Chapter 3 - The Accounting Cycle: End of the Period

Chapter 3
The Accounting Cycle: End of the Period

REVIEW QUESTIONS

Question 3-1 (LO 3-1)

The revenue recognition principle states that we record revenue in the period in which we
provide products or services to customers. If a company sells products or provides services to a
customer in the current year, then the company should report the revenue in its current income
statement. If the company sells products or provides services to a customer in the following year,
then it should report the revenue in the following year’s income statement, and so on.

Question 3-2 (LO 3-1)

The concept of expense recognition suggests that we recognize expenses in the same period as
costs are used for providing goods and services to customers. In other words, we report expenses
with the revenues they help to generate. There is a cause-and-effect relationship between revenue
and expense recognition implicit in this principle. Some costs are more difficult to match with
revenue and are expensed in the period in which they occur or are used in business operations.

Question 3-3 (LO 3-1)

Net income is an important profitability measure used by investors, creditors, and others in
assessing the performance of the company. Net income equals revenues minus expenses. Therefore,
to accurately assess profitability, it is important that revenues and the expenses that helped to
generate those revenues be reported in the same period. Otherwise, it would be difficult to tell from
period to period the company’s profit-generating ability.

Question 3-4 (LO 3-2)

Under cash-basis accounting, revenues are recorded when cash is received and expenses are
recorded when cash is paid. In contrast, under accrual-basis accounting, revenues are recorded when
goods and services are provided to customers (revenue recognition principle) and expenses are
recorded when used to generate revenues.

Question 3-5 (LO 3-2)

(1) April 10th.
(2) April 10th.
(3) April 10th.

Question 3-6 (LO 3-2)

(1) March 28th.
(2) April 10th.
(3) May 2nd.

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 Chapter 3 - The Accounting Cycle: End of the Period

Answers to Review Questions (continued)

Question 3-7 (LO 3-2)
(1) April 10th.
(2) April 10th.
(3) April 10th.

Question 3-8 (LO 3-2)

(1) March 28th.
(2) April 10th.
(3) May 2nd.

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3-2 Financial Accounting, 6e
 Chapter 3 - The Accounting Cycle: End of the Period

Question 3-9 (LO 3-3)

One of the primary purposes of adjusting entries is to allow for proper application of the revenue
recognition principle (revenues) and expense recognition (expenses). The revenue recognition
principle and expense recognition concept are key components of accrual-basis accounting.

Question 3-10 (LO 3-3)

Prepayments are cases where cash is received before revenue is recognized or where cash is paid
before the expense is recognized. Accruals are cases where cash is received after revenue is
recognized or where cash is paid after the expense is recognized.

Question 3-11 (LO 3-3)

A prepaid expense includes the purchase of supplies, prepaid insurance, and prepaid rent. At the
time of purchase, the purchase is recorded as an asset. When that asset is used (or expires), an
adjusting entry is needed to reduce the asset to its remaining amount and to recognize an expense.

Question 3-12 (LO 3-3)

Deferred revenue includes a customer paying cash before receiving the related product or
service, such as a magazine subscription. At the time the cash is received, a liability is recorded.
When those products and services are provided to customers, an adjusting entry is needed to reduce
the liability to its remaining amount and to recognize revenue.

Question 3-13 (LO 3-3)

An accrued expense includes incurring an expense before the related cash outflow, such as when
the cost of employees’ salaries, utilities, taxes, and interest are incurred but not paid until a later
time. In the period the cost occurs, an adjusting entry is needed to record the liability for the amount
to be paid and to recognize an expense.

Question 3-14 (LO 3-3)

An accrued revenue includes recording a revenue before the related cash inflow, such as
providing products or services to customers on account. In the period the goods and services are
provided to customers, an adjusting entry is needed to record an asset for the amount to be received
and to recognize revenue.

Answers to Review Questions (continued)

Question 3-15 (LO 3-3)
October 31 Debit Credit
Supplies Expense ($75 − $25) 50
Supplies 50
(Consume supplies during the current period)

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 Chapter 3 - The Accounting Cycle: End of the Period

Question 3-16 (LO 3-3)

Yes. Utilities expense and utilities payable will be understated at the end of September. Utilities
expense should be recorded during the period incurred (that is, in the period it helps to produce
revenues), regardless of whether it is paid. Utilities payable should be recorded in the period the
obligation (debt) arises.

