Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Chapter 3
Adjusting Accounts and Preparing
Financial Statements
QUESTIONS
1.

The cash basis of accounting reports revenues when cash is received while the
accrual basis reports revenues when they are earned. The cash basis reports
expenses when cash is paid while the accrual basis reports expenses when they are
incurred and matched with revenues they generated.

2.

The accrual basis of accounting generally provides a better indication of company

performance and financial condition than does the cash basis. Also, the accrual
basis increases the comparability of financial statements from one period to the
next. Thus, business decision makers generally prefer the accrual basis.

3.

Businesses that have major seasonal variations in sales are most likely to select the
natural business year as the fiscal year.

4.

A prepaid expense is an item paid for in advance of receiving its benefits. As such, it
is reported as an asset on the balance sheet.

5.

Long-term tangible plant assets such as equipment, buildings, and machinery lead
to adjustments for depreciation. Generally, land is the only long-term tangible plant
asset that does not require depreciation.

6.

The Accumulated Depreciation contra asset account is used for depreciation. It

provides financial statement users with additional information about the relative age
of the assets. Without the contra account information, the reader would not be able
to tell whether the assets are new or in need of replacement.

7.

Unearned revenue refers to cash received in advance of providing products and

services. Another name for unearned revenue is deferred revenue. It is reported as
a liability on the balance sheet.

8.

Accrued revenue is revenue that is earned but is not yet received in cash (and/or
other assets) and the customer has not been billed prior to the end of the period.
Therefore, end-of-period adjustments are made to record accrued revenue.
Examples are interest income that has been earned but not collected and revenues
from services performed that are neither collected nor billed.

9.A If prepaid expenses are initially recorded with debits to expense accounts, then the
prepaid expenses asset accounts are debited in the adjusting entries.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

10.

For Research In Motion, all of the accounts under the category of Property and
Equipment (except for Land), require adjusting entries. The expense related to the
Depreciation Expense account would be understated on the income statement if
Research In Motion fails to adjust these asset accounts. If the adjusting entries are
not made, net income would be overstated. Note: Students might also correctly
identify accounts receivable (for bad debts), Intangible assets (for amortization),
Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as
needing adjustment.

11.

Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its
adjusting entry, it would need to record Depreciation Expense (debit) on the plant
and equipment and Accumulated Depreciation (credit) as the contra to the Property,
plant and equipment account.

12.

The accrued wages would be reported as part of the liability Other Accrued
Liabilities on Palms balance sheet.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

QUICK STUDIES
Quick Study 3-1 (10 minutes)
a.
b.
c.
d.
e.

UR
PE
AE
AR
PE

Unearned revenue
Prepaid expenses (Depreciation)
Accrued expenses
Accrued revenue
Prepaid expenses

Quick Study 3-2 (10 minutes)

a. Insurance Expense .......................................................
Prepaid Insurance .................................................

1,800
1,800

To record 6-month insurance coverage expired.

b. Supplies Expense .........................................................

Supplies ..................................................................

2,700
2,700

To record supplies used during the year.

($1,000 + $3,000 [?] = $1,300)

Quick Study 3-3 (10 minutes)

a. Depreciation ExpenseEquipment ............................
Accumulated DepreciationEquipment .............
To record depreciation expense for the year.
($30,000 - $5,000) / 5 years = $5,000

3-3

5,000
5,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

b. No depreciation adjustments are made for land as it is expected to last

indefinitely.

Quick Study 3-4 (15 minutes)

a. Unearned Revenue........................................................
Legal Revenue .......................................................

15,000
15,000

To recognize legal revenue earned (20,000 x 3/4).

b. Unearned Subscription Revenue ................................

Subscription Revenue ...........................................
To recognize subscription revenue earned.
[100 x ($48 / 12 month) x 6 months]

3-4

2,400
2,400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-5 (10 minutes)

Salaries Expense...........................................................
Salaries Payable ....................................................

400

To record salaries incurred but not yet paid.

[One student earns, $100 x 4 days, M-R]

Quick Study 3-6 (15 minutes)

Accounts Debited and Credited
Debit
Unearned Revenue
Credit Revenue Earned

Financial Statement
Balance Sheet
Income Statement

b.

Debit
Credit

Depreciation Expense
Accumulated Depreciation

Income Statement
Balance Sheet

c.

Debit
Credit

Wages Expense
Wages Payable

Income Statement
Balance Sheet

d.

Debit
Credit

Accounts Receivable
Revenue Earned

Balance Sheet
Income Statement

e.

Debit
Credit

Insurance Expense
Prepaid Insurance

Income Statement
Balance Sheet

a.

3-5

400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-7 (10 minutes)

Cash Accounting:
Revenues (cash receipts) ......................................................
Expenses (cash payments: $22,500 - $2,250 + $3,750) ......
Net income .............................................................................

$33,000
24,000
$ 9,000

Accrual Accounting:
Revenues (earned) ................................................................
Expenses (incurred) ..............................................................
Net income ..............................................................................

$39,000
22,500
$16,500

Quick Study 3-8 (10 minutes)

The answer is c.
Explanation:
The debit balance in Prepaid Insurance was reduced by $400, implying a
$400 debit to Insurance Expense. The credit balance in Interest Payable
increased by $800, which implies an $800 debit to Interest Expense.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Quick Study 3-9 (15 minutes)

The answer is 2.
Explanation:
Insurance premium error:
Understates expenses (and overstates assets) by ..........
Accrued salaries error:
Understates expenses (and understates liabilities) by ....
Combination of errors:
Understates expenses by .....................................................
Overstates assets by .............................................................
Understates liabilities by ......................................................

$1,600
1,000
$2,600
$1,600
$1,000

Quick Study 3-10 (15 minutes)

Debit

Credit

1. Accrue salaries expense

2. Adjust the Unearned Services Revenue account

to recognize earned revenue

3. Record the earning of services revenue for which

cash will be received the following period

Adjusting entry

Quick Study 3-11 (10 minutes)

Profit margin = $37,925 / $390,000 = 9.7%
Interpretation: For each one dollar that Yang Company records as revenue, it
earns 9.7 cents in net income. Yangs 9.7% is markedly lower than the
competitors average profit margin of 15%. Thus, it must improve performance.
Quick Study 3-12A (5 minutes)
The answer is d.
Quick Study 3-13 (10 minutes)
a.

Under IFRS, financial statements normally present assets from least

liquid to most liquid.

b.

Under IFRS, financial statements normally present liabilities from

furthest from maturity to nearest to maturity.

3-7

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

EXERCISES
Exercise 3-1 (10 minutes)
1.

4.

2.

5.

3.

6.

Exercise 3-2 (30 minutes)

a.

Unearned Fee Revenue ....................................................

Fee Revenue ..................................................................

10,000
10,000

To record earned portion of fee received in advance.

b. Wages Expense .................................................................

Wages Payable ..............................................................

9,000
9,000

To record wages accrued but not yet paid.

c.

Depreciation ExpenseEquipment ................................

Accumulated DepreciationEquipment.....................

19,127
19,127

To record depreciation expense for the year.

d. Office Supplies Expense ..................................................

Office Supplies* .............................................................

5,242
5,242

To record office supplies used ($480 + $5,349 - $587).

e.

Insurance Expense ...........................................................

Prepaid Insurance** .......................................................

2,800
2,800

To record insurance coverage expired ($5,000 - $2,200).

f.

Interest Receivable .........................................................

Interest Revenue ........................................................

750
750

To record interest earned but not yet received.

g. Interest Expense .............................................................

Interest Payable...........................................................

3,500
3,500

To record interest incurred but not yet paid.

Notes:
Beg. Bal.
Purch.
End. Bal.

Office Supplies*
480
5,349
?
587

Prepaid Insurance**
Beg. Bal.
5,000
Used

?
End. Bal.

3-8

2,200

Used

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-3 (25 minutes)

a.

Depreciation ExpenseEquipment ................................

Accumulated DepreciationEquipment.....................
To record depreciation expense for the year.

16,000

b. Insurance Expense ...........................................................

Prepaid Insurance* ........................................................
To record insurance coverage that expired
($7,000 - $1,040).

5,960

c.

Office Supplies Expense ..................................................

Office Supplies** ............................................................
To record office supplies used ($300 + $2,680 - $354).

2,626

d. Unearned Fee Revenue ....................................................

Fee Revenue ..................................................................
To record earned portion of fee received in advance
($10,000 x 1/2).

5,000

e.

Insurance Expense ...........................................................

Prepaid Insurance .........................................................
To record insurance coverage that expired.

4,600

Wages Expense .................................................................

