66124_c03_101-138.qxd 11/10/03 8:08 PM Page 118118Chapter 3 • The Matching Concept and the Adjusting Process••Exhibit 9Exhibit 9Vertical Analysis of Income StatementsJ. Holmes, Attorney-at-LawIncome StatementsFor the Years Ended December 31, 2005 and 200620062005AmountPercentAmountPercentFees earned . . . . . . . . . . . . . .$187,500100.0%$150,000100.0%Operating expenses:Wages expense . . . . . . . . . .$60,00032.0%$45,00030.0%*Rent expense . . . . . . . . . . . .15,0008.0%12,0008.0%Utilities expense . . . . . . . . . .12,5006.7%9,0006.0%Supplies expense . . . . . . . . .2,7001.4%3,0002.0%Miscellaneous expense . . . . .2,3001.2%1,8001.2%Total operating expenses . .$92,50049.3%$70,80047.2%Net income . . . . . . . . . . . . . .$95,00050.7%$79,20052.8%*$45,000 Ϭ$150,000SPOTLIGHT ON STRATEGYNOT CUTTING CORNERSHave you ever ordered a hamburger from Wendy’sandDave Thomas’s strategy enabled Wendy’s to grow to benoticed that the meat patty is square? The square meatthe third largest fast-food restaurant in the world, withpatty reflects a business strategy instilled in Wendy’s byannual sales of over $7 billion.its founder, Dave Thomas. Mr. Thomas’s strategy was tooffer high-quality products at a fair price in a friendly at-Source:“Dave Thomas, 69, Wendy’s Founder, Dies,” by Douglas Martin,mosphere, without “cutting corners”; hence, the squareThe New York Times, January 9, 2002.meat patty. In the highly competitive fast-food industry,Key Points1Explain how the matchingnizing an expense already paid or aconcept relates to the accrualrevenue already received is called abasis of accounting.2Explain why adjustments arenecessary and list the charac-teristics of adjusting entries.The accrual basis of accounting re-At the end of an accounting period,deferral.quires the use of an adjusting processsome of the amounts listed on theSome revenues and expenses re-at the end of the accounting periodtrial balance are not necessarily cur-lated to a period may not be recordedto match revenues and expensesrent balances. For example, amountsat the end of the period, since theseproperly. Revenues are reported inlisted for prepaid expenses are nor-items are normally recorded onlythe period in which they are earned,mally overstated because the use ofwhen cash has been received orand expenses are matched with thethese assets has not been recordedpaid. A revenue or expense that hasrevenues they generate.on a daily basis. A delay in recog-not been paid or recorded is calledan accrual.66124_c03_101-138.qxd 11/10/03 8:08 PM Page 119Chapter 3 • The Matching Concept and the Adjusting Process119The entries required at the end ofexpenses, deferred (unearned) rev-an accounting period to bring ac-enues, accrued expenses (accruedcounts up to date and to ensure theliabilities), and accrued revenues5Use vertical analysis to com-pare financial statement itemswith each other and with in-proper matching of revenues and ex-(accrued assets). In addition, the ad-dustry averages.penses are called adjusting entries.justing entry necessary to record de-Comparing each item in a currentAdjusting entries require a debit or apreciation on fixed assets wasstatement with a total amount withincredit to a revenue or an expense ac-illustrated.the same statement is called verticalcount and an offsetting debit or creditanalysis. In vertical analysis of a bal-to an asset or a liability account.ance sheet, each asset item is statedAdjusting entries affect amounts4Summarize the adjustmentprocess and prepare an ad-as a percent of the total assets. Eachreported in the income statementjusted trial balance.and the balance sheet. Thus, if anA summary of adjustments, includingliability and owner’s equity item isadjusting entry is not recorded, thesethe type of adjustment, the adjustingstated as a percent of the total lia-financial statements will be incorrectentry, and the effect of omitting anbilities and owner’s equity. In verti-(misstated).adjustment on the financial state-cal analysis of an income statement,each item is stated as a percent of3ments, is shown in Exhibit 5. AfterJournalize entries for accountsall the adjusting entries have beenrevenues or fees earned.requiring adjustment.posted, the equality of the total debitAdjusting entries illustrated in thisbalances and total credit balances ischapter include deferred (prepaid)verified by an adjusted trial balance.Key Termsaccounting period concept(102)adjusting entries(103)depreciation expense(112)accrual basis(102)adjusting process(103)fixed assets(112)accruals(103)book value of the asset(112)matching concept(102)accrued assets(104)cash basis(102)prepaid expenses(103)accrued expenses(103)contra account(112)revenue recognition concept(102)accrued liabilities(103)deferrals(103)unearned revenues(103)accrued revenues(104)deferred expenses(103)vertical analysis(116)accumulated depreciation(112)deferred revenues(103)adjusted trial balance(113)depreciation(112)Illustrative ProblemThree years ago, T. Roderick organized Harbor Realty. At July 31, 2006, the end ofthe current year, the unadjusted trial balance of Harbor Realty appears as shown atthe top of the following page. The data needed to determine year-end adjustmentsare as follows:a.Supplies on hand at July 31, 2006, 380.b.Insurance premiums expired during the year, $315.c.Depreciation of equipment during the year, $4,950.d.Wages accrued but not paid at July 31, 2006, $440.e.Accrued fees earned but not recorded at July 31, 2006, $1,000.f.Unearned fees on July 31, 2006, $750.Instructions1.Prepare the necessary adjusting journal entries.2.Determine the balance of the accounts affected by the adjusting entries and pre-pare an adjusted trial balance.66124_c03_101-138.qxd 11/10/03 8:08 PM Page 120120Chapter 3 • The Matching Concept and the Adjusting ProcessHarbor RealtyTrial BalanceJuly 31, 2006Cash3 4 2 5 00Accounts Receivable 7 0 0 0 00Supplies 1 2 7 0 00Prepaid Insurance6 2 0 00Office Equipment51 6 5 0 00Accumulated Depreciation9 7 0 0 00Accounts Payable 9 2 5 00Wages Payable 0 00Unearned Fees 1 2 5 0 00T. Roderick, Capital29 0 0 0 00T. Roderick, Drawing5 2 0 0 00Fees Earned 59 1 2 5 00Wages Expense22 4 1 5 00Depreciation Expense 0 00Rent Expense 4 2 0 0 00Utilities Expense 2 7 1 5 00Supplies Expense 0 00Insurance Expense0 00Miscellaneous Expense1 5 0 5 00 100 0 0 0 00100 0 0 0 00Solution1.JOURNALPost.DateDescriptionRef.DebitCredit1 July200631 Supplies Expense8 9 0 001 2 Supplies8 9 0 002 3 3 4 31 Insurance Expense3 1 5 004 5 Prepaid Insurance3 1 5 005 6 6 7 31 Depreciation Expense4 9 5 0 007 8 Accumulated Depreciation4 9 5 0 008 9 9 10 31 Wages Expense4 4 0 0010 11 Wages Payable4 4 0 0011 12 12 13 31 Accounts Receivable1 0 0 0 0013 14 Fees Earned1 0 0 0 0014 15 15 16 31Unearned Fees5 0 0 0016 17 Fees Earned5 0 0 0017 66124_c03_101-138.qxd 11/10/03 8:09 PM Page 121Chapter 3 • The Matching Concept and the Adjusting Process1212.Harbor RealtyAdjusted Trial BalanceJuly 31, 2006Cash3 4 2 5 00Accounts Receivable 8 0 0 0 00Supplies 3 8 0 00Prepaid Insurance3 0 5 00Office Equipment51 6 5 0 00Accumulated Depreciation14 6 5 0 00Accounts Payable 9 2 5 00Wages Payable 4 4 0 00Unearned Fees 7 5 0 00T. Roderick, Capital29 0 0 0 00T. Roderick, Drawing5 2 0 0 00Fees Earned 60 6 2 5 00Wages Expense22 8 5 5 00Depreciation Expense 4 9 5 0 00Rent Expense 4 2 0 0 00Utilities Expense 2 7 1 5 00Supplies Expense 8 9 0 00Insurance Expense3 1 5 00Miscellaneous Expense1 5 0 5 00106 3 9 0 00106 3 9 0 00Self-Examination Questions(Answers at End of Chapter)1.Which of the following items represents a deferral?during December, the effect on the balance sheetA.Prepaid insuranceand income statement for December is:B.Wages payableA.assets understated $600; net income overstatedC.Fees earned$600.D.Accumulated depreciationB.liabilities understated $600; net income under-2.If the supplies account, before adjustment on Maystated $600.31, indicated a balance of $2,250, and supplies onC.liabilities overstated $600; net income under-hand at May 31 totaled $950, the adjusting entrystated $600.would be:D.liabilities overstated $600; net income overstatedA.debit Supplies, $950; credit Supplies Expense,$600.