Adjusting the Accounts Part IV

PROBLEM 3.5 (Continued) Retained Earnings Date Explanation Nov. 1 Balance Ref.  Debit Credit Service Revenue Date Explanation Nov. 12 27 30 Adjusting Ref. J1 J1 J1 Debit Credit 3,100 2,200 1,220 Depreciation Expense Date Explanation Nov. 30 Adjusting Ref. J1 Debit 200 Credit Ref. J1 Debit 1,100 Credit Salaries and Wages Expense Date Explanation Nov. 8 25 30 Adjusting Ref. J1 J1 J1 Debit 1,000 1,700 350 Credit Rent Expense Date Explanation Nov. 22 Ref. J1 Debit 400 Credit Supplies Expense Date Nov. 30 Explanation Adjusting No. 320 Balance 2,950 No. 407 Balance 3,100 5,300 6,520 No. 615 Balance 200 No. 631 Balance 1,100 No. 726 Balance 1,000 2,700 3,050 No. 729 Balance 400 PROBLEM 3.5 (Continued) (b) General Journal J1 Date Nov. Account Titles and Explanation Salaries and Wages Payable.............. Salaries and Wages Expense ............ Cash ............................................. Ref. 212 726 101 Debit 700 1,000 Cash..................................................... Accounts Receivable .................. 101 112 3,620 Cash..................................................... Service Revenue ......................... 101 407 3,100 Equipment ........................................... Accounts Payable ....................... 153 201 2,000 Supplies .............................................. Accounts Payable ....................... 126 201 700 Accounts Payable ............................... Cash............................................. 201 101 2,700 22 Rent Expense ...................................... Cash............................................. 729 101 400 25 Salaries and Wages Expense ............ Cash............................................. 726 101 1,700 27 Accounts Receivable.......................... Service Revenue ......................... 112 407 2,200 29 Cash..................................................... Unearned Service Revenue ........ 101 209 600 8 10 12 15 17 20 Credit 1,700 3,620 3,100 2,000 700 2,700 400 1,700 2,200 600 PROBLEM 3.5 (Continued) (d) & (f) BECK EQUIPMENT REPAIR Trial Balances November 30, 2020 Before After Adjustment Dr. Cash .................................................................. Adjustment Cr. ₤ 3,220 Dr. Cr. ₤ 3,220 Accounts Receivable ...................................... 2,830 Supplies............................................................ 2,500 1,400 2,830 Equipment ........................................................ 14,000 14,000 Accumulated Depreciation— ₤ 2,000 ₤ 2,200 Accounts Payable ........................................... Equipment ..................................................... 2,600 2,600 Unearned Service Revenue ............................ 1,800 580 Salaries and Wages Payable .......................... –0– Share Capital—Ordinary ................................. 11,000 11,000 Retained Earnings ........................................... 2,950 2,950 Service Revenue.............................................. 5,300 350 6,520 Depreciation Expense ..................................... 200 Supplies Expense............................................ Salaries and Wages Expense......................... Rent Expense ................................................... 1,100 2,700 ₤25,650 (e) 1. Nov. 30 2. 3. 4. 30 30 30 3,050 400 400 ₤25,650 ₤26,200 ₤26,200 Supplies Expense........................ 631 1,100 Supplies (₤2,500 – ₤1,400). ... 126 1,100 Salaries and Wages Expense ..... 726 350 Salaries and Wages Payable................................ 212 350 Depreciation Expense ................. Accumulated Depreciation— Equipment.......................... 615 200 Unearned Service Revenue ........ Service Revenue.................... 209 1,220 407 200 154 1,220 PROBLEM 3.5 (Continued) (g) BECK EQUIPMENT REPAIR Income Statement For the Month Ended November 30, 2020 Revenues Service revenue............................................... Expenses Salaries and wages expense .......................... Supplies expense ............................................ Rent expense................................................... Depreciation expense ..................................... Total expenses......................................... Net Income .............................................................. ₤6,520 ₤3,050 1,100 400 200 4,750 ₤1,770 BECK EQUIPMENT REPAIR Retained Earnings Statement For the Month Ended November 30, 2020 Retained earnings, November 1 ............................................. Plus: Net income.................................................................... Retained earnings, November 30 ........................................... ₤2,950 1,770 ₤4,720 PROBLEM 3.5 (Continued) BECK EQUIPMENT REPAIR Statement of Financial Position November 30, 2020 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Supplies................................................................. Accounts receivable ............................................. Cash ....................................................................... Total assets ................................................... ₤14,000 2,200 ₤11,800 1,400 2,830 3,220 ₤19,250 Equity and Liabilities Equity Share capital—ordinary ................................ ₤11,000 Retained earnings ......................................... 4,720 ₤15,720 Liabilities Accounts payable.......................................... 2,600 Unearned service revenue ............................ 580 Salaries and wages payable ......................... 350 Total liabilities........................................................... 