SOLUTIONS TO EXERCISES—SET B

EXERCISE 3-1B

1. False. Adjusting entries are necessary to update the accounting records

to the accrual basis.
2. True.
3. True.
4. False. Accounting time periods can be any length, and are generally a
month, a quarter, or a year.
5. True.
6. False. All calendar years are fiscal years, but not all fiscal years are
calendar years. An accounting time period that is one year in length is
referred to as a fiscal year. A fiscal year that starts on January 1 and
ends on December 31 is a calendar year.

EXERCISE 3-2B

(a) Cash received from revenue ................................................... $150,000

Cash paid for expenses ............................................................ (100,000)
Cash-basis net income................................................... $ 50,000

(b) Revenues [($150,000 – $30,000) + $47,000]........................ $167,000

Expenses [($100,000 – $30,000) + $44,000] ........................ (114,000)
Accrual-basis net income.............................................. $ 53,000

EXERCISE 3-3B

1. Prepaid expense.
2. Accrued expense.
3. Accrued expense.
4. Accrued revenue.
5. Unearned revenue.
6. Prepaid expense.
7. Accrued revenue.
8. Prepaid expense.
9. Unearned revenue.
10. Prepaid expense.
11. Accrued expense.

© 2008 For Instructor Use Only 3-1

EXERCISE 3-4B

1. Interest Expense.............................................................. 750

Interest Payable ....................................................... 750
($25,000 X 12% X 3/12)

2. Supplies Expense............................................................ 1,950

Supplies...................................................................... 1,950
($2,650 – $700)

3. Depreciation Expense.................................................... 2,000

Accumulated Depreciation—Equipment ......... 2,000

4. Insurance Expense ......................................................... 1,050

Prepaid Insurance ................................................... 1,050
($2,520 X 5/12)

5. Unearned Consulting Revenue................................... 12,500

Consulting Revenue............................................... 12,500
($50,000 X 1/4)

6. Accounts Receivable ..................................................... 5,300

Consulting Revenue............................................... 5,300

7. Salaries Expense ............................................................. 4,000

Salaries Payable ...................................................... 4,000
($10,000 X 2/5)

© 2008 For Instructor Use Only 3-2

EXERCISE 3-5B

(a) (b)
Item Type of Adjustment Accounts before Adjustment
1. Prepaid Expenses Assets Overstated
Expenses Understated

2. Accrued Revenues Assets Understated

Revenues Understated

3. Unearned Revenues Liabilities Overstated

Revenues Understated

4. Accrued Expenses Expenses Understated

Liabilities Understated

5. Prepaid Expenses Assets Overstated

Expenses Understated

6. Accrued Expenses Expenses Understated

Liabilities Understated

EXERCISE 3-6B

1. Mar. 31 Depreciation Expense ($500 X 3) .................... 1,500

Accumulated Depreciation—
Equipment ................................................. 1,500

2. 31 Unearned Rent....................................................... 2,700

Rent Revenue ($10,800 X 1/4).................. 2,700

3. 31 Interest Expense ................................................... 750

Interest Payable ........................................... 750

4. 31 Supplies Expense................................................. 2,300

Supplies ($3,400 – $1,100) ........................ 2,300

5. 31 Insurance Expense ($4,200 X 3/24)................. 525

Prepaid Insurance ....................................... 525

© 2008 For Instructor Use Only 3-3

EXERCISE 3-7B

1. Jan. 31 Accounts Receivable........................................... 1,280

Service Revenue........................................... 1,280

2. 31 Utilities Expense ................................................... 365

Utilities Payable............................................ 365

3. 31 Depreciation Expense ......................................... 500

Accumulated Depreciation—
Dental Equipment.................................... 500

31 Interest Expense ................................................... 600

Interest Payable............................................ 600

4. 31 Insurance Expense ($9,600 ÷ 12)..................... 800

Prepaid Insurance........................................ 800

5. 31 Supplies Expense ($2,300 – $700)................... 1,600

Supplies .......................................................... 1,600

EXERCISE 3-8B

1. Oct. 31 Advertising Supplies Expense ......................... 1,800

Advertising Supplies .................................. 1,800
($2,500 – $700)