$950.4.If the estimated amount of depreciation on equip-B.debit Supplies, $1,300; credit Supplies Expense,ment for a period is $2,000, the adjusting entry to$1,300.record depreciation would be:C.debit Supplies Expense, $950; credit Supplies,A.debit Depreciation Expense, $2,000; credit Equip-$950.ment, $2,000.D.debit Supplies Expense, $1,300; credit Supplies,B.debit Equipment, $2,000; credit Depreciation Ex-$1,300.pense, $2,000.3.The balance in the unearned rent account for JonesC.debit Depreciation Expense, $2,000; credit Accu-Co. as of December 31 is $1,200. If Jones Co. failedmulated Depreciation, $2,000.to record the adjusting entry for $600 of rent earnedD.debit Accumulated Depreciation, $2,000; creditDepreciation Expense, $2,000.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 122122Chapter 3 • The Matching Concept and the Adjusting Process5.If the equipment account has a balance of $22,500and its accumulated depreciation account has abalance of $14,000, the book value of the equip-ment is:A.$36,500.B.$22,500.C.$14,000.D.$8,500.Class Discussion Questions1.How are revenues and expenses reported on the income statement under (a)the cash basis of accounting and (b) the accrual basis of accounting?2.Fees for services provided are billed to a customer during 2005. The customerremits the amount owed in 2006. During which year would the revenues be re-ported on the income statement under (a) the cash basis? (b) the accrual basis?3.Employees performed services in 2005, but the wages were not paid until 2006.During which year would the wages expense be reported on the income state-ment under (a) the cash basis? (b) the accrual basis?4.Is the matching concept related to (a) the cash basis of accounting or (b) theaccrual basis of accounting?5.Is the balance listed for cash on the trial balance, before the accounts have beenadjusted, the amount that should normally be reported on the balance sheet?Explain.6.Is the balance listed for supplies on the trial balance, before the accounts havebeen adjusted, the amount that should normally be reported on the balancesheet? Explain.7.Why are adjusting entries needed at the end of an accounting period?8.What is the difference between adjusting entriesand correcting entries?9.Identify the five different categories of adjusting entries frequently required atthe end of an accounting period.10.If the effect of the credit portion of an adjusting entry is to increase the balanceof a liability account, which of the following statements describes the effect ofthe debit portion of the entry?a.Increases the balance of a revenue account.b.Increases the balance of an expense account.c.Increases the balance of an asset account.11.If the effect of the debit portion of an adjusting entry is to increase the balanceof an asset account, which of the following statements describes the effect ofthe credit portion of the entry?a.Increases the balance of a revenue account.b.Increases the balance of an expense account.c.Increases the balance of a liability account.12.Does every adjusting entry have an effect on determining the amount of net in-come for a period? Explain.13.What is the nature of the balance in the prepaid insurance account at the endof the accounting period (a) before adjustment? (b) after adjustment?14.On August 1 of the current year, a business paid the August rent on the build-ing that it occupies. (a) Do the rights acquired at August 1 represent an assetor an expense? (b) What is the justification for debiting Rent Expense at the timeof payment?15.(a) Explain the purpose of the two accounts: Depreciation Expense and Accu-mulated Depreciation. (b) What is the normal balance of each account? (c) Is itcustomary for the balances of the two accounts to be equal in amount? (d) Inwhat financial statements, if any, will each account appear?66124_c03_101-138.qxd 11/10/03 8:09 PM Page 123Chapter 3 • The Matching Concept and the Adjusting Process123Remember! If you need additional help, visit South-Western’s Website. See page 28 for a description of the online and printed materialsthat are available. http://warren.swlearning.comAnswer:Procter & GambleExercisesEXERCISE 3-1Classify the following items as (a) deferred expense (prepaid expense), (b) deferredClassify accruals anddeferralsrevenue (unearned revenue), (c) accrued expense (accrued liability), or (d) accruedrevenue (accrued asset).Objectives 2, 31.Salary owed but not yet paid.2.Supplies on hand.3.Fees received but not yet earned.4.Fees earned but not yet received.5.Taxes owed but payable in the following period.6.Utilities owed but not yet paid.7.A two-year premium paid on a fire insurance policy.8.Subscriptions received in advance by a magazine publisher.EXERCISE 3-2The following accounts were taken from the unadjusted trial balance of Dobro Co.,Classify adjusting entriesa congressional lobbying firm. Indicate whether or not each account would normallyObjectives 2, 3require an adjusting entry. If the account normally requires an adjusting entry, usethe following notation to indicate the type of adjustment:AE—Accrued ExpenseAR—Accrued RevenueDR—Deferred RevenueDE—Deferred ExpenseTo illustrate, the answers for the first two accounts are shown below.AccountAnswerAaron Piper, Drawing . . . . . . . . . .Does not normally require adjustment.Accounts Receivable . . . . . . . . . . .Normally requires adjustment (AR).Accumulated Depreciation . . . . . . .Cash . . . . . . . . . . . . . . . . . . . . . . .Interest Payable . . . . . . . . . . . . . . .Interest Receivable . . . . . . . . . . . .Land . . . . . . . . . . . . . . . . . . . . . . .Office Equipment . . . . . . . . . . . . .Prepaid Rent . . . . . . . . . . . . . . . . .Supplies Expense . . . . . . . . . . . . . .Unearned Fees . . . . . . . . . . . . . . .Wages Expense . . . . . . . . . . . . . . .66124_c03_101-138.qxd 11/10/03 8:09 PM Page 124124Chapter 3 • The Matching Concept and the Adjusting ProcessEXERCISE 3-3Adjusting entry for suppliesObjective 3EXERCISE 3-4Determine suppliespurchasedObjective 3EXERCISE 3-5Effect of omitting adjustingentryObjective 3EXERCISE 3-6Adjusting entries forprepaid insuranceObjective 3EXERCISE 3-7Adjusting entries forprepaid insuranceObjective 3EXERCISE 3-8Adjusting entries forunearned feesObjective 3Amount of