Wages Payable ..............................................................
To record wages accrued but not yet paid.

4,000

f.

16,000

5,960

2,626

5,000

4,600

4,000

Notes:
Prepaid Insurance*
Bal. Bal.
7,000
?
End. Bal.

Used

1,040

3-9

Office Supplies**
Beg. Bal.
300
Purch.
2,680
?
End. Bal.
354

Used

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-4 (25 minutes)

a.
Apr. 30 Legal Fees Expense ...........................................
Legal Fees Payable .....................................

2,500
2,500

To record accrued legal fees.

May 12 Legal Fees Payable ............................................

Cash .............................................................

2,500
2,500

To pay accrued legal fees.

b.
Apr. 30 Interest Expense ................................................
Interest Payable ..........................................
To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable ..................................................
Interest Expense .................................................
Cash ............................................................
To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c.
Apr. 30 Salaries Expense.................................................
Salaries Payable..........................................
To record accrued salaries
($9,000 x 2/5 week).
May 3

Salaries Payable .................................................

Salaries Expense ................................................
Cash .............................................................
To record payment of accrued and
current salaries ($9,000 x 3/5 week).

3-10

2,080
2,080

2,080
4,160
6,240

3,600
3,600

3,600
5,400
9,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-5 (15 minutes)

a.
b.
c.
d.

$ 1,650
$ 5,700
$10,080
$ 1,375

Proof:
(a)
Supplies available prior year-end ......... $ 300

(b)

(c)

(d)

$1,600

$ 1,360

$1,375

Supplies purchased in current year ........

2,100

5,400

10,080

6,000

Total supplies available ............................

2,400

7,000

11,440

7,375

Supplies available current year-end .....

(750)

(5,700)

(1,840)

Supplies expense for current year........... $1,650

$1,300

$ 9,600

(800)
$6,575

Exercise 3-6 (15 minutes)

a. Adjusting entry:
2011
Dec. 31

Wages Expense..............................................................500
Wages Payable ......................................................

500

To record accrued wages for one day.

(5 workers x $100 x 1 day)

b. Payday entry:
2012
Jan. 4

Wages Expense..............................................................
1,500
Wages Payable ...............................................................500
Cash ........................................................................
To record accrued and current wages.

3-11

2,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-7 (25 minutes)

Dec. 31 Accounts Receivable ..............................................
Fees Earned.....................................................
To record earned but unbilled fees
(30% x $6,000).

1,800

31 Unearned Fees .........................................................

Fees Earned.....................................................
To record earned fees collected in
advance (70% x $6,000).

4,200

31 Depreciation ExpenseComputers ......................

Accumulated DepreciationComputers ......
To record depreciation on computers.

1,500

31 Depreciation ExpenseOffice Furniture ..............

Accumulated DepreciationOffice Furniture ...
To record depreciation on office furniture.

1,750

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

Salaries Payable..............................................
To record accrued salaries.

2,450

31 Insurance Expense ..................................................

Prepaid Insurance ...........................................
To record expired prepaid insurance.

1,300

31 Office Supplies Expense .........................................

Office Supplies ................................................
To record use of office supplies.

480

31 Utilities Expense ......................................................

Utilities Payable ..............................................
To record incurred and unpaid utility costs.

70

3-12

1,800

4,200

1,500

1,750

2,450

1,300

480

70

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-8 (20 minutes)

Balance Sheet Insurance Asset using
Accrual
Cash
*
Basis
Basis
Dec. 31, 2009 ...................
$11,700
$0

Insurance Expense using

Accrual
Cash
**
Basis
Basis
2009 ..................................
$ 4,500
$16,200

Dec. 31, 2010 ...................

6,300

2010 ..................................
5,400

Dec. 31, 2011 ...................

900

2011 ..................................
5,400

Dec. 31, 2012 ...................

0

2012 ..................................
900

Total .................................
$16,200

$16,200

EXPLANATIONS:
*

Accrual asset balance equals months left in the policy x $450 per month (monthly
cost is computed as $450, from $16,200 divided by 36 months).
Months Left
Balance
12/31/2009 ....
26
$11,700
12/31/2010 ....
14
6,300
12/31/2011 ....
2
900
12/31/2012 ....
0
0
**

Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered
Expense
2009..................................
10
$ 4,500
2010..................................
12
5,400
2011..................................
12
5,400
2012..................................
2
900
$16,200

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-9 (10 minutes)

a.
b.
c.
d.
e.

$5,390
$87,644
$93,385
$55,234
$70,158

/
/
/
/
/

$44,830
$398,954
$257,082
$1,458,999
$435,925

= 12.0%
= 22.0%
= 36.3%
= 3.8%
= 16.1%

Analysis and Interpretation: Company c has the highest profitability

according to the profit margin ratio. Company c earns 36.3 cents in net
income for each one dollar of net sales recorded.
Exercise 3-10A (25 minutes)
a.
Initial credit recorded in the Unearned Fees account:
July 1 Cash .......................................................................
2,000
Unearned Fees ..............................................

2,000

Received fees for work to be done.

Cash .......................................................................
Unearned Fees ..............................................

8,400
8,400

Received fees for work to be done.

12

Unearned Fees ......................................................

Fees Earned...................................................

3-14

2,000
2,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Completed work for customer.

18

Cash .......................................................................
Unearned Fees ..............................................

7,500
7,500

Received fees for work to be done.

27

Unearned Fees ......................................................

Fees Earned...................................................

8,400
8,400

Completed work for customer.

31

No adjusting entries required.

b.

Initial credit recorded in the Fees Earned account:

July 1

Cash .......................................................................
Fees Earned...................................................

2,000
2,000

Received fees for work to be done.

Cash .......................................................................
Fees Earned...................................................

8,400
8,400

Received fees for work to be done.

12

No entry required.

18

Cash .......................................................................
Fees Earned...................................................

7,500
7,500

Received fees for work to be done.

27

No entry required.

31

Fees Earned ..........................................................

Unearned Fees ..............................................
Adjusted to reflect unearned fees for unfinished job.

3-15

7,500
7,500

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-10A - (Continued)

c. Under the first method (and using entries from a):
Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500
Fees Earned = $2,000 + $8,400 = $10,400
Under the second method (and using entries from b):

Unearned Fees = $7,500

Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial statements.]

Exercise 3-11A (30 minutes)

a.
Dec. 1 Supplies Expense ............................................
Cash ..........................................................

3,000
3,000

Purchased supplies.

b.
Dec. 2

Insurance Expense ..........................................

Cash ..........................................................

1,440
1,440

Paid insurance premiums.

c.
Dec. 15 Cash .................................................................. 12,000
Remodeling Fees Earned ........................

12,000

Received fees for work to be done.

d.
Dec. 28 Cash ..................................................................
Remodeling Fees Earned ........................
Received fees for work to be done.

3-16

3,600
3,600

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

e.
Dec. 31 Supplies .............................................................
Supplies Expense ....................................

1,920
1,920

Adjust expenses for unused supplies.

f.
Dec. 31 Prepaid Insurance ($1,440 - $240)..................
Insurance Expense ..................................

1,200
1,200

Adjust expenses for unexpired coverage.

g.
Dec. 31 Remodeling Fees Earned ..............................
Unearned Remodeling Fees ...................
Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).

3-17

9,300
9,300

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Exercise 3-12 (20 minutes)

adidas AG
Balance Sheet
December 31, 2009
(Euros in millions)

Assets
Noncurrent assets
Intangible assets ...................................................
Tangible and other assets ....................................
Total noncurrent assets ........................................
Current assets
Other current assets .............................................
Inventories .............................................................
Receivables and financial assets ........................
Cash and cash equivalents ..................................
Total current assets ..............................................
Total assets ..............................................................
Equity
Total equity ..............................................................
Liabilities
Total noncurrent liabilities .....................................
Total current liabilities ............................................
Total liabilities .........................................................
Total equity and liabilities ......................................

3-18

2,980
1,410
4,390
486
1,471
1,753
775
4,485
8,875
3,776
2,263
2,836
5,099
8,875

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

PROBLEM SET A
Problem 3-1A (35 minutes)
Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense .............................
Office Supplies ......................................

12,760
12,760

To record cost of supplies used

($3,000 + $12,400 - $2,640).

Adjustment (b)
31 Insurance Expense .......................................
Prepaid Insurance .................................

12,312
12,312

To record annual insurance coverage expense.

Policy
A
B
C
Total

Cost per Month

Months Active in 2011 2011 Cost
$660 ($15,840/24 mo.)
12
$ 7,920
363 ($13,068/36 mo.)
9
3,267
225 ($ 2,700 /12 mo.)
5
1,125
$12,312

Adjustment (c)
31 Salaries Expense (2 days x $2,100) ............
Salaries Payable....................................

