SOLUTIONS TO EXERCISES

Ex 4.1 a. Book value

b. Materiality
c. Matching principle
d. Unrecorded revenue
e. Adjusting entries
f. Unearned revenue
g. Prepaid expenses
h. None (This is an example of “depreciation expense.”)

Ex. 4.2 Income Statement Balance Sheet

Adjusting Net Owners'
Entry Revenue - Expenses = Income Assets - Liabilities = Equity
a. NE I D D NE D
b. NE I D NE I D
c. I NE I I NE I
d. NE I D NE I D
e. NE I D D NE D
f. I NE I NE D I

Ex. 4.3 1. Rent Expense …………………………………………………… 250,000

Prepaid Rent ………………………………………… 250,000
To record rent expense for May ($1,500,000/6 months =
$250,000 per month).

2. Unearned Ticket Revenue …………………………………… 750,000

Ticket Revenue Earned ……………………………… 750,000
To record earned portion of season ticket revenue relating
to May home games.

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Ex. 4.4 a. Prepaid Advertising is reported in the balance sheet as an asset as a component of
the Prepaid Expenses balance. Customer Deposits are reported in the balance sheet
as liabilities.

b. Advertising Expense ………………………………………… 2,400,000

Prepaid Advertising …………………………………… 2,400,000
To record the mailing of brochures costing $2.4 million
to print.

c. Customer Deposits …………………………………………… 48,000,000

Cruise Revenue …………………………………………… 48,000,000
To record revenue earned for voyages completed.

d. The adjusting entry that results in the most significant expense in the
company’s income statement is the recording of depreciation expense on its
cruise ships.

Note to the instructor: In a recent income statement the company reported

depreciation expense of over $1.6 billion.

Ex. 4.5 a. (1) Interest Expense ……………………………………… 375

Interest Payable ……………………………… 375
$50,000 x 9% annual rate x 1/12 = $375.
(2) Accounts Receivable ………………………………… 10,000
Consulting Fees Earned ……………………… 10,000
To record ten days of unbilled consulting fees at
$1,000 per day.

b. $2,250 ($50,000 x 9% x 6/12 = $2,250).

c. $15,000 ($25,000 - $10,000 earned in December).

Ex. 4.6 a. At the time cash is collected by Delta Airlines for advance ticket sales, the entire
amount is accounted for as unearned revenue. The liability created represents the
deferral (or the postponement) of earned revenue until flight services are actually
provided to passengers.

b. Airlines normally reduce the balance of this liability account by converting it to

passenger revenue as flight services are provided. On some occasions, however, the
liability may be reduced if the ticket expires unused.

c. Air Traffic Liability ………………………………………… 105,000

Passenger Revenue Earned ………………………… 105,000
To record passenger revenue earned from advance ticket
Pas
sales for flights completed.
sen

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Ex. 4.7 a. 1. Interest Expense ………………………………………………… 1,500
Interest Payable …………………………………………… 1,500
To record interest accrued on bank loan during
December.

2. Depreciation Expense: Office Building …………………… 1,250

Accumulated Depreciation: Office Building …………… 1,250
To record depreciation on office building ($450,000/30 years)
x 1/12 = $1,250).

3. Accounts Receivable …………………………………………… 75,000

Marketing Revenue Earned ……………………………… 75,000
To record accrued marketing revenue earned in December.
4. Insurance Expense ……………………………………………… 200
Prepaid Insurance ………………………………………… 200
To record insurance expense ($2,400/12 months = $200).
5. Unearned Revenue ………………………………………………… 9,000
Marketing Revenue Earned …………………………………. 9,000
To record portion of unearned revenue that had become
earned in December.

6. Salaries Expense ……………………………………………… 1,900

Salaries Payable …………………………………………… 1,900
To record accrued salaries in December.

b. $79,150 Increase ($75,000 + $9,000 - $1,500 - $1,250 - $200 - $1,900).

Ex. 4.8 a. The total interest expense over the life of the note is $4,500 ($150,000 x .06 x 6/12 =
$4,500).

The monthly interest expense is $750 ($4,500/6 = $750).

b. The liability to the bank at December 31, year 1, is $151,500 (Principal, $150,000 +
$1,500 accrued interest).

c. Yr. 1
Oct. 31 Cash …………………………………………………………150,000
Notes Payable ………………………………… 150,000
Obtain from bank six-month loan with interest at 6%
a year.

d. Dec. 31 Interest Expense ………………………………………… 750

Interest Payable ……………………………. 750
To accrue interest expense for December on note
payable ($150,000 x 6% x 1/12).

e. The liability to the bank at March 31, year 2, is $153,750, consisting of $150,000
principal plus $3,750 accrued interest for five months.