entry: $9,570EXERCISE 3-9Effect of omitting adjustingentryObjective 3EXERCISE 3-10Adjusting entries foraccrued salariesObjective 3a. Amount of entry: $9,360EXERCISE 3-11Determine wages paidObjective 3The balance in the supplies account, before adjustment at the end of the year, is$1,175. Journalize the adjusting entry required if the amount of supplies on hand atthe end of the year is $374.The supplies and supplies expense accounts at December 31, after adjusting entrieshave been posted at the end of the first year of operations, are shown in the fol-lowing T accounts:SuppliesSupplies ExpenseBal.118Bal.949Determine the amount of supplies purchased during the year.At December 31, the end of the first month of operations, the usual adjusting entrytransferring prepaid insurance expired to an expense account is omitted. Which itemswill be incorrectly stated, because of the error, on (a) the income statement for De-cember and (b) the balance sheet as of December 31? Also indicate whether theitems in error will be overstated or understated.The balance in the prepaid insurance account, before adjustment at the end of theyear, is $2,475. Journalize the adjusting entry required under each of the followingalternativesfor determining the amount of the adjustment: (a) the amount of in-surance expired during the year is $1,215; (b) the amount of unexpired insuranceapplicable to future periods is $1,260.The prepaid insurance account had a balance of $5,600 at the beginning of theyear. The account was debited for $1,800 for premiums on policies purchased dur-ing the year. Journalize the adjusting entry required at the end of the year for eachof the following situations: (a) the amount of unexpired insurance applicable tofuture periods is $3,680; (b) the amount of insurance expired during the year is$3,720.The balance in the unearned fees account, before adjustment at the end of the year,is $21,880. Journalize the adjusting entry required if the amount of unearned fees atthe end of the year is $12,310.At the end of July, the first month of the business year, the usual adjusting entrytransferring rent earned to a revenue account from the unearned rent account wasomitted. Indicate which items will be incorrectly stated, because of the error, on (a)the income statement for July and (b) the balance sheet as of July 31. Also indicatewhether the items in error will be overstated or understated.Xenon Realty Co. pays weekly salaries of $15,600 on Friday for a five-day week end-ing on that day. Journalize the necessary adjusting entry at the end of the account-ing period, assuming that the period ends (a) on Wednesday, (b) on Thursday.The wages payable and wages expense accounts at August 31, after adjusting en-tries have been posted at the end of the first month of operations, are shown in thefollowing T accounts:Wages PayableWages ExpenseBal.3,150Bal.63,000Determine the amount of wages paid during the month.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 125EXERCISE 3-12Effect of omitting adjustingentryObjective 3EXERCISE 3-13Effect of omitting adjustingentryObjective 3EXERCISE 3-14Adjusting entries forprepaid and accrued taxesObjective 3b. $9,695EXERCISE 3-15Effects of errors onfinancial statementsObjective 3EXERCISE 3-16Effects of errors onfinancial statementsObjective 3EXERCISE 3-17Effects of errors onfinancial statementsObjective 31. a. Revenueunderstated, $6,900Chapter 3 • The Matching Concept and the Adjusting Process125Accrued salaries of $1,590 owed to employees for December 30 and 31 are not con-sidered in preparing the financial statements for the year ended December 31. In-dicate which items will be erroneously stated, because of the error, on (a) the incomestatement for the year and (b) the balance sheet as of December 31. Also indicatewhether the items in error will be overstated or understated.Assume that the error in Exercise 3-12 was not corrected and that the $1,590 of ac-crued salaries was included in the first salary payment in January. Indicate whichitems will be erroneously stated, because of failure to correct the initial error, on(a) the income statement for the month of January and (b) the balance sheet as ofJanuary 31.Titanium Financial Services was organized on April 1 of the current year. On April2, Titanium prepaid $1,260 to the city for taxes (license fees) for the next12 monthsand debited the prepaid taxes account. Titanium is also required to pay in Januaryan annual tax (on property) for the previouscalendar year. The estimated amountof the property tax for the current year (April 1 to December 31) is $8,750. (a) Jour-nalize the two adjusting entries required to bring the accounts affected by the twotaxes up to date as of December 31, the end of the current year. (b) What is theamount of tax expense for the current year?For a recent period, Circuit City Storesreported accrued expenses and other cur-rent liabilities of $128,776,000. For the same period, Circuit City reported earningsof $67,040,000 before income taxes. If accrued expenses and other current liabilitieshad not been recorded, what would have been the earnings (loss) before incometaxes?The balance sheet for The Campbell Soup Co.as of July 31, 2002, includes ac-crued liabilities of $503,000,000. The income before taxes for The Campbell SoupCo. for the year ended July 28, 2002, was $798,000,000. (a) If the accruals had notbeen recorded at July 28, 2002, by how much would income before taxes have beenmisstated for the fiscal year ended July 28, 2002? (b) What is the percentage of themisstatement in (a) to the reported income of $798,000,000?The accountant for Glacier Medical Co., a medical services consulting firm, mistak-enly omitted adjusting entries for (a) unearned revenue earned during the year($6,900) and (b) accrued wages ($3,740). Indicate the effect of each error, consid-ered individually, on the income statement for the current year ended December 31.Also indicate the effect of each error on the December 31 balance sheet. Set up atable similar to the following, and record your answers by inserting the dollar amountin the appropriate spaces. Insert a zero if the error does not affect the item.Error (a)Error (b)Over-Under-Over-Under-statedstatedstatedstated1. Revenue for the year would be$$$$2. Expenses for the year would be$$$$3. Net income for the year would be$$$$(continued)66124_c03_101-138.qxd 11/10/03 8:09 PM Page 126126Chapter 3 • The Matching Concept and the Adjusting ProcessEXERCISE 3-18Effects of errors onfinancial statementsObjective 3EXERCISE 3-19Adjusting entry for accruedfeesObjective 3EXERCISE 3-20Adjusting entries forunearned and accrued feesObjective 3EXERCISE 3-21Effect on financialstatements of omittingadjusting entryObjective 3EXERCISE 3-22Adjustment fordepreciationObjective 3EXERCISE 3-23Determine fixed asset’sbook valueObjective 3EXERCISE 3-24Book value of fixed assetsObjective 3EXERCISE 3-25Adjusting entries fordepreciation; effect of errorObjective 3Error (a)Error (b)Over-Under-Over-Under-statedstatedstatedstated4. Assets at December 31 would be$$$$5. Liabilities at December 31 would be$$$$6. Owner’s equity at December 31 would be$$$$If the net income for the current year had been $172,680 in Exercise 3-17, whatwould be the correct net income if the proper adjusting entries had been made?At the end of the current year, $11,500 of fees have been earned but have not beenbilled to clients.a.Journalize the adjusting entry to record the accrued fees.b.If the cash basis rather than the accrual basis had been used, would an adjust-ing entry have been necessary? Explain.The balance in the unearned fees account, before adjustment at the end of the year,is $27,600. Of these fees, $8,100 have been earned. In addition, $6,450 of fees havebeen earned but have not been billed. Journalize the adjusting entries (a) to adjustthe unearned fees account and (b) to record the accrued fees.The adjusting entry for accrued fees was omitted at December 31, the end of the cur-rent year. Indicate which items will be in error, because of the omission, on (a) theincome statement for the current year and (b) the balance sheet as of December 31.Also indicate whether the items in error will be overstated or understated.The estimated amount of depreciation on equipment for the current year is $5,200.Journalize the adjusting entry to record the depreciation.The balance in the equipment account is $318,500, and the balance in the accu-mulated depreciation—equipment account is $113,900.a.What is the book value of the equipment?b.Does the balance in the accumulated depreciation account mean that the equip-ment’s loss of value is $113,900? Explain.Microsoft Corporationreported Property, Plant, and Equipmentof $5,1 millionand Accumulated Depreciationof $3,623 million at June 30, 2002.a.What was the book value of the fixed assets at June 30, 2002?b.Would the book value of Microsoft Corporation’s fixed assets normally approxi-mate their fair market values?On December 31, a business estimates depreciation on equipment used during thefirst year of operations to be $7,500. (a) Journalize the adjusting entry required asof December 31. (b) If the adjusting entry in (a) were omitted, which items wouldbe erroneously stated on (1) the income statement for the year and (2) the balancesheet as of December 31?66124_c03_101-138.qxd 11/10/03 8:09 PM Page 127EXERCISE 3-26Adjusting entries from trialbalancesObjectives 3, 4EXERCISE 3-27Adjusting entries from trialbalancesObjectives 3, 4Corrected trial balancetotals, $168,450Chapter 3 • The Matching Concept and the Adjusting Process127The unadjusted and adjusted trial balances for Aleutian Services Co. on December31, 2006, are shown below.Aleutian Services Co.Trial BalanceDecember 31, 2006UnadjustedAdjustedCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1616Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3842Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .129Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2012Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2626Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4040Accumulated Depreciation—Equipment . . . . . . . . . . . . . . .813Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2626Wages Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .01Brian Stuart, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9292Brian Stuart, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7478Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2425Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .88Insurance Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .08Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Depreciation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . .05Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .03Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . .44Totals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200200210210Journalize the five entries that adjusted the accounts at December 31, 2006. Noneof the accounts were affected by more than one adjusting entry.The accountant for Minaret Laundry prepared the following unadjusted and ad-justed trial balances. Assume that all balances in the unadjusted trial balance andthe amounts of the adjustments are correct. Identify the errors in the accountant’sadjusting entries.Minaret LaundryTrial BalanceMay 31, 2006UnadjustedAdjustedCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,5002,500Accounts Receivable . . . . . . . . . . . . . . . . .7,5009,500Laundry Supplies . . . . . . . . . . . . . . . . . . . .1,7502,850Prepaid Insurance* . . . . . . . . . . . . . . . . . .2,8251,125Laundry Equipment . . . . . . . . . . . . . . . . . .85,60080,000Accumulated Depreciation . . . . . . . . . . . . .55,70055,700Accounts Payable . . . . . . . . . . . . . . . . . . .4,9504,950Wages Payable . . . . . . . . . . . . . . . . . . . . .850Troy Jobe, Capital . . . . . . . . . . . . . . . . . . .32,45032,450Troy Jobe, Drawing . . . . . . . . . . . . . . . . . .10,00010,000Laundry Revenue . . . . . . . . . . . . . . . . . . .66,90066,900Wages Expense . . . . . . . . . . . . . . . . . . . . .24,50024,500Rent Expense . . . . . . . . . . . . . . . . . . . . . .15,57515,575Utilities Expense . . . . . . . . . . . . . . . . . . . .8,5008,500Depreciation Expense . . . . . . . . . . . . . . . .5,600Laundry Supplies Expense . . . . . . . . . . . . .1,100Insurance Expense . . . . . . . . . . . . . . . . . . .700Miscellaneous Expense . . . . . . . . . . . . . . .1,2501,250160,000160,000163,200160,850*$1,700 of insurance expired during the year.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 128128Chapter 3 • The Matching Concept and the Adjusting ProcessEXERCISE 3-28The financial statements for The Home Depotare presented in Appendix E at theVertical analysis of incomestatementend of the text.Objective 5a.Determine for Home Depot:1.The amount of the change (in millions) and percent of change in net earnings(net income) for the year ended February 2, 2003.2.The percentage relationship between net earnings (net income) and net sales(net earnings divided by net sales) for the years ended February 2, 2003 andFebruary 3, 2002.b.What conclusions can you draw from your analysis?EXERCISE 3-29The following income statement data (in thousands) for Dell Computer Corpora-Vertical analysis of incomestatementtionand Gateway Inc.were taken from their recent annual reports:Objective 5DellGatewayNet sales$35,404,000$4,171,325Cost of goods sold (expense)(29,055,000)(3,605,120)Operating expenses(3,505,000)(1,077,447)Operating income (loss)$2,844,000$(511,242)a.Prepare a vertical analysis of the income statement for Dell.b.Prepare a vertical analysis of the income statement for Gateway.c.Based upon (a) and (b), how does Dell compare to Gateway?Problems Series APROBLEM 3-1AOn August 31, 2006, the following data were accumulated to assist the accountantAdjusting entriesin preparing the adjusting entries for Osage Realty:Objective 3a.Fees accrued but unbilled at August 31 are $7,100.b.The supplies account balance on August 31 is $3,010. The supplies on hand atAugust 31 are $1,150.c.Wages accrued but not paid at August 31 are $1,380.d.The unearned rent account balance at August 31 is $4,950, representing the re-ceipt of an advance payment on August 1 of three months’ rent from tenants.e.Depreciation of office equipment is $1,120.Instructions1.Journalize