Question 3-17 (LO 3-3)

November 30 Debit Credit
Deferred Revenues 20,000
Service Revenue 20,000
(Provide services to customers who paid in advance)

Question 3-18 (LO 3-3)

Yes. Accounts receivable and service revenue will be understated at the end of May. Accounts
receivable should be recorded in the period the right to receive cash arises. Service revenue should
be recorded in the period the service is provided to the customer, regardless of whether cash is
received.

Question 3-19 (LO 3-3)

(a) Prepaid expense: Debit Supplies Expense; credit Supplies.
(b) Deferred revenue: Debit Deferred Revenue; credit Service Revenue.
(c) Accrued expense: Debit Salaries Expense; credit Salaries Payable.
(d) Accrued revenue: Debit Accounts Receivable; credit Service Revenue.

Question 3-20 (LO 3-4)

The purpose of the adjusted trial balance is to list all accounts and their balances after updating
account balances for adjusting entries and check the equality of total debits and total credits.
Account balances reported on the (unadjusted) trial balance do not include the effects of adjusting
entries. Account balances reported on the adjusted trial balance do include the effects of adjusting
entries.

Question 3-21 (LO 3-5)

Classified indicates that assets are separated into those that provide a benefit over the next year
(current assets) and those that provide a benefit for more than one year (long-term assets) from the
date of the balance sheet. Similarly, liabilities are divided into those due over the next year (current
liabilities) and those due in more than one year (long-term liabilities) from the date of the balance
sheet.

Answers to Review Questions (continued)

Question 3-22 (LO 3-5)

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 Chapter 3 - The Accounting Cycle: End of the Period

Stockholders’
Assets = Liabilities + equity
$12,000 = $8,000 + $X
$12,000 − $8,000 = $4,000

Question 3-23 (LO 3-6)

The two purposes of closing entries are (1) to transfer the balances of temporary accounts
(revenues, expenses, and dividends) to the retained earnings account and (2) to reduce the balances
of these temporary accounts to zero to prepare them for measuring activity in the next period.

Question 3-24 (LO 3-6)

To “close” temporary accounts indicates that temporary account balances should be reduced to zero
at the end of the accounting period. The reason is that temporary accounts measure activity over a
single period only and therefore need to start each period at zero. To start a period at zero, it is
necessary to end the previous period with a zero balance. Dividends, revenues, and expenses are
closed.

Question 3-25 (LO 3-6)

The first closing entry transfers revenue transactions to retained earnings by debiting all
revenue accounts (reducing their balances to zero) and crediting retained earnings. The second
closing entry transfers expense transactions to retained earnings by crediting all expense accounts
(reducing their balance to zero) and debiting retained earnings. The third closing entry transfers
dividend transactions to retained earnings by crediting the dividends account (reducing its balance to
zero) and debiting retained earnings.

Question 3-26 (LO 3-6)

Net Income Dividends Retained
Earnings*
Year 1 $ 300 $200 $ 100
Year 2 900 200 800
Year 3 1,500 200 2,100
Year 4 2,400 200 4,300

* Retained earnings = Previous year’s retained earnings + Net income − Dividends

Answers to Review Questions (continued)

Question 3-27 (LO 3-6)
It is important to understand that transactions are recorded from the company’s perspective. The
company is paying dividends to its stockholders. From the company’s perspective, there is a
reduction in total assets of the company (generally cash) and total stockholders’ equity when

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Solutions Manual, Chapter 3 3-5
 Chapter 3 - The Accounting Cycle: End of the Period

dividends are paid. [The personal accounting records of the stockholder would show an increase in
cash and stockholders’ equity when the dividend is received from the company.]

Question 3-28 (LO 3-7)

The adjusted trial balance does not include the effect of closing entries while the post-closing
trial balance does. This means that revenues, expenses, and dividends will be reported in the
adjusted trial balance but not in the post-closing trial balance. The balance of retained earnings will
differ in the two trial balances. In the post-closing trial balance, all balances for revenue, expense,
and dividends accounts will have been transferred to the balance of retained earnings.