4,200
4,200

To record accrued but unpaid wages.

Adjustment (d)
31 Depreciation ExpenseBuilding ................
Accumulated DepreciationBuilding

27,000
27,000

To record annual depreciation expense

[($855,000 -$45,000) / 30 years = $27,000].

Adjustment (e)
31 Rent Receivable ............................................
Rent Earned ...........................................

2,400
2,400

To record earned but unpaid Dec. rent.

Adjustment (f)
31 Unearned Rent ..............................................
Rent Earned ...........................................
To record the amount of rent earned for
November and December (2 x 2,175).

3-19

4,350
4,350

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-1A (Continued)

Part 2
Cash Payment for (c)
Jan. 6

Salaries Payable ...........................................

Salaries Expense* ........................................
Cash .......................................................

4,200
6,300
10,500

To record payment of accrued and

current salaries. *(3 days x $2,100)

15

Cash Payment for (e)

Cash ...............................................................
Rent Receivable ....................................
Rent Earned ...........................................
To record past due rent for two months.

Problem 3-2A (10 minutes)

1.

5.

9. F

2.

6.

10. D

3.

7.

11. A

4.

8.

12. D

3-20

4,800
2,400
2,400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (90 minutes)

Parts 1 and 2

Unadj. Bal.

Cash
26,000

Unadj. Bal.

Accumulated Depreciation
Equipment
Unadj. Bal.
16,000
(c)
12,000
Adj. Bal.
28,000

Accounts Receivable
0
(f)
7,500
Adj. Bal.
7,500
Unadj. Bal.

Unadj. Bal.
Adj. Bal.

Teaching Supplies
10,000
(b)
2,600

Equipment
70,000

Accounts Payable
Unadj. Bal.

Salaries Payable
Unadj. Bal.

Unadj. Bal.
Adj. Bal.

Prepaid Insurance
15,000
(a)
12,000

(g)
Adj. Bal.

Unadj. Bal.
Adj. Bal.

0
400
400

3,000
Unearned Training Fees
Unadj. Bal.

Prepaid Rent
2,000
(h)
0

36,000

7,400

(e)

11,000

4,400
Adj. Bal.

6,600

2,000
T. Watson, Capital
Unadj. Bal.

Professional Library
30,000

Unadj. Bal.

T. Watson, Withdrawals
40,000

Unadj. Bal.

Accumulated Depreciation
Professional Library
Unadj. Bal.
9,000
(d)
6,000
Adj. Bal.
15,000

3-21

63,600

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (Continued)

Tuition Fees Earned
Unadj. Bal.

(f)
Adj. Bal.

Unadj. Bal.

102,000
7,500
109,500

(h)
Adj. Bal.

Training Fees Earned

Unadj. Bal.

(e)
Adj. Bal.

Rent Expense
22,000
2,000
24,000

Teaching Supplies Expense

0
(b)
7,400
Adj. Bal.
7,400
Unadj. Bal.

38,000
4,400
42,400

Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
6,000
Adj. Bal.
6,000

Advertising Expense
Unadj. Bal.
7,000

Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
12,000
Adj. Bal.
12,000

Unadj. Bal.

Salaries Expense
Unadj. Bal.
48,000
(g)
400
Adj. Bal.
48,400
Insurance Expense
Unadj. Bal.
0
(a)
3,000
Adj. Bal.
3,000

3-22

Utilities Expense
5,600

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (Continued)

Part 2
Dec. 31

Adjustment (a)
Insurance Expense ......................................................
3,000
Prepaid Insurance ..................................................

3,000

To record the insurance expired.

Adjustment (b)
31 Teaching Supplies Expense .......................................
7,400
Teaching Supplies .................................................

7,400

To record supplies used ($10,000-$2,600).

Adjustment (c)
31 Depreciation ExpenseEquipment ...........................
12,000
Accumulated DepreciationEquipment ....................
To record equipment depreciation.

Adjustment (d)
31 Depreciation ExpenseProfess. Library ..................
6,000
Accumul. DepreciationProfess. Library ................

12,000

6,000

To record professional library depreciation.

Adjustment (e)
31 Unearned Training Fees ..............................................
4,400
Training Fees Earned ............................................

4,400

To record training fees earned that were

collected in advance.

Adjustment (f)
31 Accounts Receivable ...................................................
7,500
Tuition Fees Earned...............................................

7,500

To record tuition earned ($3,000 x 2 1/2 months).

Adjustment (g)
31 Salaries Expense .........................................................400
Salaries Payable.....................................................

400

To record accrued salaries (2 days x $100 x 2).

Adjustment (h)
31 Rent Expense ...............................................................
2,000
Prepaid Rent ...........................................................
To record expiration of prepaid rent.

3-23

2,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (Continued)

Part 3
Watson Technical Institute
Adjusted Trial Balance
December 31, 2011

Debit
$ 26,000
7,500
2,600
12,000
0
30,000

Cash ..........................................................................
Accounts receivable ................................................
Teaching supplies ...................................................
Prepaid insurance ....................................................
Prepaid rent ..............................................................
Professional library .................................................
Accumulated depreciationProfessional library ...
Equipment ................................................................
70,000
Accumulated depreciationEquipment ................
Accounts payable ....................................................
Salaries payable .......................................................
Unearned training fees ............................................
T. Watson, Capital ....................................................
T. Watson, Withdrawals ..........................................
40,000
Tuition fees earned ..................................................
Training fees earned ................................................
Depreciation expenseProfessional library ........
6,000
Depreciation expenseEquipment .......................
12,000
Salaries expense .....................................................
48,400
Insurance expense ..................................................
3,000
Rent expense............................................................
24,000
Teaching supplies expense ....................................
7,400
Advertising expense ................................................
7,000
Utilities expense.......................................................
5,600
Totals ........................................................................ $301,500

3-24

Credit

$ 15,000
28,000
36,000
400
6,600
63,600
109,500
42,400

_______
$301,500

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (Continued)

Part 4
WATSON TECHNICAL INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned ............................................ $109,500
Training fees earned ..........................................
42,400
Total revenues ....................................................
Expenses
Depreciation expenseProfessional library ...
6,000
Depreciation expenseEquipment ..................
12,000
Salaries expense ................................................
48,400
Insurance expense .............................................
3,000
Rent expense ......................................................
24,000
Teaching supplies expense...............................
7,400
Advertising expense ..........................................
7,000
Utilities expense .................................................
5,600
Total expenses ...................................................
Net income ............................................................

$151,900

113,400
$ 38,500

WATSON TECHNICAL INSTITUTE

Statement of Owners Equity
For Year Ended December 31, 2011
T. Watson, Capital, December 31, 2010 ..............
Plus: Net income ..................................................
Less: Owner withdrawals ....................................
T. Watson, Capital, December 31, 2011 ..............

3-25

$ 63,600
38,500
102,100
40,000
$ 62,100

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3A (Concluded)

WATSON TECHNICAL INSTITUTE
Balance Sheet
December 31, 2011
Assets
Cash .................................................................................
Accounts receivable ......................................................
Teaching supplies ..........................................................
Prepaid insurance ..........................................................
Professional library ........................................................ $30,000
Accumulated depreciationProfessional library ....... (15,000)
Equipment ....................................................................... 70,000
Accumulated depreciationEquipment ...................... (28,000)
Total assets .....................................................................
Liabilities
Accounts payable ...........................................................
Salaries payable .............................................................
Unearned training fees ..................................................
Total liabilities ................................................................
Equity
T. Watson, Capital ..........................................................
Total liabilities and equity .............................................

3-26

$ 26,000
7,500
2,600
12,000
15,000
42,000
$105,100

$ 36,000
400
6,600
43,000
62,100
$105,100

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-4A (45 minutes) Part 1

Account

Unadjusted
Trial Balance

Adjusted
Trial Balance

Adjustments

Cash............................................. $ 27,000
Accounts receivable...............
Office supplies..........................
Prepaid insurance...................
Office equipment.....................

12,000
18,000
7,320
92,000

(a)

10,460
(b)
(c)

15,000
2,440

$ 27,000
22,460
3,000
4,880
92,000

Accumulated depreciation
Office equipment ..............

$ 12,000

(d)

6,000

$ 18,000

Accounts payable...................

9,300

(e)
(f)
(g)

900
800
6,600

10,200
800
6,600
14,300
44,000
28,420

(a)
(h)

10,460
1,700

Interest payable........................
Salaries payable.......................
Unearned consulting fees....