the adjusting entries required at August 31, 2006.2.Briefly explain the difference between adjusting entries and entries that would bemade to correct errors.PROBLEM 3-2ASelected account balances before adjustment for Flanders Realty at March 31, 2006,Adjusting entriesthe end of the current year, are as follows:Objective 3DebitsCreditsDebitsCreditsAccounts Receivable$28,250Unearned Fees$4,800Supplies1,770Fees Earned170,850Prepaid Rent15,500Wages Expense$69,750Equipment80,500Rent Expense—Accumulated Depreciation$16,900Depreciation Expense—Wages Payable—Supplies Expense—66124_c03_101-138.qxd 11/10/03 8:09 PM Page 129PROBLEM 3-3AAdjusting entriesObjective 3PROBLEM 3-4AAdjusting entriesObjectives 3, 4Chapter 3 • The Matching Concept and the Adjusting Process129Data needed for year-end adjustments are as follows:a.Supplies on hand at March 31, $350.b.Depreciation of equipment during year, $1,450.c.Rent expired during year, $9,500.d.Wages accrued but not paid at March 31, $1,050.e.Unearned fees at March 31, $1,200.f.Unbilled fees at March 31, $7,100.InstructionsJournalize the six adjusting entries required at March 31, based upon the data pre-sented.Wild Trout Co., an outfitter store for fishing treks, prepared the following trial bal-ance at the end of its first year of operations:Wild Trout Co.Trial BalanceNovember 30, 2006Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,610Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,900Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,820Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .27,860Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,050Unearned Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,800Angie Sanders, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37,800Angie Sanders, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,400Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .51,450Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28,210Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13,790Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,250Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,26093,10093,100For preparing the adjusting entries, the following data were assembled:a.Supplies on hand on November 30 were $315.b.Fees earned but unbilled on November 30 were $1,750.c.Depreciation of equipment was estimated to be $1,600 for the year.d.Unpaid wages accrued on November 30 were $380.e.The balance in unearned fees represented the November 1 receipt in advancefor services to be provided. Only $700 of the services were provided betweenNovember 1 and November 30.InstructionsJournalize the adjusting entries necessary on November 30.Dynamo Company specializes in the maintenance and repair of signs, such as bill-boards. On March 31, 2006, the accountant for Dynamo Company prepared the trialbalances shown at the top of the next page.InstructionsJournalize the seven entries that adjusted the accounts at March 31. None of the ac-counts were affected by more than one adjusting entry.(continued)66124_c03_101-138.qxd 11/10/03 8:09 PM Page 130130Chapter 3 • The Matching Concept and the Adjusting ProcessPROBLEM 3-5AAdjusting entries andadjusted trial balancesObjectives 3, 42. Total of Debit Column:$552,520Dynamo CompanyTrial BalanceMarch 31, 2006UnadjustedAdjustedCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,7504,750Accounts Receivable . . . . . . . . . . . . . . . . . . .17,40017,400Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,8801,175Prepaid Insurance . . . . . . . . . . . . . . . . . . . . .4,8003,200Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47,50047,500Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . .111,590111,590Accumulated Depreciation—Buildings . . . . . .56,60060,700Trucks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73,00073,000Accumulated Depreciation—Trucks . . . . . . . .11,80020,300Accounts Payable . . . . . . . . . . . . . . . . . . . . .6,9207,435Salaries Payable . . . . . . . . . . . . . . . . . . . . . .—1,080Unearned Service Fees . . . . . . . . . . . . . . . . .6,4004,750Joy Autry, Capital . . . . . . . . . . . . . . . . . . . . .125,600125,600Joy Autry, Drawing . . . . . . . . . . . . . . . . . . . .5,0005,000Service Fees Earned . . . . . . . . . . . . . . . . . . . .152,680154,330Salary Expense . . . . . . . . . . . . . . . . . . . . . . .73,60074,680Depreciation Expense—Trucks . . . . . . . . . . . .—8,500Rent Expense . . . . . . . . . . . . . . . . . . . . . . . .9,6009,600Supplies Expense . . . . . . . . . . . . . . . . . . . . . .—2,705Utilities Expense . . . . . . . . . . . . . . . . . . . . . .6,2006,715Depreciation Expense—Buildings . . . . . . . . . .—4,100Taxes Expense . . . . . . . . . . . . . . . . . . . . . . . .1,7201,720Insurance Expense . . . . . . . . . . . . . . . . . . . . .—1,600Miscellaneous Expense . . . . . . . . . . . . . . . . .960960360,000360,000374,195374,195Greco Service Co., which specializes in appliance repair services, is owned and op-erated by Curtis Loomis. Greco Service Co.’s accounting clerk prepared the follow-ing trial balance at December 31, 2006:Greco Service Co.Trial BalanceDecember 31, 2006Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,200Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20,600Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,000Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,450Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .100,000Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .161,500Accumulated Depreciation—Building . . . . . . . . . . . . . . . . . . . . . . . . . .75,700Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .80,100Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . .35,300Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,500Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,200Curtis Loomis, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .157,100Curtis Loomis, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,000Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .257,200Salaries and Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .101,800Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28,200Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000Repairs Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12,100Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,050540,000540,000The data needed to determine year-end adjustments are as follows:a.Depreciation of building for the year, $3,600.b.Depreciation of equipment for the year, $2,400.c.Accrued salaries and wages at December 31, $2,170.