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 Chapter 3 - The Accounting Cycle: End of the Period

BRIEF EXERCISES
Brief Exercise 3-1 (LO 3-1)
Assets Liabilities Revenues
(a) Increase Increase No Effect
(b) Increase No Effect Increase
(c) Increase No Effect Increase

Brief Exercise 3-2 (LO 3-1)

Assets Liabilities Expenses
(a) Decrease No Effect Increase
(b) No Effect Increase Increase
(c) Decrease Decrease No Effect

Brief Exercise 3-3 (LO 3-1)

Revenues − Expenses = Net Income
$17,000 − $12,000 = $5,000

Brief Exercise 3-4 (LO 3-1, 3-2)

Cash Cash-basis Accrual-basis
Impact on:
Balance Net Income Net Income
(a) Receive $1,500 from
customers who were billed +$1,500 +$1,500 $0
for services in April.
(b) Provide $3,200 of consulting $0 $0 +$3,200
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 Chapter 3 - The Accounting Cycle: End of the Period

services to a local business.

Payment is not expected until
June.
(c) Purchase office supplies for
$400 on account. All
$0 $0 −$400
supplies are used by the end
of May.
(d) Pay $600 to workers. $400 is
for work in May and $200 is −$600 −$600 −$400
for work in April.
(e) Pay $200 to advertise in a
−$200 −$200 −$200
local newspaper in May.
Total +$700 +$700 +$2,200

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 Chapter 3 - The Accounting Cycle: End of the Period

Brief Exercise 3-5 (LO 3-1, 3-2)

Cash-basis Accrual Accrual-basis
net income adjustments net income
Cash inflows $50,000 +$6,900* $56,900
Cash outflows 21,900 −$3,000** 18,900
$28,100 $38,000
* The increase in accounts receivable ($6,900) represents accrual-basis revenues with no
corresponding cash inflows.
** The decrease in salaries owed ($3,000) represents cash outflows for salaries of the prior year
and would not be expensed in the current year.

Brief Exercise 3-6 (LO 3-3)

(1)
During the year Debit Credit
Supplies 3,300
Cash 3,300
(Purchase supplies for cash)

(2)
End of the year Debit Credit
Supplies Expense 3,500
Supplies 3,500
(Adjust supplies)

(3) Supplies
Supplies Expense
Beginning balance $ 500 $ 0
Purchases during the year 3,300
Supplies used during the year (3,500) 3,500
Ending balance $ 300 $3,500
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Solutions Manual, Chapter 3 3-9
 Chapter 3 - The Accounting Cycle: End of the Period

Brief Exercise 3-7 (LO 3-3)

(1)
Oct. 1 Debit Credit
Prepaid Rent 25,200
Cash 25,200
(Pay for rent in advance)

(2)
Dec. 31 Debit Credit
Rent Expense 6,300
Prepaid Rent 6,300
(Adjust prepaid rent)
= $2,100 per month x 3 months (Oct., Nov., and Dec.)

(3) Prepaid Rent

Rent Expense
Jan. 1 Beginning balance $ 0 $ 0
Oct. 1 Payment 25,200
Adjustment Prepaid rent expired during year (6,300) 6,300
Dec. 31 Ending balance $18,900 $6,300

Brief Exercise 3-8 (LO 3-3)

(1)
Mar. 1 Debit Credit
Prepaid Insurance 36,000
Cash 36,000
(Purchase insurance in advance)

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 Chapter 3 - The Accounting Cycle: End of the Period

(2)
Dec. 31 Debit Credit
Insurance Expense 30,000
Prepaid Insurance 30,000
(Adjust prepaid insurance)
= $3,000 per month x 10 months (Mar. – Dec.)

(3) Prepaid Insurance

Insurance Expense
Jan. 1 Beginning balance $ 0 $ 0
Mar. 1 Payment 36,000
Adjustment Insurance expired during year (30,000) 30,000
Dec. 31 Ending balance $ 6,000 $30,000

Brief Exercise 3-9 (LO 3-3)

(1)
Apr. 1 Debit Credit
Equipment 50,400
Cash 50,400
(Purchase equipment)

(2)
Dec. 31 Debit Credit
Depreciation Expense 5,400
Accumulated Depreciation 5,400
(Adjust accumulated depreciation)
= $600 per month x 9 months (Apr. – Dec.)

(3) Accumulated Depreciation

Depreciation Expense
Jan. 1 Beginning balance $ 0 $ 0
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 Chapter 3 - The Accounting Cycle: End of the Period

Adjustment Depreciation during year 5,400 5,400

Dec. 31 Ending balance $5,400 $5,400

Brief Exercise 3-10 (LO 3-3)

(1)
Nov. 1 Debit Credit
Cash 6,000
Deferred Revenue 6,000
(Receive cash in advance from customer)

(2)
Dec. 31 Debit Credit
Deferred Revenue 4,000
Service Revenue 4,000
(Adjust deferred revenue)
= $2,000 per month x 2 months (Nov. and Dec.)