2. 31 Insurance Expense............................................... 75
Prepaid Insurance........................................ 75

3. 31 Depreciation Expense ......................................... 100

Accumulated Depreciation—
Office Equipment..................................... 100

4. 31 Unearned Revenue ............................................... 800

Service Revenue........................................... 800
(2/3 X $1,200)

5. 31 Accounts Receivable ........................................... 375

Service Revenue........................................... 375

© 2008 For Instructor Use Only 3-4

EXERCISE 3-8B (Continued)

6. Oct. 31 Interest Expense ............................................ 25

Interest Payable .................................... 25
($5,000 X 6% X 1/12)

7. 31 Salaries Expense ........................................... 1,050

Salaries Payable.................................... 1,050
(3 X $350)

EXERCISE 3-9B

BENNING CO.
Income Statement
For the Month Ended July 31, 2008

Revenues
Service revenue ($6,700 + $650) ................................... $7,350
Expenses
Wages expense ($2,500 + $350).................................... $2,850
Supplies expense ($1,700 – $250) ................................ 1,450
Depreciation expense....................................................... 225
Insurance expense ............................................................ 600
Utilities expense................................................................. 500
Total expenses........................................................... 5,625
Net income .................................................................................... $1,725

EXERCISE 3-10B

Answer Computation

(a) Supplies balance = $300 Supplies expense $1,100

Add: Supplies (1/31) 900
Less: Supplies purchased (1,700)
Supplies (1/1) $ 300
(b) Total premium = $6,000 Total premium = Monthly premium X 12;
$500 X 12 = $6,000

Purchase date = June 1, 2007 Purchase date: On Jan. 31, there are
4 months’ coverage remaining ($500 X 4).
Thus, the purchase date was 8 months
earlier on June 1, 2007.

© 2008 For Instructor Use Only 3-5

EXERCISE 3-10B (Continued)

(c) Salaries payable = $1,350 Cash paid $4,000

Salaries payable (1/31/08) 1,000
5,000
Less: Salaries expense 3,650
Salaries payable (12/31/07) $1,350

(d) Unearned revenue = $1,050 Service revenue $3,500

Unearned service revenue
(1/31/08) 550
4,050
Cash received in January 3,000
Unearned service revenue
(12/31/07) $1,050

EXERCISE 3-11B

(a) July 10 Supplies ................................................................... 1,500

Cash.................................................................. 1,500

14 Cash .......................................................................... 3,300

Service Revenue........................................... 3,300

15 Salaries Expense................................................... 1,400

Cash.................................................................. 1,400

20 Cash .......................................................................... 1,200

Unearned Revenue ...................................... 1,200

(b) July 31 Supplies Expense ................................................. 1,900

Supplies .......................................................... 1,900

31 Accounts Receivable........................................... 900

Service Revenue........................................... 900

31 Salaries Expense................................................... 850

Salaries Payable ........................................... 850

31 Unearned Revenue ............................................... 1,800

Service Revenue........................................... 1,800

© 2008 For Instructor Use Only 3-6

EXERCISE 3-12B

Aug. 31 Accounts Receivable............................................ 1,300

Service Revenue ........................................... 1,300

31 Office Supplies Expense ..................................... 1,900

Office Supplies .............................................. 1,900

31 Insurance Expense................................................ 1,400

Prepaid Insurance......................................... 1,400

31 Depreciation Expense .......................................... 800

Accumulated Depreciation—Office
Equipment................................................... 800

31 Salaries Expense ................................................... 1,400

Salaries Payable............................................ 1,400

31 Unearned Rent ........................................................ 1,100

Rent Revenue................................................. 1,100

EXERCISE 3-13B

VASQUEZ COMPANY
Income Statement
For the Year Ended August 31, 2008

Revenues
Service revenue.................................................................. $39,300
Rent revenue ....................................................................... 13,100
Total revenues ........................................................... 52,400
Expenses
Salaries expense................................................................ $17,400
Rent expense ...................................................................... 14,000
Office supplies expense .................................................. 1,900
Insurance expense ............................................................ 1,400
Depreciation expense....................................................... 800
Total expenses........................................................... 35,500
Net income .................................................................................... $16,900