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 131Chapter 3 • The Matching Concept and the Adjusting Process131d.Unexpired insurance at December 31, $3,500.e.Fees earned but unbilled on December 31, $4,350.f.Supplies on hand at December 31, $375.g.Rent unearned at December 31, $2,800.Instructions1.Journalize the adjusting entries. Add additional accounts as needed.2.Determine the balances of the accounts affected by the adjusting entries and pre-pare an adjusted trial balance.PROBLEM 3-6AAt the end of July, the first month of operations, the following selected data wereAdjusting entries and errorstaken from the financial statements of Kay Lopez, an attorney:Objective 3Net income for July$124,350Total assets at July 31500,000Total liabilities at July 31125,000Total owner’s equity at July 31375,000Corrected Net Income:In preparing the financial statements, adjustments for the following data were over-$127,900looked:a.Unbilled fees earned at July 31, $9,600.b.Depreciation of equipment for July, $3,500.c.Accrued wages at July 31, $1,450.d.Supplies used during July, $1,100.Instructions1.Journalize the entries to record the omitted adjustments.2.Determine the correct amount of net income for July and the total assets, liabil-ities, and owner’s equity at July 31. In addition to indicating the corrected amounts,indicate the effect of each omitted adjustment by setting up and completing a colum-nar table similar to the following. Adjustment (a) is presented as an example.NetTotalTotalTotalIncomeAssetsLiabilitiesOwner’s EquityReported amounts$124,350$500,000$125,000$375,000Corrections:Adjustment (a)ϩ9,600ϩ9,6000ϩ9,600Adjustment (b)Adjustment (c)Adjustment (d)Corrected amountsProblems Series BPROBLEM 3-1BOn October 31, 2006, the following data were accumulated to assist the accountantAdjusting entriesin preparing the adjusting entries for Melville Realty:Objective 3a.The supplies account balance on October 31 is $1,875. The supplies on hand onOctober 31 are $310.b.The unearned rent account balance on October 31 is $4,020, representing the re-ceipt of an advance payment on October 1 of three months’ rent from tenants.c.Wages accrued but not paid at October 31 are $2,150.d.Fees accrued but unbilled at October 31 are $11,278.e.Depreciation of office equipment is $1,000.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 132132Chapter 3 • The Matching Concept and the Adjusting ProcessPROBLEM 3-2BAdjusting entriesObjective 3PROBLEM 3-3BAdjusting entriesObjective 3Instructions1.Journalize the adjusting entries required at October 31, 2006.2.Briefly explain the difference between adjusting entries and entries that would bemade to correct errors.Selected account balances before adjustment for Maltese Realty at May 31, 2006, theend of the current year, are as follows:DebitsCreditsDebitsCreditsAccounts Receivable$11,250Unearned Fees$6,500Supplies1,750Fees Earned117,950Prepaid Rent7,500Wages Expense$59,400Equipment52,500Rent Expense—Accumulated Depreciation$8,900Depreciation Expense—Wages Payable—Supplies Expense—Data needed for year-end adjustments are as follows:a.Unbilled fees at May 31, $1,150.b.Supplies on hand at May 31, $360.c.Rent expired $6,000.d.Depreciation of equipment during year, $1,650.e.Unearned fees at May 31, $1,775.f.Wages accrued but not paid at May 31, $2,180.InstructionsJournalize the six adjusting entries required at May 31, based upon the data presented.Anguilla Company, an electronics repair store, prepared the following trial balanceat the end of its first year of operations:Anguilla CompanyTrial BalanceApril 30, 2006Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,300Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,000Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,600Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75,800Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,500Unearned Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,000Oscar Daly, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52,000Oscar Daly, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,000Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90,500Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21,000Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16,000Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,500Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,800150,000150,000For preparing the adjusting entries, the following data were assembled:a.Fees earned but unbilled on April 30 were $3,200.b.Supplies on hand on April 30 were $1,010.c.Depreciation of equipment was estimated to be $3,850 for the year.d.The balance in unearned fees represented the April 1 receipt in advance for ser-vices to be provided. Only $1,000 of the services was provided between April 1and April 30.e.Unpaid wages accrued on April 30 were $820.InstructionsJournalize the adjusting entries necessary on April 30, 2006.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 133PROBLEM 3-4BAdjusting entriesObjectives 3, 4PROBLEM 3-5BAdjusting entries andadjusted trial balancesObjectives 3, 42. Total of Debit Column:$510,380Chapter 3 • The Matching Concept and the Adjusting Process133ExposeЈCompany specializes in the repair of music equipment and is owned andoperated by Gavin Staub. On June 30, 2006, the end of the current year, the ac-countant for ExposeЈCompany prepared the following trial balances:ExposeCompanyTrial BalanceJune 30, 2006UnadjustedAdjustedCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,3158,315Accounts Receivable . . . . . . . . . . . . . . . . . . . .30,50030,500Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,7501,080Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . .4,7502,200Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .92,15092,150Accumulated Depreciation—Equipment . . . . . .33,48040,500Automobiles . . . . . . . . . . . . . . . . . . . . . . . . . .36,50036,500Accumulated Depreciation—Automobiles . . . .18,25021,900Accounts Payable . . . . . . . . . . . . . . . . . . . . . .8,3108,730Salaries Payable . . . . . . . . . . . . . . . . . . . . . . . .—1,560Unearned Service Fees . . . . . . . . . . . . . . . . . . .6,0004,000Gavin Staub, Capital . . . . . . . . . . . . . . . . . . . .69,36069,360Gavin Staub, Drawing . . . . . . . . . . . . . . . . . . .5,0005,000Service Fees Earned . . . . . . . . . . . . . . . . . . . . .244,600246,600Salary Expense . . . . . . . . . . . . . . . . . . . . . . . .172,300173,860Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . .18,00018,000Supplies Expense . . . . . . . . . . . . . . . . . . . . . . .—2,670Depreciation Expense—Equipment . . . . . . . . . .—7,020Depreciation Expense—Automobiles . . . . . . . .—3,650Utilities Expense . . . . . . . . . . . . . . . . . . . . . . .4,3004,720Taxes Expense . . . . . . . . . . . . . . . . . . . . . . . . .2,7252,725Insurance Expense . . . . . . . . . . . . . . . . . . . . . .—2,550Miscellaneous Expense . . . . . . . . . . . . . . . . . .1,7101,710380,000380,000392,650392,650InstructionsJournalize the seven entries that adjusted the accounts at June 30. None of the ac-counts were affected by more than one adjusting entry.Berserk Company is a small editorial services company owned and operated by EthelPringle. On December 31, 2006, the end of the current year, Berserk Company’s ac-counting clerk prepared the trial balance shown at the top of the next page.The data needed to determine year-end adjustments are as follows:a.Unexpired insurance at December 31, $1,600.b.Supplies on hand at December 31, $280.c.Depreciation of building for the year, $1,320.d.Depreciation of equipment for the year, $4,100.e.Rent unearned at December 31, $1,500.f.Accrued salaries and wages at December 31, $1,760.g.Fees earned but unbilled on December 31, $3,200.Instructions1.Journalize the adjusting entries. Add additional accounts as needed.2.Determine the balances of the accounts affected by the adjusting entries and pre-pare an adjusted trial balance.