(3) Deferred Service

Revenue Revenue
Jan. 1 Beginning balance $ 0 $ 0
Nov. 1 Cash received 6,000
Adjustment Revenue recognized during (4,000) 4,000
year
Dec. 31 Ending balance $2,000 $4,000

Brief Exercise 3-11 (LO 3-3)

(1)
Dec. 31, 2024 Debit Credit
Salaries Expense 1,200
Salaries Payable 1,200
(Record salaries owed at December 31;
$400 per day x 3 days [Dec. 29 – 31] = $1,200)
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 Chapter 3 - The Accounting Cycle: End of the Period

(2) Salaries
Payable
Jan. 1, 2024 Beginning balance $ 0
Adjustment Salaries incurred but not paid 1,200
Dec. 31, 2024 Ending balance $1,200

Brief Exercise 3-12 (LO 3-3)

(1)
Jul. 1, 2024 Debit Credit
Cash 15,000
Notes Payable 15,000
(Borrow cash)

(2)
Dec. 31, 2024 Debit Credit
Interest Expense 900
Interest Payable 900
(Record interest payable)
= $150 (or 1% of $15,000) per month x 6 months (Jul. – Dec.)

(3) Interest Interest

Payable Expense
Jan. 1, 2024 Beginning balance $ 0 $ 0
Adjustment Interest incurred but not paid 900 900
Dec. 31, 2024 Ending balance $900 $900

Brief Exercise 3-13 (LO 3-3)

(1)
Jul. 1, 2024 Debit Credit
Notes Receivable 15,000
Cash 15,000
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 Chapter 3 - The Accounting Cycle: End of the Period

(Lend cash)

(2)
Dec. 31, 2024 Debit Credit
Interest Receivable 900
Interest Revenue 900
(Record interest receivable)
= $150 (or 1% of $15,000) per month x 6 months (Jul. – Dec.)

(3) Interest Interest

Receivable Revenue
Jan. 1, 2024 Beginning balance $ 0 $ 0
Adjustment Interest earned but not received 900 900
Dec. 31, 2024 Ending balance $900 $900

Brief Exercise 3-14 (LO 3-5)

Account Financial Statement
1 Accounts Receivable Balance Sheet
.
2 Deferred Revenue Balance Sheet
.
3 Supplies Expense Income Statement
.
4 Salaries Payable Balance Sheet
.
5 Rent Expense Income Statement
.
6 Service Revenue Income Statement
.

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 Chapter 3 - The Accounting Cycle: End of the Period

Brief Exercise 3-15 (LO 3-5)

1 (b)
.
2 (d)
.
3 (a)
.
4 (c)
.

Brief Exercise 3-16 (LO 3-5)

Beavers Corporation
Income Statement
For the year ended December 31, 2024
Service revenue $275,000
Expenses:
Salaries 110,000
Supplies 20,000
Rent 26,000
Advertising 44,000
Delivery 18,000
Total expenses 218,000
Net income $ 57,000

Brief Exercise 3-17 (LO 3-5)

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 Chapter 3 - The Accounting Cycle: End of the Period

Spiders Corporation
Statement of Stockholders’ Equity
For the year ended December 31, 2024
Total
Common Retained Stockholders’
Stock Earnings Equity

Balance at January 1 $30,000 $ 8,000 $38,000

Issuance of common stock 0 0
Add: Net income for 2024 3,000 * 3,000
Less: Dividends (1,000) (1,000)
Balance at December 31 $30,000 $10,000 $40,000

* $3,000 is calculated as total revenues ($28,000) less total expenses ($25,000) for the year.

