Assets

$ 16,000 1,800 1,500 $ 19,300 49,000 (5,700) 43,300 $ 62,600

Liabilities Current Liabilities: Accounts Payable Salaries Payable Unearned Revenue Total Current Liabilities Long-term Liabilities: Notes Payable (long-term) Total Liabilities

$ 4,800 100 5,000 $ 9,900 5,400 15,300

Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

18,000 29,300 47,300 $ 62,600

Calculation of Retained Earnings = $19,000 − $1,100 + $18,100 − $3,600 − $1,100 − $400 − $500 − $1,100 = $29,300 Requirement 2 Current ratio = Total current assets / Total current liabilities = $19,300 / $9,900 = 1.95 O’Mallie’s abililty to pay current debts has improved.

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E4-19 Requirement 1 DATA SOLUTION Worksheet November 30, 2018 Account Names

Unadjusted Trial Balance Debit

Adjusted Trial Balance

Adjustments

Credit

Debit

Credit

Debit

Credit

Income Statement Debit

Credit

$ 4,400 3,100 1,800 3,100 30,200

Total

$ 800 $ 700 550

$ 1,500

Acc. Depr. —Equip. Accounts Payable Salaries Payable Common Stock Dividends Service Revenue Depr. Expense— Equip. Salaries Expense Rent Expense Utilities Expense Supplies Expense

a.

d. e.

$ 4,400 3,900 1,100 2,550 30,200

350 b.

$ 1,850

5,100 650 32,900 2,900

2,900 8,800

800 a. b. c. d.

2,100

350 650 700

e. $ 48,300

550 $ 3,050

2,900 9,600

350 2,750 700 700 550

700 $ 48,300

$ 1,850 5,100 650 32,900

5,100 650 32,900

c.

$ 3,050

$ 50,100

Total

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Credit

$ 4,400 3,900 1,100 2,550 30,200

Cash Accounts Receivable Prepaid Rent Office Supplies Equipment

Balance Sheet Debit

$ 9,600 $ 350 2,750 700 700 550

$ 50,100 Net Income

$ 5,050

$ 9,600

$ 45,050

$ 40,500

4,550 $ 9,600

$ 9,600

$ 45,050

4,550 $ 45,050

E4-19, cont. Requirement 2 Net income for November was $4,550. E4-20 Requirement 1 DATA SOLUTION Income Statement Month Ended November 30, 2018 Revenues: Service Revenue Expenses: Salaries Expense Utilities Expense Rent Expense Depreciation Expense—Equipment Supplies Expense Total Expenses Net Income

$ 9,600 $ 2,750 700 700 350 550 5,050 $ 4,550

Requirement 2 DATA SOLUTION Statement of Retained Earnings Month Ended November 30, 2018 Retained Earnings, November 1, 2018 Net income for the month Dividends Retained Earnings, November 30, 2018

$

0 4,550 4,550 (2,900) $ 1,650

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E4-20, cont. Requirement 3 DATA SOLUTION Balance Sheet November 30, 2018 Assets Current Assets: Cash Accounts Receivable Prepaid Rent Office Supplies Total Current Assets Property, Plant, and Equipment: Equipment Less: Accumulated Depreciation—Equipment Total Property, Plant, and Equipment Total Assets

$ 4,400 3,900 1,100 2,550 $ 11,950 30,200 (1,850) 28,350 $ 40,300

Liabilities Current Liabilities: Accounts Payable Salaries Payable Total Liabilities

$ 5,100 650 $ 5,750

Stockholders’ Equity Common Stock Retained Earnings Total Stockholders’ Equity Total Liabilities and Stockholders' Equity

32,900 1,650

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34,550 $ 40,300

E4-21 Requirement 1 Date Accounts and Explanation Jan. 31 Service Revenue Income Summary To close revenue. 31 Income Summary Salaries Expense Rent Expense Depreciation Expense—Equipment Supplies Expense Utilities Expense To close expenses. 31 Income Summary Retained Earnings To close Income Summary. 31 Retained Earnings Dividends To close dividends.

Debit 17,300

Credit 17,300

6,400 3,700 1,400 400 300 600

10,900 10,900

800 800

Requirement 2 Stone Sign Company earned net income of $10,900 ($17,300 − $6,400) for the year. We know this because revenues exceeded expenses by that amount and that was the balance in Income Summary when it was closed.

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E4-22 Requirement 1 Date Accounts and Explanation Dec. 31 Service Revenue Income Summary To close revenue.

Debit 37,500

Credit 37,500

31 Income Summary Salaries Expense Supplies Expense Depreciation Expense—Building Depreciation Expense—Furniture To close expenses.

44,400 33,200 2,700 7,000 1,500

31 Retained Earnings Income Summary To close Income Summary.

6,900 6,900

31 Retained Earnings Dividends To close dividends.

14,000 14,000

Requirement 2

Clos. Clos.

Retained Earnings 6,900 49,000 14,000 28,100

Bal. Bal.

E4-23 Clos.

Retained Earnings 12,000 27,500 10,500* 26,000

Bal. Clos. Bal.

* $34,000 − $23,500 = $10,500 (Net income). The balance in Retained Earnings will be $26,000.

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E4-24 Requirement 1 CYNTHIA ELMER, CPA Worksheet December 31, 2018 Account Names Cash Accounts Receivable Office Supplies Prepaid Rent Land Building Acc. Dep.—Building Furniture Acc. Dep.—Furniture Accounts Payable Utilities Payable

Unadjusted Trial Balance Debit $ 46,900 9,600 800 8,000 35,000 125,000

Adjustments

Credit

Debit h.

$ 3,700

1,150

c.

Income Statement

Debit $ 46,900 13,300 300 4,700 35,000 125,000

Debit

Credit

2,000

d.

4,200 500

f. g.

5,000

e.

1,300

15,000 118,000 118,090 29,000 20,000 28,000

5,000

$ 1,150

2,000 3,500