(continued)66124_c03_101-138.qxd 11/10/03 8:09 PM Page 134134Chapter 3 • The Matching Concept and the Adjusting ProcessPROBLEM 3-6BAdjusting entries and errorsObjective 3Corrected Net Income:$209,745Berserk CompanyTrial BalanceDecember 31, 2006Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,700Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18,900Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,800Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,320Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .75,000Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .141,500Accumulated Depreciation—Building . . . . . . . . . . . . . . . . . . . . . . . . . .91,700Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .90,200Accumulated Depreciation—Equipment . . . . . . . . . . . . . . . . . . . . . . . .65,300Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8,100Unearned Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,500Ethel Pringle, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .134,000Ethel Pringle, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .196,400Salaries and Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .95,580Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28,250Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15,200Repairs Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,500Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,050500,000500,000At the end of November, the first month of operations, the following selected datawere taken from the financial statements of Jaime McCune, an attorney:Net income for November$207,320Total assets at November 30440,960Total liabilities at November 3029,720Total owner’s equity at November 30411,240In preparing the financial statements, adjustments for the following data were over-looked:a.Supplies used during November, $1,025.b.Unbilled fees earned at November 30, $7,650.c.Depreciation of equipment for November, $3,100.d.Accrued wages at November 30, $1,100.Instructions1.Journalize the entries to record the omitted adjustments.2.Determine the correct amount of net income for November and the total assets,liabilities, and owner’s equity at November 30. In addition to indicating the cor-rected amounts, indicate the effect of each omitted adjustment by setting up andcompleting a columnar table similar to the following. Adjustment (a) is presentedas an example.NetTotalTotalTotalIncomeAssetsLiabilitiesOwner’s EquityReported amounts$207,320$440,960$29,720$411,240Corrections:Adjustment (a)Ϫ1,025Ϫ1,0250Ϫ1,025Adjustment (b)Adjustment (c)Adjustment (d)Corrected amounts66124_c03_101-138.qxd 11/10/03 8:09 PM Page 135Chapter 3 • The Matching Concept and the Adjusting Process135Continuing Problem3. Total of Debit Column:$33,190The trial balance that you prepared for Dancin Music at the end of Chapter 2 shouldappear as follows:Dancin MusicTrial BalanceMay 31, 2006Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7,330Accounts Receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,760Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .920Prepaid Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,360Office Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,000Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,750Unearned Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4,800Shannon Burns, Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10,000Shannon Burns, Drawing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,250Fees Earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11,210Wages Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,800Office Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,600Equipment Rent Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,150Utilities Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .860Music Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,780Advertising Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1,300Supplies Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .180Miscellaneous Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .47031,76031,760The data needed to determine adjustments for the two-month period ending May31, 2006, are as follows:a.During May, Dancin Music provided guest disc jockeys for KPRG for a total of110 hours. For information on the amount of the accrued revenue to be billedto KPRG, see the contract described in the May 3, 2006 transaction at the end ofChapter 2.b.Supplies on hand at May 31, $170.c.The balance of the prepaid insurance account relates to the May 1, 2006 trans-action at the end of Chapter 2.d.Depreciation of the office equipment is $100.e.The balance of the unearned revenue account relates to the contract betweenDancin Music and KPRG, described in the May 3, 2006 transaction at the end ofChapter 2.f.Accrued wages as of May 31, 2006, were $130.Instructions1.Prepare adjusting journal entries. You will need the following additional accounts:18 Accumulated Depreciation—Office Equipment22 Wages Payable57 Insurance Expense58 Depreciation Expense2.Post the adjusting entries, inserting balances in the accounts affected.3.Prepare an adjusted trial balance.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 136136Chapter 3 • The Matching Concept and the Adjusting ProcessSpecial ActivitiesACTIVITY 3-1Ethics and professionalconduct in businessACTIVITY 3-2Accrued expenseACTIVITY 3-3Accrued revenueRuth Harbin opened Macaw Real Estate Co. on January 1, 2005. At the end of thefirst year, the business needed additional capital. On behalf of Macaw Real Estate,Ruth applied to First City Bank for a loan of $120,000. Based on Macaw Real Es-tate’s financial statements, which had been prepared on a cash basis, the First CityBank loan officer rejected the loan as too risky.After receiving the rejection notice, Ruth instructed her accountant to prepare thefinancial statements on an accrual basis. These statements included $41,500 in ac-counts receivable and $13,200 in accounts payable. Ruth then instructed her ac-countant to record an additional $12,500 of accounts receivable for commissions onproperty for which a contract had been signed on December 28, 2005, but whichwould not be formally “closed” and the title transferred until January 20, 2006.Ruth then applied for a $120,000 loan from Second National Bank, using the re-vised financial statements. On this application, Ruth indicated that she had not pre-viously been rejected for credit.Discuss the ethical and professional conduct of Ruth Harbin in applying for theloan from Second National Bank.On December 30, 2006, you buy a Ford Expedition. It comes with a three-year,36,000-mile warranty. On January 18, 2007, you return the Expedition to the deal-ership for some basic repairs covered under the warranty. The cost of the repairsto the dealership is $725. In what year, 2006 or 2007, should Ford Motor Co.rec-ognize the cost of the warranty repairs as an expense?The following is an excerpt from a conversation between Nathan Cisneros and SonyaLucas just before they boarded a