© 2008 For Instructor Use Only 3-7

EXERCISE 3-13B (Continued)

VASQUEZ COMPANY
Retained Earnings Statement
For the Year Ended August 31, 2008

Retained earnings, September 1, 2007 .................................................. $ 4,700

Add: Net income.......................................................................................... 16,900
Retained earnings, August 31, 2008 ....................................................... $21,600

VASQUEZ COMPANY
Balance Sheet
August 31, 2008

Assets
Cash................................................................................................ $ 7,700
Accounts receivable ................................................................. 13,300
Office supplies ............................................................................ 900
Prepaid insurance...................................................................... 2,800
Office equipment........................................................................ $16,000
Less: Accum. depreciation—office equipment............... 4,800 11,200
Total assets ................................................................ $35,900

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable .............................................................. $ 2,200
Salaries payable ................................................................. 1,400
Unearned rent...................................................................... 700
Total liabilities ............................................................ 4,300
Stockholders’ equity
Common stock.................................................................... $10,000
Retained earnings.............................................................. 21,600 31,600
Total liabilities and stockholders’ equity .......... $35,900

© 2008 For Instructor Use Only 3-8

EXERCISE 3-14B

(a) 1. Cash ............................................................................... 12,000

Fees Receivable ................................................ 12,000

2. Unearned Fees............................................................ 27,000

Fees Revenue..................................................... 27,000

3. (a) Cash ...................................................................... 38,000

Unearned Fees.......................................... 38,000

(b) Unearned Fees................................................... 20,000

($38,000 – $18,000)
Fees Revenue............................................ 20,000

4. Fees Receivable ......................................................... 114,000

Fees Revenue..................................................... 114,000
($161,000 – $27,000 – $20,000)

5. Cash ............................................................................... 95,000

Fees Receivable ................................................ 95,000
($114,000 – $19,000)

(b) Cash received with respect to fees = $12,000 + $95,000 + $38,000

= $145,000

*EXERCISE 3-15B

1. Prepaid Insurance ........................................................... 2,100

Insurance Expense.................................................. 2,100
($3,600 X 7/12)

2. Consulting Revenue ....................................................... 52,000

Unearned Consulting Revenue ........................... 52,000
($65,000 X 4/5)

3. Supplies .............................................................................. 1,200

Supplies Expense.................................................... 1,200

© 2008 For Instructor Use Only 3-9

*EXERCISE 3-16B

(a) Jan. 2 Insurance Expense............................................. 2,700

Cash................................................................ 2,700

10 Supplies Expense ............................................... 2,100

Cash................................................................ 2,100

15 Cash ........................................................................ 7,000

Service Revenue......................................... 7,000

Insurance Expense Supplies Expense

1/2 2,700 1/10 2,100

Cash Service Revenue

1/15 7,000 1/2 2,700 1/15 7,000
1/10 2,100

(b) Jan. 31 Prepaid Insurance ($225 X 11 months)........ 2,475

Insurance Expense.................................... 2,475

31 Supplies ................................................................. 900

Supplies Expense ...................................... 900

31 Service Revenue ................................................. 2,500

Unearned Revenue .................................... 2,500

Insurance Expense Supplies Expense Service Revenue

1/2 2,700 1/31 2,475 1/10 2,100 1/31 900 1/31 2,500 1/15 7,000
Bal. 225 Bal. 1,200 Bal. 4,500

Prepaid Insurance Supplies Unearned Revenue

1/31 2,475 1/31 900 1/31 2,500

(c) Insurance expense.................................................................................. $ 225

Supplies expense.................................................................................... 1,200
Service revenue ....................................................................................... 4,500
Prepaid insurance................................................................................... 2,475
Supplies...................................................................................................... 900
Unearned revenue................................................................................... 2,500

© 2008 For Instructor Use Only 3-10

 SOLUTIONS TO PROBLEMS

PROBLEM 3-1C

(a)
J4
Date Account Titles Ref. Debit Credit
2008
May 31 Supplies Expense..................................... 560 900
Supplies ............................................ 130 900