16,000 (h)
44,000
28,420

Long-term notes payable .....

J. Winner, Capital.....................
J. Winner, Withdrawals..........

10,000

Consulting fees
earned .......................................
Depreciation expense
Office equipment...................
Salaries expense .....................
Interest expense.......................

10,000
156,000

71,000
1,400

Advertising expense..............

6,000

6,000

(g)

6,600
800
2,440

77,600
2,200
2,440
13,200
15,000
14,700

_______

$43,900 $290,480

$290,480

13,200

Office supplies expense........

(b)

13,800

_______ (e)

Totals........................................... $265,720 $265,720

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

168,160

(d)

(f)
(c)

Insurance expense .................

Rent expense............................

1,700

15,000
900
$43,900

Adjustment description:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.

3-27

______

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-4A
Part 2
JJW COMPANY
Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................
Expenses
Depreciation expenseOffice equipment ..
Salaries expense ..........................................
Interest expense ...........................................
Insurance expense .......................................
Rent expense ................................................
Office supplies expense ..............................
Advertising expense ....................................
Total expenses ..............................................
Net income .......................................................

3-28

$168,160
$ 6,000
77,600
2,200
2,440
13,200
15,000
14,700
131,140
$ 37,020

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

JJW COMPANY
Statement of Owners Equity
For Year Ended July 31, 2011
J. Winner, Capital, July 31, 2010 ....................
Plus: Net income .............................................
Less: Owner withdrawals ...............................
J. Winner, Capital, July 31, 2011 ....................

$28,420
37,020
65,440
10,000
$55,440

Problem 3-4A (Concluded)

Part 2 (concluded)
JJW COMPANY
Balance Sheet
July 31, 2011
Assets
Cash .............................................................................
Accounts receivable ..................................................
Office supplies ............................................................
Prepaid insurance ......................................................
Office equipment ........................................................ $92,000
Accumulated depreciationOffice equipment ....... (18,000)
Total assets .................................................................

$ 27,000
22,460
3,000
4,880
74,000
$131,340

Liabilities
Accounts payable .......................................................
Interest payable ..........................................................
Salaries payable .........................................................
Unearned consulting fees .........................................
Long-term notes payable ...........................................
Total liabilities ............................................................

$ 10,200
800
6,600
14,300
44,000
75,900

Equity
J. Winner, Capital .......................................................
Total liabilities and equity .........................................

55,440
$131,340

3-29

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-5A (50 minutes)

Part 1
CALLAHAY COMPANY
Income Statement
For Year Ended December 31, 2011
Revenues
Fees earned .............................................. $420,000
Interest earned .......................................... 16,000
Total revenues ..........................................
Expenses
Depreciation expenseAutomobiles ..... 18,000
Depreciation expenseEquipment ........ 10,000
Salaries expense ...................................... 180,000
Wages expense ........................................ 32,000
Interest expense ....................................... 24,000
Office supplies expense .......................... 26,000
Advertising expense ................................ 50,000
Repairs expenseAutomobiles ............. 16,800
Total expenses .........................................
Net income ..................................................

3-30

$436,000

356,800
$ 79,200

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

CALLAHAY COMPANY
Statement of Owner's Equity
For Year Ended December 31, 2011
J. Callahay, Capital, December 31, 2010 ..
Plus: Net income .......................................
Less: Withdrawals by owner ....................
J. Callahay, Capital, December 31, 2011 ..

$247,800
79,200
327,000
38,000
$289,000

Problem 3-5A (Concluded)

Part 1 (concluded)
CALLAHAY COMPANY
Balance Sheet
December 31, 2011
Assets
Cash ........................................................................
Accounts receivable ..............................................
Interest receivable..................................................
Notes receivable (due in 90 days) ........................
Office supplies .......................................................
Automobiles ...........................................................
Accumulated depreciationAutomobiles ...........
Equipment...............................................................
Accumulated depreciationEquipment ..............
Land .........................................................................
Total assets ............................................................

$ 22,000
44,000
10,000
160,000
8,000
$160,000
(42,000)
130,000
(10,000)

118,000
120,000
70,000
$552,000

Liabilities
Accounts payable ..................................................
Interest payable ......................................................
Salaries payable .....................................................
Unearned fees ........................................................
Long-term notes payable ......................................
Total liabilities ........................................................

$ 88,000
12,000
11,000
22,000
130,000
263,000

Owners Equity
J. Callahay, Capital ................................................

289,000

3-31

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Total liabilities and equity .....................................

$552,000

Part 2
Profit margin = $79,200 / $436,000 = 18.2%
Problem 3-6AA (40 minutes)
Part 1
Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.

Nov. 1

Prepaid Advertising .......................................

Cash ..........................................................

1,500
1,500

Paid for future advertising.

Prepaid Insurance ...........................................

Cash ..........................................................

2,160
2,160

Paid insurance for one year.

30 Cash ..................................................................
Unearned Service Fees ...........................

3,300
3,300

Received fees in advance.

Dec. 1 Prepaid Consulting Fees ...............................

Cash ..........................................................

2,700
2,700

Paid for future consulting.

15 Cash ..................................................................
Unearned Service Fees ...........................

7,650
7,650

Received fees in advance.

31 Advertising Expense .......................................

Prepaid Advertising ................................

600
600

To adjust prepaid advertising ($1,500-$900).

31 Insurance Expense ..........................................

Prepaid Insurance ....................................
To adjust prepaid insurance
($2,160 x 2/12).

3-32

360
360

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

31...........................................Unearned Service Fees

Service Fees Earned ................................

2,100

To adjust unearned service fees

($3,300-$1,200).

31 Consulting Fees Expense ..............................

Prepaid Consulting Fees .........................

900
900

To adjust prepaid consulting fees

($2,700 x 1/3).

31 Unearned Service Fees ..................................

Service Fees Earned ................................
To adjust unearned service fees.

3-33

3,000
3,000

2,100

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-6AA (Continued)

Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.

Nov.1

Advertising Expense .......................................

Cash ..........................................................

1,500
1,500

Paid for future advertising.

Insurance Expense ..........................................

Cash ..........................................................

2,160
2,160

Paid insurance for one year.

30

Cash ..................................................................
Service Fees Earned ................................

3,300
3,300

Received fees in advance.

Dec. 1

Consulting Fees Expense ...............................

Cash ..........................................................

2,700
2,700

Paid for future consulting.

15

Cash ..................................................................
Service Fees Earned ................................

7,650
7,650

Received fees in advance.

31

Prepaid Advertising ........................................

Advertising Expense ...............................

900
900

To adjust for prepaid advertising.

31

Prepaid Insurance ...........................................

Insurance Expense ..................................

1,800
1,800

To adjust for prepaid insurance.

31

Service Fees Earned .......................................

Unearned Service Fees ...........................

1,200
1,200

To adjust for unearned service fees.

31

Prepaid Consulting Fees ................................

Consulting Fees Expense .......................

1,800
1,800

To adjust for prepaid consulting fees.

31

Service Fees Earned .......................................

Unearned Service Fees ...........................
To adjust for unearned service fees.

3-34

4,650
4,650

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-6AA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Advertising expense for two months .....................................
Prepaid advertising as of December 31 .................................
Insurance expense for two months ........................................
Prepaid insurance as of December 31 ...................................
Consulting fees expense (1/3 of total paid) ...........................
Prepaid consulting fees ...........................................................
Service fees earned for two months ($2,100 + $3,000) .........
Unearned service fees at 12/31 ($1,200 + $4,650) .................

$ 600
900
360
1,800
900
1,800
5,100
5,850

When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

3-35

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

PROBLEM SET B
Problem 3-1B (30 minutes)
Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense .......................................
Office Supplies ................................................

3,450
3,450

To record cost of supplies used

($500 + $3,650 - $700).

Adjustment (b)
31 Insurance Expense .................................................
Prepaid Insurance ...........................................

2,675
2,675

To record annual insurance coverage expense.

Policy
A
B
C
Total

Cost per Month

$125 ($3,000/24 mo.)
100 ($3,600/36 mo.)
55 ( $660 / 12 mo.)

Months Active
in 2011
12
9
5

2011
Expense
$1,500
900
275
$2,675

Adjustment (c)
31 Salaries Expense ....................................................
Salaries Payable..............................................

800
800

To record accrued but unpaid wages

(1 day x $800).

Adjustment (d)
31 Depreciation ExpenseBuilding ..........................
Accumulated DepreciationBuilding ..........
To record annual depreciation
[($155,000-$20,000) / 25 years = $5,400].