flight to Paris on American Airlines. They aregoing to Paris to attend their company’s annual sales conference.Nathan:Sonya, aren’t you taking an introductory accounting course at college?Sonya:Yes, I decided it’s about time I learned something about accounting. Youknow, our annual bonuses are based upon the sales figures that come fromthe accounting department.Nathan:I guess I never really thought about it.Sonya:You should think about it! Last year, I placed a $300,000 order on Decem-ber 27. But when I got my bonus, the $300,000 sale wasn’t included. Theysaid it hadn’t been shipped until January 5, so it would have to count in nextyear’s bonus.Nathan:A real bummer!Sonya:Right! I was counting on that bonus including the $300,000 sale.Nathan:Did you complain?Sonya:Yes, but it didn’t do any good. Beth, the head accountant, said somethingabout matching revenues and expenses. Also, something about not recordingrevenues until the sale is final. I figure I’d take the accounting course andfind out whether she’s just jerking me around.Nathan:I never really thought about it. When do you think American Airlineswill record its revenues from this flight?Sonya:Mmm . . . I guess it could record the revenue when it sells the ticket . . .or . . . when the boarding passes are taken at the door . . . or . . . when weget off the plane . . . or when our company pays for the tickets . . . or . . . Idon’t know. I’ll ask my accounting instructor.66124_c03_101-138.qxd 11/10/03 8:09 PM Page 137ACTIVITY 3-4Adjustments and financialstatementsACTIVITY 3-5Codes of ethicsChapter 3 • The Matching Concept and the Adjusting Process137Discuss when American Airlines should recognize the revenue from ticket sales toproperly match revenues and expenses.Several years ago, your brother opened Chestnut Television Repair. He made a smallinitial investment and added money from his personal bank account as needed. Hewithdrew money for living expenses at irregular intervals. As the business grew, hehired an assistant. He is now considering adding more employees, purchasing ad-ditional service trucks, and purchasing the building he now rents. To secure fundsfor the expansion, your brother submitted a loan application to the bank and in-cluded the most recent financial statements (shown below) prepared from accountsmaintained by a part-time bookkeeper.Chestnut Television RepairIncome StatementFor the Year Ended August 31, 2006Service revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$83,280Less: Rent paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$20,000Wages paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18,500Supplies paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5,100Utilities paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3,175Insurance paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,400Miscellaneous payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2,15051,325Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$31,955Chestnut Television RepairBalance SheetAugust 31, 2006AssetsCash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$11,150Amounts due from customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6,100Truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .30,000Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$47,250EquitiesOwner’s capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$47,250After reviewing the financial statements, the loan officer at the bank asked yourbrother if he used the accrual basis of accounting for revenues and expenses. Yourbrother responded that he did and that is why he included an account for “AmountsDue from Customers.” The loan officer then asked whether or not the accounts wereadjusted prior to the preparation of the statements. Your brother answered that theyhad not been adjusted.a.Why do you think the loan officer suspected that the accounts had not been ad-justed prior to the preparation of the statements?b.Indicate possible accounts that might need to be adjusted before an accurate setof financial statements could be prepared.Obtain a copy of your college or university’s student code of conduct. In groups ofthree or four, answer the following question.1.Compare this code of conduct with the accountant’s Codes of Professional Con-duct, which is linked to the text Web site at http://warren.swlearning.com.2.One of your classmates asks you for permission to copy your homework, whichyour instructor will be collecting and grading for part of your overall term grade.Although your instructor has not stated whether one student may or may notcopy another student’s homework, is it ethical for you to allow your classmateto copy your homework? Is it ethical for your classmate to copy your homework?66124_c03_101-138.qxd 11/10/03 8:09 PM Page 138138Chapter 3 • The Matching Concept and the Adjusting ProcessACTIVITY 3-6Assume that you and two friends are debating whether to open an automotive andBusiness strategyservice retail chain that will be called Auto-Mart. Initially, Auto-Mart will open threestores locally, but the business plan anticipates going nationwide within five years.Currently, you and your future business partners are debating whether to focusAuto-Mart on a “do-it-yourself” or “do-it-for-me” business strategy. A “do-it-yourself”business strategy emphasizes the sale of retail auto parts that customers will usethemselves to repair and service their cars. A “do-it-for-me” business strategy em-phasizes the offering of maintenance and service for customers.1.In groups of three or four, discuss whether to implement a “do-it-yourself” or“do-it-for-me” business strategy. List the advantages of each strategy and arrive ata conclusion as to which strategy to implement.2.Provide examples of real world businesses that use “do-it-yourself” or “do-it-for-me” business strategies.Answers to Self-Examination Questions1.AA deferral is the delay in recording an expense$600, would have the effect of overstating liabili-already paid, such as prepaid insurance (answer A).ties by $600 and understating net income by $600Wages payable (answer B) is considered an accrued(answer C).expense or accrued liability. Fees earned (answer4.CSince increases in expense accounts (such asC) is a revenue item. Accumulated depreciation (an-depreciation expense) are recorded by debits andswer D) is a contra account to a fixed asset.it is customary to record the decreases in useful-2.DThe balance in the supplies account, before ad-ness of fixed assets as credits to accumulated de-justment, represents the amount of supplies avail-preciation accounts, answer C is the correct entry.able. From this amount ($2,250) is subtracted the5.DThe book value of a fixed asset is the differ-amount of supplies on hand ($950) to determineence between the balance in the asset account andthe supplies used ($1,300). Since increases in ex-the balance in the related accumulated deprecia-pense accounts are recorded by debits and de-tion account, or $22,500 Ϫ$14,000, as indicated bycreases in asset accounts are recorded by credits,answer D ($8,500).answer D is the correct entry.3.CThe failure to record the adjusting entry debit-ing unearned rent, $600, and crediting rent revenue,