31 Travel Expense .......................................... 510 250

Travel Payable................................. 210 250

31 Insurance Expense................................... 540 150

Prepaid Insurance.......................... 120 150
($3,600 ÷ 24 months)

31 Unearned Service Revenue ................... 230 1,600

Service Revenue............................. 400 1,600
($2,000 – $400)

31 Salaries Expense ...................................... 510 960

Salaries Payable ............................. 220 960
[(3/5 X $800) X 2 employees]

31 Depreciation Expense ............................. 530 170

Accumulated Depreciation—
Office Furniture .......................... 136 170
($10,200 ÷ 60 months)

31 Accounts Receivable............................... 110 1,200

Service Revenue............................. 400 1,200

(b)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
5,700

© 2008 For Instructor Use Only 3-11

PROBLEM 3-1C (Continued)

Accounts Receivable No. 110

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
6,000
31 Adjusting J4 1,200 7,200

Prepaid Insurance No. 120

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
3,600
31 Adjusting J4 150 3,450

Supplies No. 130

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
1,900
31 Adjusting J4 900 1,000

Office Furniture No. 135

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
10,200

Accumulated Depreciation—Office Furniture No. 136

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 170 170

Accounts Payable No. 200

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
4,500

© 2008 For Instructor Use Only 3-12

PROBLEM 3-1C (Continued)

Travel Payable No. 210

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 250 250

Salaries Payable No. 220

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 960 960

Unearned Service Revenue No. 230

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
2,000
31 Adjusting J4 1,600 400

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
17,700

Service Revenue No. 400

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
7,500
31 Adjusting J4 1,600 9,100
31 Adjusting J4 1,200 10,300

Salaries Expense 510

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
3,400
31 Adjusting J4 960 4,360

© 2008 For Instructor Use Only 3-13

PROBLEM 3-1C (Continued)

Rent Expense No. 520

Date Explanation Ref. Debit Credit Balance
2008
May 31 Balance
900

Depreciation Expense No. 530

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 170 170

Insurance Expense No. 540

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 150 150

Travel Expense No. 550

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 250 250

Supplies Expense No. 560

Date Explanation Ref. Debit Credit Balance
2008
May 31 Adjusting J4 900 900

© 2008 For Instructor Use Only 3-14

PROBLEM 3-1C (Continued)

(c) HAMBONE CONSULTING

Adjusted Trial Balance
May 31, 2008

Debit Credit
Cash................................................................................. $ 5,700
Accounts Receivable ................................................. 7,200
Prepaid Insurance ....................................................... 3,450
Supplies.......................................................................... 1,000
Office Furniture ............................................................ 10,200
Accumulated Depreciation—Office
Furniture .................................................................... $ 170
Accounts Payable ....................................................... 4,500
Travel Payable .............................................................. 250
Salaries Payable .......................................................... 960
Unearned Service Revenue...................................... 400
Common Stock............................................................. 17,700
Service Revenue.......................................................... 10,300
Salaries Expense ......................................................... 4,360
Rent Expense................................................................ 900
Depreciation Expense................................................ 170
Insurance Expense ..................................................... 150
Travel Expense............................................................. 250
Supplies Expense........................................................ 900
$34,280 $34,280

© 2008 For Instructor Use Only 3-15

 PROBLEM 3-2C

(a)
J1
Date Account Titles Ref. Debit Credit
May 31 Insurance Expense.................................... 722 190
Prepaid Insurance ........................... 130 190
($2,280 X 1/12)

31 Supplies Expense ...................................... 631 1,450

Supplies ($2,200 – $750) ............... 126 1,450

31 Depreciation Expense—Lodge.............. 619 250

($3,000 X 1/12)
Accumulated Depreciation—
Lodge .............................................. 142 250

31 Depreciation Expense—Furniture ........ 621 225

($2,700 X 1/12)
Accumulated Depreciation—
Furniture ........................................ 150 225

31 Interest Expense......................................... 718 350

Interest Payable ............................... 230 350
[($35,000 X 12%) X 1/12]

31 Unearned Rent ............................................ 208 2,200

Rent Revenue ................................... 429 2,200
(2/3 X $3,300 – $2,200)