3-36

5,400
5,400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-1B (Concluded)

Adjustment (e)
Oct. 31 Rent Receivable ......................................................
Rent Earned .....................................................

600
600

To record earned but unpaid Oct. rent.

Adjustment (f)
31 Unearned Rent ........................................................
Rent Earned .....................................................

1,050
1,050

To record rent earned for September

and October (2 x $525).

Part 2
Cash Payment for (c)
Nov. 7

Salaries Payable .....................................................

Salaries Expense* ..................................................
Cash .................................................................

800
3,200
4,000

To record payment of accrued and

current salaries. *(4 days x $800)

Cash Payment for (e)

15

Cash .........................................................................
Rent Receivable ..............................................
Rent Earned .....................................................
To record past due rent for two months.

3-37

1,200
600
600

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-2B (15 minutes)

1.

5.

9. F

2.

6.

10. I

3.

7.

11. A

4.

8.

12. B

Problem 3-3B (90 minutes)

Parts 1 and 2
Unadj. Bal.

Cash
50,000

Accounts Payable
Unadj. Bal.

Accounts Receivable
0
(f)
5,500
Adj. Bal.
5,500

Salaries Payable

Unadj. Bal.

Unadj. Bal.
Adj. Bal.

Unadj. Bal.
Adj. Bal.

Unadj. Bal.
Adj. Bal.

Teaching Supplies
60,000
(b)
2,500
Prepaid Insurance
18,000
(a)
11,600
Prepaid Rent
2,600
(h)
0

12,200

Unadj. Bal.

(g)
Adj. Bal.

0
540
540

Unearned Training Fees

57,500

(e)

Unadj. Bal.

27,600

Adj. Bal.

18,400

9,200

M. Alcorn, Capital
Unadj. Bal.

6,400
M. Alcorn, Withdrawals
20,000

Unadj. Bal.

2,600

Professional Library
10,000

Unadj. Bal.

Accumulated Depreciation
Professional Library
Unadj. Bal.
1,500
(d)
2,000

3-38

68,500

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Adj. Bal.

Unadj. Bal.

3,500

Equipment
30,000

Accumulated Depreciation
Equipment
Unadj. Bal. 16,000
(c)
4,000
Adj. Bal.
20,000

3-39

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3B (Continued)

Parts 1 and 2
Tuition Fees Earned
Unadj. Bal.

(f)
Adj. Bal.

105,000
5,500
110,500

Training Fees Earned

Unadj. Bal.

(e)
Adj. Bal.

62,000
9,200
71,200

Depreciation Expense
Professional Library
Unadj. Bal.
0
(d)
2,000
Adj. Bal.
2,000
Depreciation Expense
Equipment
Unadj. Bal.
0
(c)
4,000
Adj. Bal.
4,000

Unadj. Bal.

(g)
Adj. Bal.

Unadj. Bal.

(a)
Adj. Bal.

Unadj. Bal.

(h)
Adj. Bal.

Salaries Expense
43,200
540
43,740
Insurance Expense
0
6,400
6,400
Rent Expense
28,600
2,600
31,200

Teaching Supplies Expense

Unadj. Bal.
0
(b)
57,500
Adj. Bal.
57,500

3-40

Advertising Expense
18,000

Unadj. Bal.

Utilities Expense
Unadj. Bal.
12,400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3B (Continued)

Part 2
Adjustment (a)
Dec. 31 Insurance Expense ................................................
Prepaid Insurance ..........................................

6,400
6,400

To record the insurance expired.

Adjustment (b)
31 Teaching Supplies Expense ................................. 57,500
Teaching Supplies .........................................

57,500

To record the cost of supplies used

($60,000-$2,500).

31

Adjustment (c)
Depreciation ExpenseEquipment.....................
Accumulated DepreciationEquipment .....

4,000
4,000

To record equipment depreciation.

31

Adjustment (d)
Depreciation ExpenseProfessional Library ....
Accumulated Depreciation
Professional Library .............................

2,000
2,000

To record professional library depreciation.

31

Adjustment (e)
Unearned Training Fees .......................................
Training Fees Earned ....................................

9,200
9,200

To record training fees earned that were

collected in advance.

31

Adjustment (f)
Accounts Receivable ............................................
Tuition Fees Earned.......................................

5,500
5,500

To record tuition earned ($2,200 x 2 1/2 mo).

31

Adjustment (g)
Salaries Expense ...................................................
Salaries Payable.............................................

540
540

To accrue salaries expense (3 days x $180).

31

Adjustment (h)
Rent Expense ........................................................
Prepaid Rent ...................................................
To record expiration of prepaid rent.

3-41

2,600
2,600

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3B (Continued)

Part 3
ALCORN INSTITUTE
Adjusted Trial Balance
December 31, 2011

Debit
Cash ........................................................................................... $ 50,000
Accounts receivable ...............................................................
5,500
Teaching supplies ...................................................................
2,500
Prepaid insurance ...................................................................
11,600
Prepaid rent ..............................................................................
0
Professional library.................................................................
10,000
Accumulated depreciationProfessional library ............
Equipment ................................................................................
30,000
Accumulated depreciationEquipment ............................
Accounts payable ...................................................................
Salaries payable ......................................................................
Unearned training fees ...........................................................
M. Alcorn, Capital ....................................................................
M. Alcorn, Withdrawals ..........................................................
20,000
Tuition fees earned .................................................................
Training fees earned ...............................................................
Depreciation expenseProfessional library .....................
2,000
Depreciation expenseEquipment ....................................
4,000
Salaries expense .....................................................................
43,740
Insurance expense..................................................................
6,400
Rent expense ...........................................................................
31,200
Teaching supplies expense ..................................................
57,500
Advertising expense...............................................................
18,000
Utilities expense ......................................................................
12,400
Totals ......................................................................................... $304,840

3-42

Credit

$ 3,500
20,000
12,200
540
18,400
68,500
110,500
71,200

_______
$304,840

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3B (Continued)

Part 4
ALCORN INSTITUTE
Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned ................................................... $110,500
Training fees earned .................................................
71,200
Total revenues ...........................................................
Expenses
Depreciation expenseProfessional library ..........
2,000
Depreciation expenseEquipment .........................
4,000
Salaries expense .......................................................
43,740
Insurance expense ....................................................
6,400
Rent expense .............................................................
31,200
Teaching supplies expense......................................
57,500
Advertising expense .................................................
18,000
Utilities expense ........................................................
12,400
Total expenses ..........................................................
Net income ...................................................................

$181,700

175,240
$ 6,460

ALCORN INSTITUTE
Statement of Owners Equity
For Year Ended December 31, 2011
M. Alcorn, Capital, December 31, 2010 ..............
Plus: Net income ..................................................
Less: Owner withdrawals ....................................
M. Alcorn, Capital, December 31, 2011 ..............

3-43

$68,500
6,460
74,960
20,000
$54,960

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-3B (Concluded)

ALCORN INSTITUTE
Balance Sheet
December 31, 2011
Assets
Cash ..............................................................................
Accounts receivable ...................................................
Teaching supplies .......................................................
Prepaid insurance .......................................................
Professional library ..................................................... $10,000
Accumulated depreciationProfessional library .......... (3,500)
Equipment .................................................................... 30,000
Accumulated depreciationEquipment ................... (20,000)
Total assets ..................................................................
Liabilities
Accounts payable ........................................................
Salaries payable ..........................................................
Unearned training fees ...............................................
Total liabilities .............................................................
Equity
M. Alcorn, Capital ........................................................
Total liabilities and equity ..........................................

3-44

$50,000
5,500
2,500
11,600
6,500
10,000
$86,100

$12,200
540
18,400
31,140
54,960
$86,100

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-4B (45 minutes) Part 1

Unadjusted
Trial Balance

Account

Cash ................................................$ 48,000

Accounts receivable .................. 70,000
Office supplies ............................. 30,000
Prepaid insurance....................... 13,200
Office equipment.........................150,000
Accumulated depreciation
Office equipment.............................

Accounts payable.......................
Interest payable............................
Salaries payable ..........................
Unearned consulting fees........
Long-term notes payable.........
D. Chen, Capital ...........................
D. Chen, Withdrawals ................ 10,000
Consulting fees earned............

