Chapter 3 (week 4 lecture)
Tutorial question (P3-4A, P3-8A)
P3–4A Buzzard Bicycle specializes in custom painting and design of bicycles. December 31 is the
company's fiscal year-end. Information necessary to prepare the year-end adjusting entries
appears below.
1. three-year fire insurance policy was purchased on uly 1 4 for 1 . he company
debited repaid Insurance for the entire amount on July 1.
2. mployee salaries of for the month of December will be paid in early anuary.
3. n o ember 1 4 the company recei ed in cash from a customer re uesting a custom
design for si identical bi es 1 each . Deferred e enue was credited for the entire amount on
November 1. By the end of the year four of the bi es ha e been completed.
4. upplies at the beginning of the year totaled . During 4 additional supplies of 1 were
purchased and the entire amount was debited to upplies at the time of purchase. upplies remaining
at the end of the year total .
5. Buzzard paid a local radio station 1 for four months of ad ertising on December 1 4.
he ad ertising will appear e enly o er the four-month period. he company debited repaid
d ertising for the entire amount on December 1.
6. Buzzard borrowed 3 on arch 1 4. he rincipal is due to be paid in fi e years. Interest is
payable each arch 1 at an annual rate of 1 .
e uired
ecord the necessary adjusting entries on December 31 4.
P3–8A The general ledger of Red Storm Cleaners at January 1, 20 4, includes the following
account balances:
Accounts Debits Credits
Cash $20,000
Accounts Receivable 8,000
Supplies 4,000
Equipment 15,000
Accumulated Depreciation $ 5,000
Salaries Payable 7,500
Common Stock 25,000
Retained Earnings 9,500
Totals $47,000 $47,000
The following is a summary of the transactions for the year:
1. March 12 Provide services to customers, $60,000, of which $21,000 is on account.
2. May 2 Collect on accounts receivable, $18,000.
3. June 30 Issue shares of common stock in exchange for $6,000 cash.
4. August 1 Pay salaries, $ , 00 from 3 prior year .
5. September 25 Pay repairs and maintenance expenses, $13,000.
6. October 19 Purchase equipment for $8,000 cash.
. December 30 Pay $1,100 cash dividends to stockholders.
Required:
1. Set up the necessary T-accounts and enter the beginning balances from the trial balance. In addition
to the accounts shown, the company also has accounts for Dividends, Service Revenue, Salaries
Expense, Repairs and Maintenance Expense, Depreciation Expense, and Supplies Expense.
2. Record each of the summary transactions listed above.
3. Post the transactions to the accounts.
4. Prepare an unadjusted trial balance.
5. Record adjusting entries. Accrued salaries at year-end amounted to $1 , 00. Depreciation for the
year on the equipment is $5,000. Office supplies remaining on hand at the end of the year equal
$1,200.
6. Post adjusting entries.
. Prepare an adjusted trial balance.
. Prepare an income statement for 20 4 and a classified balance sheet as of December 31, 20 4.
. Record closing entries.
1 . Post closing entries.
11. Prepare a post-closing trial balance.
Take-home question (P3-3A, P3-7A, RWP3-6)
P3–3A The information necessary for preparing the 20 4 year-end adjusting entries for
Gamecock Advertising Agency appears below. Gamecock's fiscal year-end is December 31.
1. On July 1, 20 4, Gamecock receives $6,000 from a customer for advertising services to be given
evenly over the next 10 months. Gamecock credits Deferred Revenue on July 1.
2. At the end of the yera income ta es o ed are .
3. On May 1, 20 4, the company paid $4,800 for a two-year fire and liability insurance policy. he
company debited Prepaid Insurance on ay 1.
4. On September 1, 20 4, the company borrowed $20,000 from a local bank and signed a note. Principal
and interest at 12% will be paid on August 31, 20 5.
5. At year-end there is a $2,700 debit balance in the Supplies (asset) account. Only $1,000 of supplies
remains on hand at the end of the year.
Required:
Record the necessary adjusting entries on December 31, 20 4. No prior adjustments have been made
during 20 4.
P3–7A rimson ide usic cademy offers lessons in playing a wide range of musical
instrucments. he unadjusted trial balance as of December 31 4 appears below. December 31
is the company's fisal year-end.
In addition the company had the following year-end adjusting entries.
P3–7A continued
e uired
omplete the following steps
1. nter the unadjusted balances from the trial balance into -accounts.
2. ost the adjusing entries to the accounts.
3. repare an adjusted trial balance.
4. repare an income statement and a statement of shareholders' e uity for the year ended
December 31 4 and a classified balance sheet as of December 31 4. ssume that no
common stoc is issued during the year.
5. ecord closing entries.
6. ost closing entries to the accounts.
. repare a post-closing trial balance.
Ethics
RWP3–6 You have recently been hired as the assistant controller for Stanton Temperton Corporation,
which rents building space in major metropolitan areas. Customers are required to pay six months of
rent in advance. At the end of 20 4, the company's president, Jim Temperton, notices that net income
has fallen compared to last year. In 20 3, the company reported pretax profit of $330,000, but in 20 4
the pretax profit is only $280,000. This concerns Jim for two reasons. First, his year-end bonus is tied
directly to pretax profits. Second, shareholders may see a decline in profitability as a weakness in the
company and begin to sell their stock. With the sell-off of stock, Jim's personal investment in the
company's stock, as well as his company-operated retirement plan, will be in jeopardy of severe losses.
After close inspection of the financial statements, Jim notices that the balance of the Deferred Revenue
account is $120,000. This amount represents payments in advance from long-term customers ($80,000)
and from relatively new customers ($40,000). Jim comes to you, the company's accountant, and
suggests that the company should recognize as revenue in 20 4 the $80,000 received in advance from
long-term customers. He offers the following explanation: “First, we have received these customers'
cash by the end of 20 4, so there is no question about their ability to pay. Second, we have a long-term
history of fulfilling our obligation to these customers. We have always stood by our commitments to
our customers and we always will. We earned that money when we got them to sign the six-month
contract.”
Required:
1. nderstand the reporting effect hat are the effects on preta profits of reporting the
as ser ice re enue
. pecify the options Instead of reporting the as re enue how else might you report this
amount
3. Identify the impact re in estors and creditors potentially affected by im's suggestion
. a e a decision s a staff employee should you follow um's suggestion