31 Salaries Expense........................................ 726 750

Salaries Payable .............................. 212 750

(b)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
May 31 Balance
3,500

© 2008 For Instructor Use Only 3-16

PROBLEM 3-2C (Continued)

Supplies No. 126

Date Explanation Ref. Debit Credit Balance
May 31 Balance
2,200
31 Adjusting J1 1,450 750

Prepaid Insurance No. 130

Date Explanation Ref. Debit Credit Balance
May 31 Balance
2,280
31 Adjusting J1 190 2,090

Land No. 140

Date Explanation Ref. Debit Credit Balance
May 31 Balance
12,000

Lodge No. 141

Date Explanation Ref. Debit Credit Balance
May 31 Balance
60,000

Accumulated Depreciation—Lodge No. 142

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 250 250

Furniture No. 149

Date Explanation Ref. Debit Credit Balance
May 31 Balance
15,000

Accumulated Depreciation—Furniture No. 150

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 225 225

© 2008 For Instructor Use Only 3-17

PROBLEM 3-2C (Continued)

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
May 31 Balance
4,800

Unearned Rent No. 208

Date Explanation Ref. Debit Credit Balance
May 31 Balance
3,300
31 Adjusting J1 2,200 1,100

Salaries Payable No. 212

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 750 750

Interest Payable No. 230

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 350 350

Mortgage Payable No. 275

Date Explanation Ref. Debit Credit Balance
May 31 Balance
35,000

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
May 31 Balance
46,380

Rent Revenue No. 429

Date Explanation Ref. Debit Credit Balance
May 31 Balance
10,300
31 Adjusting J1 2,200 12,500

© 2008 For Instructor Use Only 3-18

PROBLEM 3-2C (Continued)

Advertising Expense No. 610

Date Explanation Ref. Debit Credit Balance
May 31 Balance
600

Depreciation Expense—Lodge No. 619

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 250 250

Depreciation Expense—Furniture No. 621

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 225 225

Supplies Expense No. 631

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 1,450 1,450

Interest Expense No. 718

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 350 350

Insurance Expense No. 722

Date Explanation Ref. Debit Credit Balance
May 31 Adjusting J1 190 190

Salaries Expense No. 726

Date Explanation Ref. Debit Credit Balance
May 31 Balance
3,300
31 Adjusting J1 750 4,050

© 2008 For Instructor Use Only 3-19

PROBLEM 3-2C (Continued)

Utilities Expense No. 732

Date Explanation Ref. Debit Credit Balance
May 31 Balance
900

(c) MOUND VIEW MOTEL

Adjusted Trial Balance
May 31, 2008

Debit Credit
Cash ............................................................................ $ 3,500
Supplies ..................................................................... 750
Prepaid Insurance................................................... 2,090
Land............................................................................. 12,000
Lodge .......................................................................... 60,000
Accumulated Depreciation—Lodge.................. $ 250
Furniture .................................................................... 15,000
Accumulated Depreciation—Furniture............ 225
Accounts Payable................................................... 4,800
Unearned Rent ......................................................... 1,100
Salaries Payable...................................................... 750
Interest Payable....................................................... 350
Mortgage Payable ................................................... 35,000
Common Stock ........................................................ 46,380
Rent Revenue........................................................... 12,500
Advertising Expense.............................................. 600
Depreciation Expense—Lodge........................... 250
Depreciation Expense—Furniture..................... 225
Supplies Expense ................................................... 1,450
Interest Expense ..................................................... 350
Insurance Expense................................................. 190
Salaries Expense .................................................... 4,050
Utilities Expense ..................................................... 900
$101,355 $101,355

© 2008 For Instructor Use Only 3-20

PROBLEM 3-2C (Continued)

(d) MOUND VIEW MOTEL

Income Statement
For the Month Ended May 31, 2008

Revenues
Rent revenue ............................................................ $12,500
Expenses
Salaries expense..................................................... $4,050
Supplies expense ................................................... 1,450
Utilities expense...................................................... 900
Advertising expense .............................................. 600
Interest expense...................................................... 350
Depreciation expense—lodge ............................ 250
Depreciation expense—furniture ...................... 225
Insurance expense ................................................. 190
Total expenses................................................ 8,015
Net income ......................................................................... $ 4,485