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 SOLUTIONS TO PROBLEMS SET A
20 Minutes, Easy PROBLEM 4.1A
FLORIDA PALMS COUNTRY CLUB
a.
FLORIDA PALMS COUNTRY CLUB
General Journal
(Adjusting Entries)
(1)
Dec. 31 Salaries Expense 9,600
Salaries Payable 9,600
To record accrued salaries at December 31.

(2)
31 Accounts Receivable 1,800
Green Fee Revenue 1,800
To record green fees owed by the Tampa Univ.
golf team.

(3)
31 Unearned Membership Dues 106,000
Membership Dues Earned 106,000
To record the portion of annual membership dues
earned in December.

(4)
31 Depreciation Expense: Carts 1,000
Accumulated Depreciation: Carts 1,000
To record December depreciation expense
($180,000 ÷ 15 years x 1/12).
(5)
31 Interest Expense 300
Interest Payable 300
To record accrued interest expense in December
($45,000 x 8% x 1/12).

(6)
31 Insurance Expense 650
Unexpired Insurance 650
To record December insurance expense
($7,800 x 1/12).

(7)
31 No adjusting entry required. Revenue is recognized
when it is earned. Entering into a contract does not
constitute the earning of revenue.
(8)
31 Income Taxes Expense 19,000
Income Taxes Payable 19,000
To record income taxes accrued in December.

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 PROBLEM 4.1A
FLORIDA PALMS COUNTRY CLUB (concluded)
b.
1. Accruing unpaid expenses.
2. Accruing uncollected revenue.
3. Converting liabilities to revenue.
4. Converting assets to expenses.
5. Accruing unpaid expenses.
6. Converting assets to expenses.
7. No adjusting entry required.
8. Accruing unpaid expenses.

c. The clubhouse was built in 1925 and has been fully depreciated for financial accounting
purposes. The net book value of an asset reported in the balance sheet does not reflect the
asset’s fair market value. Likewise, depreciation expense reported in the income statement
does not reflect a decline in fair market value, physical obsolescence, or wear-and-tear.

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25 Minutes, Strong PROBLEM 4.3A
GUNFLINT ADVENTURES

a. (1) Age of airplane in months = accumulated depreciation/ monthly depreciation.

Useful life is given as 15 years, or 180 months.
Cost $288,000/180 months = $1,600 monthly depreciation expense
Accumulated depreciation $80,000/$1,600 monthly depreciation = 50 months.
(2) At June 30, two months of prepaid airport rent have been converted to expense (May
and June). Thus, four months of prepaid airport rent remain at June 30. Remaining
prepaid amount $9,000/4 months remaining = $2,250 per month.

(3) At June 30, five months of the original insurance policy have expired (February
through June). Thus, seven months of coverage remains unexpired at June 30.
Remaining unexpired amount $4,200/7 months remaining = $600 per month. $600
monthly cost x 12 months coverage = $7,200 paid on February 1.

b.

General Journal
(Adjusting Entries)
(1)
June 30 Depreciation Expense 1,600
Accumulated Depreciation: Airplane 1,600
To record June depreciation expense on airplane.

(2)
30 Airport Rent Expense 2,250
Prepaid Airport Rent 2,250
Recognizing rent expense for June.

(3)
30 Insurance Expense 600
Unexpired Insurance 600
Recognizing insurance expense for June.

(4)
30 Unearned Passenger Revenue 40,000
Passenger Revenue Earned 40,000
Recording portion of unearned revenue earned in
June.
June.

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30 Minutes, Medium PROBLEM 4.4A
CAMPUS THEATER
a.
General Journal
(Adjusting Entries)
Current Yr. (1)
Aug. 31 Film Rental Expense 18,240
Prepaid Film Rental 18,240
Film rental expense incurred in August.

(2)
31 Depreciation Expense: Buildings 840
Accumulated Depreciation: Buildings 840
To record August depreciation expense
($201,600 ÷ 240 months).

(3)
31 Depreciation Expense: Fixtures and Equipment 720
Accumulated Depreciation: Fixtures and Equip. 720
To record August depreciation ($43,200 ÷ 60 months).