Brief Exercise 3-18 (LO 3-5)

Blue Devils Corporation
Balance Sheet
December 31, 2024
Assets Liabilities
Current assets: Current liabilities:
Cash $ 5,000 Accounts payable $ 26,000
Accounts receivable 9,000 Salaries payable 16,000
Supplies 19,000 Total current liabilities 42,000
Total current assets 33,000
Stockholders’ Equity
Long-term assets: Common stock 60,000
Land 75,000 Retained earnings 6,000 *
Total stockholders’ equity 66,000
Total liabilities and
Total assets $108,000 stockholders’ equity $108,000

* Assets = Liabilities + Stockholders’ equity

$108,000 = $42,000 + ($60,000 + Retained earnings)
$108,000 − $42,000 − $60,000 + Retained earnings
$6,000 = Retained earnings

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 Chapter 3 - The Accounting Cycle: End of the Period

Brief Exercise 3-19 (LO 3-6)

December 31 Debit Credit
Service Revenue 900,000
Retained Earnings 900,000
(Close revenue accounts)

Retained Earnings 625,000

Salaries Expense 390,000
Rent Expense 150,000
Interest Expense 85,000
(Close expense accounts)

Retained Earnings 60,000

Dividends 60,000
(Close dividends account)

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 Chapter 3 - The Accounting Cycle: End of the Period

Brief Exercise 3-20 (LO 3-7)

Hilltoppers Corporation
Post-Closing Trial Balance

Accounts Debit Credit

Cash $ 5,000
Equipment 17,000
Accounts Payable $ 3,000
Common Stock 11,000
Retained Earnings 8,000 *
Totals $22,000 $22,000

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3-18 Financial Accounting, 6e
 Chapter 3 - The Accounting Cycle: End of the Period

Income
Statement: Revenues − Expenses = Net Income

Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+15,000
Notes Receivable
−15,000
Cash

(2)
Income
Statement: Revenues − Expenses = Net Income
+900 +900
Interest Revenue
↓
Balance
Sheet: Assets = Liabilities + Stockholders’ Equity
+900 +900
Interest Receivable

EXERCISES
Exercise 3-1 (LO 3-1)

1. August 16.
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 Chapter 3 - The Accounting Cycle: End of the Period

2. January 27.
3. April 2.
4. Revenue would be recognized as each magazine is delivered.

Exercise 3-2 (LO 3-1)

1. August 16.
2. January 27.
3. One month’s worth of insurance expense is recorded each month.
4. February 4.

Exercise 3-3 (LO 3-2)

1. June 12.
2. February 2.
3. April 2.
4. July 1.

Exercise 3-4 (LO 3-2)

1. September 2.
2. January 6.
3. January 1.
4. February 23.

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 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-5 (LO 3-1)

Net income (unadjusted) $100,000

1. Record insurance expense of $2,000 per month (6,000)
2. Reclassify service revenue as deferred revenue (liability) (4,000)
3. Reclassify supplies expense as supplies (asset) 2,750
4. Record interest expense of $525 per month (9%/12 of $70,000) (2,100)
Net income (adjusted) $ 90,650

Exercise 3-6 (LO 3-3, 3-4, 3-5, 3-6, 3-7)

(i) Use source documents to identify accounts affected by external
transactions.
(g) Analyze the impact of the transaction on the accounting
equation.
(h) Assess whether the transaction results in a debit or a credit to
the account balance.
(c) Record the transaction.
(b) Post the transaction to the T-account in the general ledger.
(f) Prepare a trial balance.
(a) Record and post adjusting entries.
(d) Prepare financial statements (income statement, statement of
stockholders’ equity, balance sheet, and statement of cash
flows).
(e) Record and post-closing entries.

Exercise 3-7 (LO 3-3)

(1a) Debit Credit
Supplies 4,500
Cash 4,500

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 Chapter 3 - The Accounting Cycle: End of the Period

(Purchase supplies during December)

(1b) Debit Credit
Supplies Expense 3,000
Supplies 3,000
(Supplies used during December)

(2a) Debit Credit

No journal entry required

(2b) Debit Credit

Insurance Expense 2,000
Prepaid Insurance 2,000
(Reduce prepaid insurance due to passage of
time)

(3a) Debit Credit

Salaries Payable 11,000
Cash 11,000
(Pay November salaries)
(3b) Debit Credit
Salaries Expense 16,000
Salaries Payable 16,000
(Record salaries owed at December 31)

(4a) Debit Credit

Cash 4,500
Deferred Revenue 4,500
(Receive cash in advance from customer)
(4b) Debit Credit
Deferred Revenue 1,500
Service Revenue 1,500
(Reduce deferred revenue for rental space
used by the customer during December)

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 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-8 (LO 3-3)

(1) Debit Credit
Income Tax Expense 42,000
Income Tax Payable 42,000
(Income taxes owed for the year)

(2) Debit Credit

Interest Receivable 1,750
Interest Revenue 1,750
(Interest revenue = $50,000 × 0.07 × 6/12)