3,530 Total equity and liabilities................................................ ₤19,250 *PROBLEM 3.6 (a) 1. 2. 3. 4. 5. 6. June 30 30 30 30 30 30 Supplies ................................................ 1,300 Supplies Expense ......................... 1,300 Interest Expense (€20,000 X 6% X 5/12) ....................... Interest Payable ............................ 500 Prepaid Insurance [(€2,700 ÷ 12) X 9] ............................. Insurance Expense ....................... 2,025 500 2, 025 Service Revenue................................... Unearned Service Revenue............ 1,300 Accounts Receivable ........................... Service Revenue ........................... 2,000 Depreciation Expense (€2,250 ÷ 2) ........................................ Accumulated Depreciation— Equipment ................................. 1,300 2,000 1,125 1,125 *PROBLEM 3.6 (Continued) (b) ALPHA GRAPHICS Adjusted Trial Balance June 30, 2020 Cash .................................................................. Accounts Receivable (€14,000 + €2,000)......... Supplies ............................................................ Prepaid Insurance ............................................ Equipment ......................................................... Accumulated Depreciation—Equipment......... Notes Payable ................................................... Accounts Payable............................................. Interest Payable ................................................ Unearned Service Revenue ............................. Share Capital—Ordinary .................................. Service Revenue (€58,100 – €1,300 + €2,000) . Salaries and Wages Expense .......................... Supplies Expense (€3,700 – €1,300) ................ Advertising Expense ........................................ Rent Expense.................................................... Utilities Expense ............................................... Depreciation Expense ...................................... Insurance Expense (€2,700 – €2,025) .............. Interest Expense ............................................... € Debit 8,600 16,000 1,300 2,025 45,000 Credit € 30,000 2,400 1,900 1,500 1,700 1,125 675 500 €112,725 1,125 20,000 9,000 500 1,300 22,000 58,800 €112,725 *PROBLEM 3.6 (Continued) (c) ALPHA GRAPHICS COMPANY Income Statement For the Six Months Ended June 30, 2020 Revenues Service revenue............................................. Expenses Salaries and wages expense ........................ Supplies expense .......................................... Advertising expense ..................................... Utilities expense ............................................ Rent expense................................................. Depreciation expense ................................... Insurance expense ........................................ Interest expense ............................................ Total expenses....................................... Net income ............................................................ €58,800 30,000 2,400 1,900 1,700 1,500 1,125 675 500 39,800 €19,000 ALPHA GRAPHICS COMPANY Retained Earnings Statement For the Six Months Ended June 30, 2020 Retained earnings, January 1 ................................................. € 0 Add: Net income .................................................................... 19,000 Retained earnings, June 30 .................................................... €19,000 *PROBLEM 3.6 (Continued) ALPHA GRAPHICS COMPANY Statement of Financial Position June 30, 2020 Assets Equipment ............................................................. Less: Accumulated depreciation— equipment .................................................. Prepaid insurance ................................................. Supplies................................................................. Accounts receivable ............................................. Cash ....................................................................... Total assets ............................................ Equity and Liabilities Equity Share capital—ordinary ................................ Retained earnings ......................................... Liabilities Notes payable ................................................ Accounts payable.......................................... Unearned service revenue ............................ Interest payable ............................................. Total liabilities........................................ Total equity and liabilities ...................... €45,000 1,125 €22,000 19,000 20,000 9,000 1,300 500 € 43,875 2,025 1,300 16,000 8,600 €71,800 €41,000 30,800 €71,800 CT 3.1 FINANCIAL REPORTING PROBLEM (a) Items that may result in adjusting entries for prepayments are: 1. Other current assets (per statement of financial position). 2. Property, plant and equipment (per statement of financial position). 3. Intangible assets (per statement of financial position)—amortization is similar to depreciation (explained later in Chapter 10). (b) Accrual adjusting entries were probably made for accounts payable, salary and bonus payable, accrued profit sharing, finance (interest) expense, and income tax payable. CT 3.2 COMPARATIVE ANALYSIS PROBLEM Nestlé Delfi Limited (a) Net increase (decrease) in property, plant, and equipment (net) for current fiscal year. CHF978,000,000 US$10,164,000 (b) Increase in marketing (selling, distribution) and administrative expenses, for current fiscal year. CHF741,000,000 US$6,247,000 (c) Increase (decrease) in non-current liabilities for current fiscal year. (CHF1,718,000,000) (US$6,483,000) (d) Increase (decrease) in profit for current fiscal year. (CHF584,000,000) US$30,893,000 (e) Increase (decrease) in cash and cash equivalents for current fiscal year. CHF3,106,000,000 US$54,505,000 CT 3.3 (a) DECISION-MAKING ACROSS THE ORGANIZATION HAPPY TRAILS PARK Income Statement For the Quarter Ended March 31, 2020 Revenues Rent revenue (£88,000 – £14,000) ................ Expenses Salaries and wages expense [£28,800 + (£300 X 2)] ................................. Advertising expense (£5,200 + £130) ........... Supplies expense (£6,200 – £1,450) ............. Maintenance and repairs expense (£4,000 + £260)............................................ Insurance expense (£7,500 X 3/12) .............. Utilities expense (£750 + £120)..................... Depreciation expense ................................... Interest expense (£12,000 X 10% X 3/12) ........ Total expenses....................................... Net income ............................................................ £74,000 £29,400 5,330 4,750 4,260 1,875 870 800 300 47,585 £26,415 (b)The international financial reporting standards pertaining to the income statement that were not recognized by Alicia were the revenue recognition principle and the expense recognition principle. The revenue recognition principle states that revenue is recognized in the accounting period in which the performance obligation is satisfied. The £14,000 for summer rentals is a prepayment for services to be performed in a later period. As a result, the performance obligation is not satisfied and, therefore, should not be reported as revenue for the quarter ended March 31. The expense recognition principle dictates that efforts (expenses) be matched with accomplishments (revenues) whenever it is reasonable and practicable to do so. This means that the expenses should include amounts incurred in March but not paid until April. The difference in expenses was £8,035 (£47,585 – £39,550). The overstatement of revenues (£14,000) plus the understatement of expenses (£8,035) equals the difference in reported income of £22,035 (£48,450 – £26,415). CT 3.4 COMMUNICATION ACTIVITY Dear Ms. Danon: Upon reviewing the accounts of your company at the end of the year, I discovered that adjusting entries were not made. Adjusting entries are made at the end of the accounting period to ensure that the revenue recognition and expense recognition principles required under international financial reporting standards are followed. The use of adjusting entries makes it possible to report on the statement of financial position the appropriate assets, liabilities, and equity at the statement date and to report on the income statement the proper net income (or loss) for the year. Adjusting entries are needed because the trial balance may not contain an up-to-date and complete record of transactions and events for the following reasons: 1. Some events are not journalized daily because it is not efficient to do so. Examples are the use of supplies and the earning of wages by employees. 2. The expiration of some costs is not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment depreciation, rent, and insurance. 3. Some expenses, such as the cost of utility service and property taxes, may be unrecorded because the bills for the costs have not been received. There are four types of adjusting entries: 1. Prepaid expenses—expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned revenues—revenues received in cash and recorded as liabilities before they are earned. CT 3.4 (Continued) 3. Accrued revenues—revenues earned but not yet received in cash or recorded. 4. Accrued expenses—expenses incurred but not yet paid in cash or recorded. I will be happy to answer any questions you may have on adjusting entries. Signature CT 3.5 ETHICS CASE (a) The stakeholders in this situation are:  Diane Leno, controller.  The president of Watkin Exterminators  Watkin Exterminators owners. (b) 1. 2. It is unethical for the president to place pressure on Diane to misstate net income by requesting her to prepare incorrect adjusting entries. It is customary for adjusting entries to be dated as of the statement of financial position date although the entries are prepared at a later date. Diane did nothing unethical by dating the adjusting entries December 31. (c) Diane can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal). GAAP EXERCISES GAAP 3.1 IFRS might choose to revalue land and buildings at fair value because it provides more relevant information. GAAP, on the other hand, requires land and buildings be valued at cost because it is more verifiable and therefore provides information that is representationally faithful. GAAP 3.2 No. GAAP classifies revenues as the economic benefit that arises from an entity's normal operating activities and gains as the benefits associated with activities outside the normal sales of goods and services. GAAP also classifies expenses as those costs associated with an entity's normal operations and losses as those costs associated with activities outside the normal sales of goods and services. GAAP FINANCIAL REPORTING PROBLEM GAAP 3.3 (a) Items that may result in adjusting entries for prepayments are: 1. Other current assets (per balance sheet). 2. Property, plant and equipment, net (per balance sheet). 3. Acquired intangible assets, net (per balance sheet)—amortization is similar to depreciation (explained later in Chapter 10). (b) Accrual adjusting entries were probably made for accounts payable accrued expenses, and income taxes payable.