(a)

6,660
(b)
(c)

$ 30,000

(d)

36,000

30,000 (h)
80,000
70,200

23,000
4,600

$ 48,000
76,660
7,000
8,600
150,000

10,000

$ 40,000

(e)
(f)
(g)

6,000
1,600
11,200

42,000
1,600
11,200
17,800
80,000
70,200

(a)
(h)

6,660
12,200

12,200

10,000
264,000

Depreciation expense
Office equipment......................
Salaries expense.........................115,600
Interest expense .......................... 6,400
Insurance expense....................
Rent expense ............................... 24,000
Office supplies expense ...........
Advertising expense.................. 43,000 _______
Totals...............................................
$510,200 $510,200

(a)
(b)
(c)
(d)
(e)
(f)
(g)
(h)

Adjusted
Trial Balance

Adjustments

282,860

(d)

10,000

10,000

(g)
(f)
(c)

11,200
1,600
4,600

(b)
(e)

23,000
6 ,000
$75,260

126,800
8,000
4,600
24,000
23,000
______
49,000 _______
$75,260 $545,660 $545,660

Adjustment Descriptions:
Earned but uncollected revenues.
Cost of consumed office supplies.
Cost of expired insurance coverage.
Depreciation expense on office equipment.
Incurred but unpaid advertising expense.
Incurred but unpaid interest expense.
Incurred but unpaid salaries expense.
Earned revenues previously received in advance.

3-45

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-4B
Part 2
DAXU CONSULTING COMPANY
Income Statement
For Year Ended December 31, 2011
Revenues
Consulting fees earned .....................................
Expenses
Depreciation expenseOffice equipment ....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................
8,000
Insurance expense ............................................
4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses ...................................................
Net income ............................................................

$282,860

245,400
$ 37,460

DAXU CONSULTING COMPANY

Statement of Owners Equity
For Year Ended December 31, 2011
D. Chen, Capital, December 31, 2010 .................
Plus: Net income ..................................................
Less: Owner withdrawals ....................................
D. Chen, Capital, December 31, 2011 .................

3-46

$ 70,200
37,460
107,660
10,000
$ 97,660

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-4B (Concluded)

Part 2 (concluded)
DAXU CONSULTING COMPANY
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................
$ 48,000
Accounts receivable .....................................................
76,660
Office supplies ...............................................................
7,000
Prepaid insurance .........................................................
8,600
Office equipment ........................................................... $150,000
Accumulated depreciationOffice equipment .......... (40,000) 110,000
Total assets ....................................................................
$250,260
Liabilities
Accounts payable ..........................................................
Interest payable .............................................................
Salaries payable ............................................................
Unearned consulting fees ............................................
Long-term notes payable ..............................................
Total liabilities ...............................................................

$ 42,000
1,600
11,200
17,800
80,000
152,600

Equity
D. Chen, Capital .............................................................
Total liabilities and equity ............................................

97,660
$250,260

3-47

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-5B (50 minutes)

Part 1
LIGHTNING COURIER
Income Statement
For Year Ended December 31, 2011
Revenues
Delivery fees earned ..................................... $580,000
Interest earned ............................................... 24,000
Total revenues ...............................................
Expenses
Depreciation expenseTrucks .................... 24,000
Depreciation expenseEquipment ............. 46,000
Salaries expense ........................................... 64,000
Wages expense ............................................. 290,000
Interest expense ............................................ 25,000
Office supplies expense ............................... 33,000
Advertising expense ..................................... 26,400
Repairs expenseTrucks ............................ 34,600
Total expenses ..............................................
Net income .......................................................

$604,000

543,000
$ 61,000

LIGHTNING COURIER
Statement of Owner's Equity
For Year Ended December 31, 2011
J. Hallam, Capital, December 31, 2010 ..........
Plus : Net income ...........................................
Less: Withdrawals by owner .........................
J. Hallam, Capital, December 31, 2011 ..........

3-48

$115,000
61,000
176,000
40,000
$136,000

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-5B (Concluded)

Part 1 (concluded)
LIGHTNING COURIER
Balance Sheet
December 31, 2011
Assets
Cash ......................................................................
$ 48,000
Accounts receivable ............................................
110,000
Interest receivable ................................................
6,000
Notes receivable (due in 90 days).........................
200,000
Office supplies .....................................................
12,000
Trucks ................................................................... $124,000
Accumulated depreciationTrucks ...................
(48,000)
76,000
Equipment .............................................................
260,000
Accumulated depreciationEquipment ............ (190,000)
70,000
Land .......................................................................
90,000
Total assets ..........................................................
$612,000
Liabilities
Accounts payable ................................................
Interest payable ....................................................
Salaries payable ...................................................
Unearned delivery fees ........................................
Long-term notes payable ....................................
Total liabilities ......................................................

$124,000
22,000
30,000
110,000
190,000
476,000

Equity
J. Hallam, Capital .................................................
Total liabilities and equity ...................................

136,000
$612,000

3-49

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Part 2
Profit margin = $61,000 / $604,000 = 10.1%
Problem 3-6BA (40 minutes)
Part 1
Method that records prepaid expenses and unearned revenues in balance sheet accounts:

Apr. 1

Prepaid Consulting Fees ..................................... 3,450

Cash ...............................................................

3,450

Paid for future consulting services.

Prepaid Insurance ................................................ 2,700

Cash ...............................................................

2,700

Paid insurance for one year.

30 Cash ....................................................................... 7,500

Unearned Service Fees ................................

7,500

Received fees in advance.

May 1

Prepaid Advertising ............................................. 3,450

Cash ...............................................................

3,450

Paid for future advertising.

23

Cash ..................................................................... 9,450

Unearned Service Fees ...............................

9,450

Received fees in advance.

31 Consulting Fees Expense .................................... 1,500

Prepaid Consulting Fees ..............................

1,500

To adjust prepaid consulting fees.

31 Insurance Expense ...............................................

Prepaid Insurance .........................................

450
450

To adjust prepaid insurance.

31 Unearned Service Fees ....................................... 3,900

Service Fees Earned .....................................

3,900

To adjust unearned service fees.

31 Advertising Expense ............................................ 2,400

Prepaid Advertising ......................................
To adjust prepaid advertising.

31 Unearned Service Fees ........................................ 4,500

3-50

2,400

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

................................................Service Fees Earned

................................................4,500

To adjust unearned service fees.

Problem 3-6BA (Continued)

Part 2

Method that records prepaid expenses and unearned revenues in income statement accounts:

Apr. 1

Consulting Fees Expense .................................

Cash .............................................................

3,450
3,450

Paid for future consulting services.

Insurance Expense .............................................

Cash .............................................................

2,700
2,700

Paid insurance for one year.

30

Cash .....................................................................
Service Fees Earned ...................................

7,500
7,500

Received fees in advance.

May 1

Advertising Expense ..........................................

Cash .............................................................

3,450
3,450

Paid for future advertising.

23

Cash .....................................................................
Service Fees Earned ...................................

9,450
9,450

Received fees in advance.

31

Prepaid Consulting Fees ...................................

Consulting Fees Expense ..........................

1,950
1,950

To adjust for prepaid consulting fees.

31

Prepaid Insurance .............................................

Insurance Expense .....................................

2,250
2,250

To adjust for prepaid insurance.

31

Service Fees Earned ..........................................

Unearned Service Fees .............................

3,600
3,600

To adjust for unearned service fees.

31

Prepaid Advertising ...........................................

Advertising Expense ..................................

1,050
1,050

To adjust for prepaid advertising.

31

Service Fees Earned ..........................................

Unearned Service Fees .............................
To adjust for unearned service fees.

3-51

4,950
4,950

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Problem 3-6BA (Concluded)

Part 3
There are no differences between the two methods in terms of the amounts
that appear on the financial statements. In both cases, the financial
statements reflect the following:
Prepaid consulting fees as of May 31 .........................................
Consulting fees expense for two months ..................................
Insurance expense for two months ............................................
Prepaid insurance as of May 31 ..................................................
Unearned service fees as of May 31 ($3,600 + $4,950) .............
Service fees earned for two months ($3,900 + $4,500) .............
Prepaid advertising as of May 31 ................................................
Advertising expense for two months..........................................

$ 1,950
1,500
450
2,250
8,550
8,400
1,050
2,400

When prepaid expenses and unearned revenues are recorded in balance

sheet accounts, the related adjusting entries are designed to generate the
correct asset, expense, liability, and revenue account balances. When
prepaid expenses and unearned revenues are recorded in income
statement accounts, the related adjusting entries are designed to
accomplish exactly the same result.

3-52

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

SERIAL PROBLEM SP 3
Serial Problem, Business Solutions (180 minutes) Part 1
<Note: The general ledger is displayed at the end of Part 6>

Journal entries
Dec. 2

Advertising Expense .................................. 655

Cash .....................................................101

1,025
1,025

Paid share of mall advertising costs.