(3) Debit Credit

Deferred Revenue 4,000
Service Revenue 4,000
(Recognize revenue for three months of
twelve months received in advance; $16,000
× 3/12)

Exercise 3-9 (LO 3-3)

If the adjusting entry is NOT made:
Revenues − Expenses = Net Income
(1) $0 − −$42,000 = +$42,000
(2) −$1,750 − $0 = −$1,750
(3) −$4,000 − $0 = −$4,000
Total +$36,250

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 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-10 (LO 3-3)

(1) Debit Credit
Deferred Revenue 1,500
Service Revenue 1,500
(Recognize revenue for one month = $4,500
÷ 3 = $1,500)

(2) Debit Credit

Advertising Expense 900
Prepaid Advertising 900
(Recognize advertising expense for one
month; 10 ads used ÷ 30 prepaid = $2,700 ×
1/3 = $900 )

(3) Debit Credit

Salaries Expense 8,000
Salaries Payable 8,000
(Record salaries payable)

(4) Debit Credit

Interest Expense 2,100
Interest Payable 2,100
(Record interest payable; $70,000 × 0.09 ×
4/12)

Exercise 3-11 (LO 3-3, 3-4)

If the adjusting entry is NOT made:
Assets = Liabilities + Stockholders’
Equity
(1) $0 = +$1,500 + −$1,500
(2) +$900 = $0 + +$900
(3) $0 = −$8,000 + +$8,000
(4) $0 = −$2,100 + +$2,100
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 Chapter 3 - The Accounting Cycle: End of the Period

Total +$900 −$8,600 +$9,500

Exercise 3-12 (LO 3-3)

(1) Debit Credit
Deferred Revenue 2,000
Service Revenue 2,000
(Recognize revenue for one month = $4,000
÷ 2 months received = $2,000)

(2) Debit Credit

Insurance Expense 6,600
Prepaid Insurance 6,600
(Recognize insurance expense for 6 months)

(3) Debit Credit

Salaries Expense 3,000
Salaries Payable 3,000
(Record salaries owed at December 31)

(4) Debit Credit

Interest Expense 250
Interest Payable 250
(Record interest expense; $15,000 × 0.10 ×
2/12 = $250)

(5) Debit Credit

Supplies Expense 3,900
Supplies 3,900
(Office supplies used during year; $1,000 +
$3,400 – $500 = $3,900)

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Solutions Manual, Chapter 3 3-25
 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-13 (LO 3-3)

(1) Debit Credit
Interest Receivable 270
Interest Revenue 270
(Record interest revenue not received;
$9,000 × 0.12 × 3/12 = $270)

(2) Debit Credit

Rent Expense 3,000
Prepaid Rent 3,000
(Reduce prepaid rent for two months used of
three months prepaid; $4,500 × 2/3 =$3,000 )

(3) Debit Credit

Deferred Revenue 5,500
Service Revenue 5,500
(Recognize revenue for five months of 12
months collected in advance; $13,200 × 5/12 )

(4) Debit Credit

Utilities Expense 5,500
Utilities Payable 5,500
(Utilities owed at December 31)

(5) Debit Credit

Salaries Expense 5,000
Salaries Payable 5,000
(Record salaries owed at December 31)

(6) Debit Credit

Supplies Expense 3,500
Supplies 3,500
(Supplies used during year; $1,500 + $5,500
– $3,500 = $3,500)

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3-26 Financial Accounting, 6e
 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-14 (LO 3-3, 3-4)

Requirement 1
(1) Debit Credit
Rent Expense 2,400
Prepaid Rent 2,400
(Adjust prepaid rent to recognize two
months used of six months prepaid = $7,200
× 2/6 = $2,400)

(2) Debit Credit

Deferred Revenue 750
Service Revenue 750
(Adjust deferred revenue for service
provided)

(3) Debit Credit

Salaries Expense 700
Salaries Payable 700
(Record salaries owed at December 31)

(4) Debit Credit

Supplies Expense 3,200
Supplies 3,200
(Supplies used during year; $1,700 + $2,300
– $800 = $3,200)

Exercise 3-14 (concluded)

Requirement 2
Demon Deacons Corporation
Adjusted Trial Balance
December 31, 2024
Accounts Debit Credit
Cash $ 10,000
Accounts Receivable 15,000

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Solutions Manual, Chapter 3 3-27
 Chapter 3 - The Accounting Cycle: End of the Period

Prepaid Rent 4,800

Supplies 800
Deferred Revenue $ 2,250
Salaries Payable 700
Common Stock 11,000
Retained Earnings 6,000
Service Revenue 51,950
Salaries Expense 35,700
Rent Expense 2,400
Supplies Expense 3,200
Totals $71,900 $71,900

Exercise 3-15 (LO 3-5)

Volunteers Inc. Raiders Inc.