MOUND VIEW MOTEL

Retained Earnings Statement
For the Month Ended May 31, 2008

Retained earnings, May 1................................................................... $ 0

Add: Net income ................................................................................. 4,485
Retained earnings, May 31 ................................................................ $4,485

© 2008 For Instructor Use Only 3-21

PROBLEM 3-2C (Continued)

MOUND VIEW MOTEL

Balance Sheet
May 31, 2008

Assets
Cash................................................................................ $ 3,500
Supplies......................................................................... 750
Prepaid insurance...................................................... 2,090
Land................................................................................ 12,000
Lodge ............................................................................. $60,000
Less: Accumulated depreciation—lodge.......... 250 59,750
Furniture........................................................................ 15,000
Less: Accumulated depreciation—furniture ....... 225 14,775
Total assets ................................................ $92,865

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable ...................................................... $ 4,800
Mortgage payable....................................................... 35,000
Unearned rent.............................................................. 1,100
Salaries payable ......................................................... 750
Interest payable .......................................................... 350
Total liabilities .................................................... 42,000
Stockholders’ equity
Common stock ............................................................ $46,380
Retained earnings ...................................................... 4,485 50,865
Total liabilities and stockholders’ equity ..... $92,865

© 2008 For Instructor Use Only 3-22

 PROBLEM 3-3C

(a) Sept.30 A Accounts Receivable .................................. 800

Commission Revenue........................... 800

30 B Supplies Expense........................................... 600

Supplies ....................................................... 600

30 C Rent Expense................................................... 900

Prepaid Rent............................................... 900

30 D Depreciation Expense ................................... 500

Accum. Depreciation—Equipment ........ 500

30 E Salaries Expense ............................................ 725

Salaries Payable........................................ 725

30 F Interest Expense ............................................. 100

Interest Payable ........................................ 100

30 G Unearned Rent................................................. 850

Rent Revenue............................................. 850

(b) POBLANO CO.

Income Statement
For the Quarter Ended September 30, 2008

Revenues
Commission revenue.................................................. $16,800
Rent revenue ................................................................. 2,260
Total revenues ..................................................... 19,060
Expenses
Salaries expense.......................................................... $8,725
Rent expense................................................................. 2,800
Utilities expense........................................................... 1,510
Supplies expense ........................................................ 600
Depreciation expense................................................. 500
Interest expense........................................................... 100
Total expenses..................................................... 14,235
Net income .............................................................................. $ 4,825

© 2008 For Instructor Use Only 3-23

PROBLEM 3-3C (Continued)

POBLANO CO.
Retained Earnings Statement
For the Quarter Ended September 30, 2008

Retained earnings, July 1, 2008 ...................................................... $ 0

Add: Net income ................................................................................ 4,825
4,825
Less: Dividends................................................................................... 1,600
Retained earnings, September 30, 2008....................................... $3,225

POBLANO CO.
Balance Sheet
September 30, 2008

Assets
Cash.......................................................................................... $ 8,700
Accounts receivable............................................................ 11,200
Supplies................................................................................... 900
Prepaid rent............................................................................ 1,300
Equipment .............................................................................. $18,000
Less: Accum. depreciation—equipment..................... 500 17,500
Total assets .......................................................... $39,600

Liabilities and Stockholders’ Equity

Liabilities
Notes payable................................................................ $10,000
Accounts payable ........................................................ 2,500
Salaries payable ........................................................... 725
Unearned rent................................................................ 1,050
Interest payable ............................................................ 100
Total liabilities ...................................................... $14,375
Stockholders’ equity
Common stock .............................................................. $22,000
Retained earnings ........................................................ 3,225 25,225
Total liabilities and stockholders’ equity .... $39,600

(c) Interest of 12% per year equals a monthly rate of 1%; monthly interest
is $100 ($10,000 X 1%). Since total interest expense is $100, the note
has been outstanding one month.