Repairs ExpenseComputer ..................... 684

Cash .....................................................101

500
500

Repaired the computer.

Cash ............................................................. 101

Accounts Receivable ..........................106

3,950
3,950

Collected accounts receivable.

10

Wages Expense .......................................... 623

Cash .....................................................101

750
750

Paid employee for part-time work.

14

Cash ............................................................. 101

Unearned Computer Services Revenue ...236

1,500
1,500

Received advance on work to be performed.

15

Computer Supplies .................................... 126

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

1,100
1,100

Purchased supplies on credit.

16

No entry recorded in the journal.

20

Cash ............................................................. 101

Computer Services Revenue .............403

5,625
5,625

Collected cash revenue from customer.

28

Cash ............................................................. 101

Accounts Receivable ..........................106

3,000
3,000

Collected accounts receivable.

29

Mileage Expense ........................................ 676

Cash .....................................................101

192
192

Reimbursed Rey for mileage.

31

S. Rey, Withdrawals ................................... 302

Cash .....................................................101
Paid cash for owner withdrawal.

3-53

1,500
1,500

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Part 2
Adjusting entries
Dec. 31 Computer Supplies Expense .........................652
Computer Supplies .................................126

3,065
3,065

Adjustment for supplies used (supplies

balance less cost of supplies available).

31 Insurance Expense .........................................637

Prepaid Insurance ...................................128

555
555

Adjustment for expired insurance (1/4

of $2,220 original prepaid amount).

31 Wages Expense ..............................................623

Wages Payable ........................................210

500
500

Adjustment for accrued wages.

31 Depreciation ExpenseComputer Equip .......613

Accumulated Depreciation
Computer Equipment ...........................168

1,250
1,250

Adjustment for computer equipment depreciation:

Cost ......................................................... $20,000
Predicted life ...........................................
4 years
Annual depreciation (cost/life) ...............
$5,000
Expense for three months ......................
$1,250

31 Depreciation ExpenseOffice Equip ............612

Accumulated Depreciation
Office Equipment ..................................164

400
400

Adjustment for office equipment depreciation:

Cost .........................................................
Predicted life ...........................................
Annual depreciation (cost/life) ...............
Expense for three months ......................

$8,000
5 years
$1,600
$400

31 Rent Expense ..................................................640

Prepaid Rent ............................................131
Adjustment for expired rent (3/4 of
$3,300 original prepaid amount).

3-54

2,475
2,475

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Part 3
BUSINESS SOLUTIONS
Adjusted Trial Balance
December 31, 2011
Debit
Cash ........................................................................... $ 48,372
Accounts receivable .................................................
5,668
Computer supplies ...................................................
580
Prepaid insurance .....................................................
1,665
Prepaid rent ...............................................................
825
Office equipment ......................................................
8,000
Accumulated depreciationOffice equipment .......
Computer equipment ................................................
20,000
Accumulated depreciationComputer equipment
Accounts payable .....................................................
Wages payable ..........................................................
Unearned computer services revenue ...................
S. Rey, Capital ............................................................
S. Rey, Withdrawals ...................................................
7,100
Computer services revenue .....................................
Depreciation expenseOffice equipment ..............
400
Depreciation expenseComputer equipment ........
1,250
Wages expense .........................................................
3,875
Insurance expense ...................................................
555
Rent expense ............................................................
2,475
Computer supplies expense ....................................
3,065
Advertising expense ..................................................
2,753
Mileage expense .......................................................
896
Miscellaneous expenses ..........................................
250
Repairs expenseComputer ...................................
1,305
Totals .......................................................................... $109,034

3-55

Credit

400
1,250
1,100
500
1,500
73,000
31,284

_______
$109,034

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Part 4
BUSINESS SOLUTIONS
Income Statement
For Three Months Ended December 31, 2011
Revenue
Computer services revenue.......................................
Expenses
Depreciation expenseOffice equipment ...............
Depreciation expenseComputer equipment .........
Wages expense ...........................................................
Insurance expense .....................................................
Rent expense ..............................................................
Computer supplies expense ......................................
Advertising expense ...................................................
Mileage expense .........................................................
Miscellaneous expenses ............................................
Repairs expenseComputer.....................................
Total expenses ............................................................
Net income ....................................................................

$31,284
$ 400
1,250
3,875
555
2,475
3,065
2,753
896
250
1,305
16,824
$14,460

Part 5
BUSINESS SOLUTIONS
Statement of Owners Equity
For Three Months Ended December 31, 2011
S. Rey, Capital, October 1, 2011 ..................................
Plus: Net income ..........................................................
Less: Withdrawals ........................................................
S. Rey, Capital, December 31, 2011 ............................

3-56

$73,000
14,460
87,460
7,100
$80,360

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Part 6
BUSINESS SOLUTIONS
Balance Sheet
December 31, 2011
Assets
Cash ................................................................................
Accounts receivable .....................................................
Computer supplies ........................................................
Prepaid insurance .........................................................
Prepaid rent ...................................................................
Office equipment ........................................................... $ 8,000
Accumulated depreciationOffice equipment .............
(400)
Computer equipment .....................................................
Accumulated depreciationComputer equipment ......
Total assets .....................................................................
Liabilities
Accounts payable ...........................................................
Wages payable ...............................................................
Unearned computer services revenue .........................
Total liabilities ................................................................
Equity
S. Rey, Capital ................................................................
Total liabilities and equity .............................................

3-57

20,000
(1,250)

$ 48,372
5,668
580
1,665
825
7,600
18,750
$ 83,460

1,100
500
1,500
3,100

80,360
$ 83,460

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

[Note: Ledger includes all entries from prior three months. The Working Papers shorten
the solution by showing account balances as of November 30.]

General Ledger

Cash
Date
Oct.

Nov.

Dec.

Explanation

PR

1
2
5
8
15
17
20
22
31
31
1
2
5
18
22
28
30
30
2
3
4
10
14
20
28
29
31

Debit
45,000

4,800

1,400

4,633
2,208

3,950
1,500
5,625
3,000

3-58

Acct. No. 101

Credit
Balance
45,000
3,300
41,700
2,220
39,480
1,420
38,060
42,860
805
42,055
1,728
40,327
41,727
875
40,852
3,600
37,252
320
36,932
41,565
1,125
40,440
42,648
250
42,398
384
42,014
1,750
40,264
2,000
38,264
1,025
37,239
500
36,739
40,689
750
39,939
41,439
47,064
50,064
192
49,872
1,500
48,372

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Date
Oct.

Nov.

Dec.

Date
Oct.
Nov.
Dec.

Date
Oct.
Dec.

Date
Oct.
Dec.

Date
Oct.

Date
Dec.

6
12
15
22
28
8
18
24
4
28

Accounts Receivable
Explanation
PR
Debit
4,800
1,400

5,208
5,668
3,950

Computer Supplies
Explanation
PR
3
5
15
31
Prepaid Insurance
Explanation
PR
5
31
Prepaid Rent
Explanation
PR
2
31
Office Equipment
Explanation
PR
1

Acct. No. 106

Credit
Balance
4,800
6,200
4,800
1,400
1,400
0
5,208
10,876
2,208
8,668
12,618
3,950
8,668
3,000
5,668

Debit
1,420
1,125
1,100

Acct. No. 126

Credit
Balance
1,420
2,545
3,645
3,065
580

Debit
2,220

Acct. No. 128

Credit
Balance
2,220
555
1,665

Debit
3,300

Acct. No. 131

Credit
Balance
3,300
2,475
825

Debit
8,000

Acct. No. 163

Credit
Balance
8,000

Accumulated DepreciationOffice Equipment

Acct. No. 164
Explanation
PR
Debit
Credit
Balance
31
400
400

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

Date
Oct.

Date
Dec.

Date
Oct.
Dec.

Date
Dec.

Date
Dec.

Date
Oct.

Date
Oct.
Nov.
Dec.

Computer Equipment
Explanation
PR
Debit
20,000

Acct. No. 167

Credit
Balance
20,000

Accumulated DepreciationComputer Equipment

Acct. No. 168
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250
Accounts Payable
Explanation
PR
Debit
3
8
15

1,420

Explanation

Wages Payable
PR

Debit

31

Acct. No. 210

Credit
Balance
500
500

Unearned Computer Services Revenue

Explanation
PR
Debit

Acct. No. 236

Credit
Balance
1,500
1,500

S. Rey, Capital
Explanation
PR

Acct. No. 301

Credit
Balance
73,000
73,000

14

Debit

31
30
31

Acct. No. 201

Credit
Balance
1,420
1,420
0
1,100
1,100

S. Rey, Withdrawals
Explanation
PR
Debit
3,600
2,000
1,500

3-60

Acct. No. 302

Credit
Balance
3,600
5,600
7,100

Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Continued)

6
12
28
2
8
24
20

Acct. No. 403

Credit
Balance
4,800
4,800
1,400
6,200
5,208
11,408
4,633
16,041
5,668
21,709
3,950
25,659
5,625
31,284

Date
Dec.