(in millions) (in millions)
Net Retained Net Retained
Year Income (Loss) Earnings Income (Loss) Earnings
2015 — $ 0 $ 35 $ 11
2016 $ 30 30 (43) (32)
2017 (7) 23 63 31
2018 41 64 63 94
2019 135 199 102 196
2020 30 229 135 331
2021 (131) 98 (42) 289
2022 577 675 74 363
2023 359 1,034 110 473
2024 360 1,394 162 635

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3-28 Financial Accounting, 6e
 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-16 (LO 3-5)

Requirement 1
Fightin’ Blue Hens Corporation
Income Statement
For the year ended December 31, 2024
Service revenue $500,000
Expenses:
Salaries 400,000
Rent 20,000
Utilities 40,000
Interest 5,000
Total expenses 465,000
Net income $ 35,000

Requirement 2
Fightin’ Blue Hens Corporation
Statement of Stockholders’ Equity
For the period ended December 31, 2024
Total
Common Retained Stockholders’
Stock Earnings Equity

Balance at July 1 $300,000 $60,000 $360,000

Issuance of common stock 0 0
Add: Net income for 2024 35,000 35,000

Balance at December 31 $300,000 $95,000 $395,000

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Solutions Manual, Chapter 3 3-29
 Chapter 3 - The Accounting Cycle: End of the Period

Exercise 3-16 (concluded)

Requirement 3
Fightin’ Blue Hens Corporation
Balance Sheet
December 31, 2024
Assets Liabilities
Current assets: Current liabilities:
Cash $ 12,000 Accounts payable $ 12,000
Accounts receivable 150,000 Salaries payable 11,000
Prepaid rent 6,000 Interest payable 5,000
Supplies 30,000 Total current liabilities 28,000
Total current assets 198,000 Long-term liabilities:
Notes payable 40,000
Total liabilities 68,000
Stockholders’ Equity
Long-term assets: Common stock 300,000
Land 265,000 Retained earnings 95,000 *
Total stockholders’ equity 395,000
Total liabilities and
Total assets $463,000 stockholders’ equity $463,000

* Retained earnings = Beginning retained earnings + Net income − Dividends

= $60,000 + $35,000 − $0
= $95,000

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3-30 Financial Accounting, 6e
 Chapter 3 - The Accounting Cycle: End of the Period

Problem 3-5A (LO 3-5)

Boilermaker Unlimited
Income Statement
For the year ended December 31, 2024
Service revenues:
New construction $450,000
Remodeling 280,000
Total revenues 730,000
Expenses:
Salaries 160,000
Supplies 285,000
Rent 50,000
Insurance 25,000
Utilities 42,000
Interest 9,000
Service fee 73,000
Total expenses 644,000
Net income $ 86,000

Problem 3-5A (concluded)

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Solutions Manual, Chapter 3 3-31
 Chapter 3 - The Accounting Cycle: End of the Period

Boilermaker Unlimited
Statement of Stockholders’ Equity
For the year ended December 31, 2024
Total
Common Retained Stockholders’
Stock Earnings Equity

Balance at January 1 $170,000 $ 31,000 $201,000

Issuance of common stock 30,000 30,000
Add: Net income for 2024 86,000 86,000
Less: Dividends (26,000) (26,000)
Balance at December 31 $200,000 $91,000 $291,000

Boilermaker Unlimited
Balance Sheet
December 31, 2024
Assets Liabilities
Current assets: Current liabilities:
Cash $ 16,000 Accounts payable $ 31,000
Accounts receivable 25,000 Salaries payable 28,000
Supplies 32,000 Utilities payable 5,000
Prepaid insurance 7,000 Total current liabilities 64,000
Total current assets 80,000 Long-term liabilities:
Notes payable 150,000
Total Liabilities 214,000
Long-term assets: Stockholders’ Equity
Investments 425,000 Common stock 200,000
Retained earnings 91,000
Total stockholders’ equity 291,000
Total liabilities and stockholders’
Total assets $505,000 equity $505,000

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3-32 Financial Accounting, 6e