© 2008 For Instructor Use Only 3-24

 PROBLEM 3-4C

1. Dec. 31 Insurance Expense .............................................. 4,650

Prepaid Insurance ....................................... 4,650
[($7,200 ÷ 3) = $2,400
[($4,500 ÷ 2) = 2,250
$4,650]

2. Dec. 31 Unearned Subscriptions .................................... 6,375

Subscription Revenue................................ 6,375
[Oct. 200 X $45 X 3/12 = $2,250
[Nov. 300 X $45 X 2/12 = 2,250
[Dec. 500 X $45 X 1/12 = 1,875
$6,375]

3. Dec. 31 Interest Expense ................................................... 1,500

Interest Payable ........................................... 1,500
($100,000 X 9% X 2/12)

4. Dec. 31 Salaries Expense .................................................. 2,000

Salaries Payable........................................... 2,000
[5 X $700 X 2/5 = $1,400
[3 X $500 X 2/5 = 600
$2,000]

© 2008 For Instructor Use Only 3-25

PROBLEM 3-4C (Continued)

A review of the ledger of Obi Company at December 31, 2008, produces the
following data pertaining to the preparation of annual adjusting entries.

Note: Prepare adjusting entries.

1. Prepaid Insurance $9,900. The company has separate insurance

policies on its buildings and its motor vehicles. Policy B4564 on the
building was purchased on April 1, 2007, for $7,200. The policy has a
term of 3 years. Policy A2958 on the vehicles was purchased on
January 1, 2008, for $4,500. This policy has a term of 2 years.

2. Unearned Subscriptions $45,000. The company began selling magazine

subscriptions in 2008 on an annual basis. The magazine is published
monthly. The selling price of a subscription is $45. A review of
subscription contracts reveals the following.

Subscription Date Number of Subscription

October 1 200
November 1 300
December 1 500
1,000

3. Notes Payable $100,000. This balance consists of a note for 9 months

at an annual interest rate of 9%, dated November 1.

© 2008 For Instructor Use Only 3-26

 PROBLEM 3-5C

(a), (c) & (e)

Cash No. 101

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
2,400
8 J1 1,700 700
10 J1 3,420 4,120
12 J1 3,100 7,220
20 J1 2,700 4,520
22 J1 400 4,120
25 J1 1,700 2,420
29 J1 600 3,020

Accounts Receivable No. 112

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
4,250
10 J1 3,420 830
27 J1 900 1,730

Supplies No. 126

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
1,800
17 J1 700 2,500
30 Adjusting J1 1,300 1,200

Store Equipment No. 153

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
12,000
15 J1 2,000 14,000

© 2008 For Instructor Use Only 3-27

PROBLEM 3-5C (Continued)

Accumulated Depreciation—Store Equipment No. 154

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
2,000
30 Adjusting J1 200 2,200

Accounts Payable No. 201

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
2,600
15 J1 2,000 4,600
17 J1 700 5,300
20 J1 2,700 2,600

Unearned Service Revenue No. 209

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
1,200
29 J1 600 1,800
30 Adjusting J1 1,250 550

Salaries Payable No. 212

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
700
8 J1 700 0
30 Adjusting J1 400 400

Common Stock No. 311

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
10,000

Retained Earnings No. 320

Date Explanation Ref. Debit Credit Balance
Nov. 1 Balance
3,950

© 2008 For Instructor Use Only 3-28

PROBLEM 3-5C (Continued)

Service Revenue No. 407

Date Explanation Ref. Debit Credit Balance
Nov. 12 J1 3,100 3,100
27 J1 900 4,000
30 Adjusting J1 1,250 5,250

Depreciation Expense No. 615

Date Explanation Ref. Debit Credit Balance
Nov. 30 Adjusting J1 200 200

Supplies Expense No. 631

Date Explanation Ref. Debit Credit Balance
Nov. 30 Adjusting J1 1,300 1,300

Salaries Expense No. 726

Date Explanation Ref. Debit Credit Balance
Nov. 8 J1 1,000 1,000
25 J1 1,700 2,700
30 Adjusting J1 400 3,100

Rent Expense No. 729

Date Explanation Ref. Debit Credit Balance
Nov. 22 J1 400 400

© 2008 For Instructor Use Only 3-29

PROBLEM 3-5C (Continued)