31

Depreciation ExpenseOffice Equipment

Acct. No. 612
Explanation
PR
Debit
Credit
Balance
400
400

Date
Dec.

Depreciation ExpenseComputer Equipment

Acct. No. 613
Explanation
PR
Debit
Credit
Balance
31
1,250
1,250

Date
Oct.

Nov.

Dec.

Date
Oct.
Nov.
Dec.

Date
Dec.

Computer Services Revenue

Explanation
PR
Debit

Wages Expense
Explanation
PR
31
30
10
31

Debit
875
1,750
750
500

Acct. No. 623

Credit
Balance
875
2,625
3,375
3,875

31

Insurance Expense
Explanation
PR
Debit
555

Acct. No. 637

Credit
Balance
555

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Serial Problem, SP 3 (Concluded)

Date
Dec.

Date
Dec.

Date
Oct.
Dec.

Date
Nov.
Dec.

Date
Nov.

Date
Oct.
Dec.

31

Debit
2,475

Acct. No. 640

Credit
Balance
2,475

31

Computer Supplies Expense

Explanation
PR
Debit
3,065

Acct. No. 652

Credit
Balance
3,065

20
2

Advertising Expense
Explanation
PR
Debit
1,728
1,025

Acct. No. 655

Credit
Balance
1,728
2,753

Mileage Expense
Explanation
PR
1
28
29

Debit
320
384
192

Acct. No. 676

Credit
Balance
320
704
896

22

Miscellaneous Expense
Explanation
PR
Debit
250

Acct. No. 677

Credit
Balance
250

17
3

Repairs ExpenseComputer
Explanation
PR
Debit
805
500

Acct. No. 684

Credit
Balance
805
1,305

Explanation

Rent Expense
PR

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Reporting in Action

BTN 3-1

1. The revenue recognition principle requires that revenue be recorded

when realized or realizable and earned, not before and not after. Most
companies earn revenue when they provide services and products to
customers.
2. Research In Motion provides information on revenue recognition in its
footnote 1 titled Research In Motion Limited and Summary of
Significant Accounting Policies. They report that Revenue from the
sales of Blackberry devices is recognized when title is transferred to the
customer and all significant contractual obligations that affect the
customers final acceptance have been fulfilled. For hardware products
for which software is deemed not to be incidental, the Company
recognizes revenue in accordance with industry specific software
revenue recognition guidance. Research In Motion also explains how it
estimates accruals for price protection commitments, incentive
programs, warranties and royalties related to sales of Blackberry
devices.
3. For fiscal year-end February 28, 2009, the profit margin is ($ millions):
$1,893 / $11,065 = 0.171 = 17.1%
For fiscal year-end February 27, 2010, the profit margin is ($ millions):
$2,457 / $14,953 = 0.164 = 16.4%
4. Solution depends on the financial statements accessed.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Comparative Analysis

BTN 3-2

1. Research In Motion
Current year, profit margin = $2,457 / $14,953 = 16.4%
Prior year, profit margin
= $1,893 / $11,065 = 17.1%
Apple
Current year, profit margin = $8,235 / $42,905
Prior year, profit margin
= $6,119 / $37,491

= 19.2%
= 16.3%

2. Apple is more successful on the basis of profit margin in the current

year relative to Research In Motion, but Research In Motion is more
successful based on the prior year profit margin. Research In Motions
profit margin declined in the current year while Apples increased. In
the current year, Research In Motion earned an average of 16.4 cents on
each dollar while Apple earned 19.2 cents on each dollar.

Ethics Challenge

BTN 3-3

1. GAAP requires that annual deprecation be accumulated in a contraasset account, called Accumulated Depreciation. While property, plant,
and equipment is often shown at its net value on the balance sheet (as
with Research In Motions balance sheet in Appendix A) the cost of
property, plant, and equipment along with its related accumulated
depreciation are reported in the footnotes. Thus, Bergez is correct with
her journal entry recommendation.
2. One strength of Welchs method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the
adjusted trial balance would be directly transferable to the balance sheet
when the preparer desired to show the amount at net. Welchs approach
carries weaknesses in that financial statement users would not be able
to ascertain the original cost of the equipment or be able to know how
much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergezs approach. As a professional,
Bergez is required to uphold the standards of her profession and, thus,
the decision is an ethical one for her.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Communicating in Practice

BTN 3-4

This communication activity has no set solution. A class discussion of the

ratios can be conducted with emphasis on (1) return and profitability by
industries and (2) a contrast of debt financing between industries.

Taking It to the Net

BTN 3-5

1. The Gaps main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands.
2. The Gaps fiscal year-end is January 30, 2010. It appears that The Gaps
fiscal year-end is consistently set as of the Saturday closest to January
31 meaning it falls in the last week of January or first week of
February.
3. Net sales for the year ended January 30, 2010, are $14,197 million.
4. Net income for the year ended January 30, 2010, is $1,102 million.
5. Profit margin = $1,102 million / $14,197 million = 7.76%
6. The company probably chose a fiscal year-end as the end of January or
early February to have it be consistent with their natural year. For many
retailers, the highest amount of sales is in November and December
(with some residual in January including sales returns).

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Teamwork in Action

BTN 3-6

Note that there is no specific solution to this activity. Still, the presentation
of each expert team should reflect the following summary points:

Type

Before Adjusting
Balance Sheet
Account
Account

Prepaid expense

Asset overstated

Income Statement
Adjusting Entry

Expense understated Dr. Expense

Cr. Asset*

Unearned revenues Liability overstated Revenue understated Dr. Liability

Cr. Revenue
Accrued Expenses

Liability understated Expense understated Dr. Expense

Cr. Liability

Accrued Revenues

Asset understated

Revenue understated Dr. Asset

Cr. Revenue

* For depreciation, one would Credit the Accumulated Depreciation contra account.

Some implementation notes: This activity allows all students to be actively

involved in the learning process. Encourage students to take the opportunity
to ask questions in the small group environment the learning team provides.
Encourage the better students to serve as experts on unearned revenues. The
instructors observation of and reactions to expert teams development of
presentation material as well as the delivery to learning teams will have a
significant impact on the effectiveness of this activity.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Entrepreneurial Decision

BTN 3-7

1. a. To record the collection of cash from sale of the gift certificate in

advance of delivery of merchandise to the customer:
Cash .....................................................................
Unearned revenue.......................................

300
300

b. To record the delivery of merchandise to the customer when he/she

uses the gift certificate:
Unearned revenue ..............................................
Revenue earned ..........................................

300
300

2. Carrying less inventory would allows Cheezburger Network to save the

costs of carrying that added inventory; such as warehousing costs,
insurance, theft/damage, and other potential losses. Saving these
costs can increase income. By increasing income (via lower costs),
profit margin should increase.

3. If it carries additional inventory, Cheezburger Network can potentially

sell more merchandise and increase its profits. This might further fuel
increased sales as additional customers might be attracted to its
products. On the other hand, carrying inventory has risks. The most
important risk for a company like Cheezburger Network is that of
inventory obsolescence. Consumer tastes and trends are constantly
changing, and by carrying less inventory, the business can be more
flexible in quickly responding with products consistent with those
changing consumer trends.

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Chapter 03 - Adjusting Accounts and Preparing Financial Statements

Hitting the Road

BTN 3-8

There is no formal solution to this field activity. The instructor may wish to
tally students findings to see what companies were selected, who
responded, what was the response time, etc. The instructor can also
periodically ask students to bring in examples from their selected
companies at certain times, and then compare and contrast them with the
examples in the book.

Global Decision

BTN 3-9

1. Nokias Note 1 (Accounting Principles - Revenue Recognition) reports

that Sales from the majority of the Group are recognized when the
significant risks and rewards of ownership have transferred to the
buyer, continuing managerial involvement usually associated with
ownership and effective control have ceased, the amount of revenue can
be measured reliably, it is probable that economic benefits associated
with the transaction will flow to the Group and the costs incurred or to
be incurred in respect of the transaction can be measured reliably.
Subsequent text and paragraphs provide more details for revenue
recognition for specific sub-categories of revenues.
2. Profit margin = 260 EUR / 40,984 EUR = 0.6% (EUR in millions)

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