(4)
31 Interest Expense 1,800
Interest Payable 1,800
Interest expense accrued in August.

(5)
31 Unearned Admissions Revenue (YMCA) 600
Admissions Revenue 600
To record advance payment from YMCA earned in
August ($1,800 x 1/3).

(6)
31 Concessions Revenue Receivable 2,700
Concessions Revenue 2,700
To record accrued concessions revenue in August.

(7)
31 Salaries Expense 2,040
Salaries Payable 2,040
To record accrued salary expense in August.

(8)
31 Income Taxes Expense 5,040
Income Taxes Payable 5,040
To record income taxes accrued in August.

(9)
31 No adjusting entry required.

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 PROBLEM 4.4A
CAMPUS THEATER (concluded)
b. (1) Eight months (bills received January through August). Utilities bills are recorded as
monthly bills are received. As of August 31, eight monthly bills should have been
received.
(2) Seven months (January through July). Depreciation expense is recorded only in month-
end adjusting entries. Thus, depreciation for August is not included in the August
unadjusted trial balance.
(3) Twenty months ($16,800/$840 per month).

c. Corporations must pay income taxes in several installments throughout the year. The
balance in the Income Taxes Expense account represents the total amount of income taxes
expense recognized since the beginning of the year. But Income Taxes Payable represents
only the portion of this expense that has not yet been paid. In the example at hand, the
$5,688 in income taxes payable probably represents only the income taxes expense accrued
in July, as Campus Theater should have paid taxes accrued in the first two quarters by June
15.

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30 Minutes, Medium PROBLEM 4.5A
TERRIFIC TEMPS
a.
General Journal
(Adjusting Entries)
Year 1 (1)
Dec. 31 Accounts Receivable 1,500
Fees Earned 1,500
To record accrued but uncollected fees earned.
(2)
31 Unearned Revenue 2,500
Fees Earned 2,500
To convert previously unearned revenue to
earned revenue.

(3)
31 Insurance Expense 300
Unexpired Insurance 300
To record Dec. insurance exp. ($1,800 ÷ 6 mo.).
(4)
31 Rent Expense 1,000
Prepaid Rent 1,000
To record Dec. rent expense ($3,000 ÷ 3 mo.).

(5)
31 Office Supplies Expense 200
Office Supplies 200
To record offices supplies used in December
($600 - $400).

(6)
31 Depreciation Expense: Equipment 500
Accumulated Depreciation: Equipment 500
To record December depreciation expense
($60,000 ÷ 120 mo.).

(7)
31 Interest Expense 80
Interest Payable 80
To record interest accrued in December
($12,000 x 8% x 1/12).

(8)
31 Salaries Expense 2,700
Salaries Payable 2,700
To record income taxes accrued in December.

(9)
31 Income Taxes Expense 3,000
Income Taxes Payable 3,000
To record income taxes accrued in December.

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 PROBLEM 4.5A
TERRIFIC TEMPS (concluded)
b.

1. Fees earned (unadjusted) $ 75,000

Add: Adjusting entry #1 1,500
Adjusting entry #2 2,500
Fees Earned in Year 1 $ 79,000

2. Travel expense (no adjustment required) $ 5,000

3. Insurance expense (unadjusted) $ 2,980

Add: Adjusting entry #3 300
Insurance expense incurred in Year 1 $ 3,280

4. Rent expense (unadjusted) $ 9,900

Add: Adjusting entry #4 1,000
Rent expense incurred in Year 1 $ 10,900

5. Office supplies expense (unadjusted) $ 780

Add: Adjusting entry #5 200
Office supplies expense incurred in Year 1 $ 980

6. Utilities expense (no adjustment required) $ 4,800

7. Depreciation expense: equipment (unadjusted) $ 5,500

Add: Adjusting entry #6 500
Equipment depreciation expense in Year 1 $ 6,000

8. Interest expense (unadjusted) $ 320

Add: Adjusting entry #7 80
Interest expense incurred in Year 1 $ 400

9. Salaries expense (unadjusted) $ 30,000

Add: Adjusting entry #8 2,700
Salaries expense incurred in Year 1 $ 32,700

10. Income taxes expense (unadjusted) $ 12,000

Add: Adjusting entry #9 3,000
Income taxes expense incurred in Year 1 $15,000

c. The unadjusted trial balance reports no dividends payable. Thus, the entire $3,000
dividend has been paid.

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