(b)
General Journal J1
Date Account Titles and Explanation Ref. Debit Credit
Nov. 8 Salaries Payable ........................................ 212 700
Salaries Expense ....................................... 726 1,000
Cash ...................................................... 101 1,700

10 Cash............................................................... 101 3,420

Accounts Receivable ...................... 112 3,420

12 Cash............................................................... 101 3,100

Service Revenue............................... 407 3,100

15 Store Equipment........................................ 153 2,000

Accounts Payable ............................ 201 2,000

17 Supplies........................................................ 126 700

Accounts Payable ............................ 201 700

20 Accounts Payable ..................................... 201 2,700

Cash...................................................... 101 2,700

22 Rent Expense.............................................. 729 400

Cash...................................................... 101 400

25 Salaries Expense ....................................... 726 1,700

Cash...................................................... 101 1,700

27 Accounts Receivable ............................... 112 900

Service Revenue............................... 407 900

29 Cash............................................................... 101 600

Unearned Service Revenue........... 209 600

© 2008 For Instructor Use Only 3-30

PROBLEM 3-5C (Continued)

(d) & (f) MORELLI EQUIPMENT REPAIR

Trial Balances
November 30, 2008

Before After
Adjustment Adjustment
Dr. Cr. Dr. Cr.
Cash.................................................... $ 3,020 $ 3,020
Accounts Receivable .................... 1,730 1,730
Supplies............................................. 2,500 1,200
Store Equipment............................. 14,000 14,000
Accumulated Depreciation.......... $ 2,000 $ 2,200
Accounts Payable .......................... 2,600 2,600
Unearned Service Revenue......... 1,800 550
Salaries Payable ............................. 400
Common Stock................................ 10,000 10,000
Retained Earnings.......................... 3,950 3,950
Service Revenue............................. 4,000 5,250
Depreciation Expense................... 200
Supplies Expense........................... 1,300
Salaries Expense ............................ 2,700 3,100
Rent Expense................................... 400 400
$24,350 $24,350 $24,950 $24,950

(e) 1. Nov. 30 Supplies Expense .............................. 631 1,300

Supplies ($2,500 – $1,200) ....... 126 1,300

2. 30 Salaries Expense................................ 726 400

Salaries Payable.......................... 212 400

3. 30 Depreciation Expense ...................... 615 200

Accumulated Depreciation—
Store Equipment..................... 154 200

4. 30 Unearned Service Revenue ............ 209 1,250

Service Revenue ......................... 407 1,250

© 2008 For Instructor Use Only 3-31

PROBLEM 3-5C (Continued)

(g) MORELLI EQUIPMENT REPAIR

Income Statement
For the Month Ended November 30, 2008

Revenues
Service revenue ....................................................... $5,250
Expenses
Salaries expense ..................................................... $3,100
Supplies expense.................................................... 1,300
Rent expense ............................................................ 400
Depreciation expense ............................................ 200
Total expenses ................................................ 5,000
Net Income.......................................................................... $ 250

MORELLI EQUIPMENT REPAIR

Retained Earnings Statement
For the Month Ended November 30, 2008

Retained earnings, November 1...................................................... $3,950

Plus: Net income................................................................................ 250
Retained earnings, November 30.................................................... $4,200

© 2008 For Instructor Use Only 3-32

PROBLEM 3-5C (Continued)

MORELLI EQUIPMENT REPAIR

Balance Sheet
November 30, 2008

Assets
Cash ........................................................................................... $ 3,020
Accounts receivable ............................................................. 1,730
Supplies .................................................................................... 1,200
Equipment ................................................................................ $14,000
Less: Accumulated depreciation—
equipment............................................................... 2,200 11,800
Total assets..................................................................... $17,750

Liabilities and Stockholders’ Equity

Liabilities
Accounts payable ......................................................... $ 2,600
Unearned service revenue......................................... 550
Salaries payable ............................................................ 400
Total liabilities....................................................... 3,550
Stockholders’ equity
Common stock............................................................... $10,000
Retained earnings......................................................... 4,200 14,200
Total liabilities and stockholders’ equity..... $17,750

© 2008 For Instructor Use Only 3-33