Adjusting Entries Excercies

Chapter 3 – Adjusting Accounts for Financial Statements
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Exercise 3-3 page 124 Preparing Adjusting Entries Exercise 3-3 Exercise 3-3 Alt
Exercise 3-4 page 124 Adjusting and Paying Accrued Wages Exercise 3-4 Exercise 3-4 Alt
Exercise 3-5 page 124 Adjusting and Paying Accrued Expenses Exercise 3-5 Exercise 3-5 Alt
Exercise 3-6 page 125 Preparing Adjusting Entries Exercise 3-6 Exercise 3-6 Alt
Exercise 3-8 page 125 Preparing adjusting entries—accrued Exercise 3-8 Exercise 3-8 Alt
revenues and expenses
Exercise 3-12 page 126 Analyzing and Preparing Adjusting Entries Exercise 3-12 Exercise 3-12 Alt
Exercise 3-13 page 126 Preparing an adjusted trial balance Exercise 3-13 Exercise 3-13 Alt
Exercise 3-14 page 126 Preparing financial statements Exercise 3-14 Exercise 3-14 Alt
Exercise 3-15 page 127 Preparing closing entries Exercise 3-15 Exercise 3-15 Alt
Exercise 3-16 page 127 Preparing closing entries and a post-closing Exercise 3-16 Exercise 3-16 Alt
trial balance
Exercise 3-17 page 127 Preparing financial statements Exercise 3-17 Exercise 3-17 Alt
Exercise 3-18 page 127 Preparing a classified balance sheet Exercise 3-18 Exercise 3-18 Alt
Exercise 3-19 page 128 Computing and interpreting profit margin Exercise 3-19 Exercise 3-19 Alt
Copyright © by McGraw-Hill Education, Inc. All rights reserved. 1

Chapter 3 – Adjusting Accounts for Financial Statements
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Exercise 3-20 page 128 Computing and analyzing the current ratio Exercise 3-20 Exercise 3-20 Alt
Exercise 3-21 page 128 Prepaids recorded as Expenses and Exercise 3-21 Exercise 3-21 Alt
Unearned revenues recorded as Revenues
Exercise 3-23 page 129 Preparing reversing entries Exercise 3-23 Exercise 3-23 Alt
Copyright © by McGraw-Hill Education, Inc. All rights reserved. 2

Exercise 3-3 page 124
3
Prepare adjusting journal entries for the year ended December 31, for each of these separate situations.
(Assume that prepaid expenses are initially recorded in asset accounts. Also assume that fees collected
in advance of work are initially recorded as liabilities.)
a. Depreciation on the company’s equipment for the current year is computed to be $18,000.
b. The Prepaid Insurance account had a $6,000 debit balance at December 31 before adjusting
for the costs of any expired coverage. An analysis of the company’s insurance policies showed that $1,100
of unexpired insurance coverage remains.
c. The Supplies account had a $700 debit balance at the beginning of December; and $3,480 of
supplies were purchased December. The December 31 physical count showed $300 of supplies
available.
d. Two-thirds of the work related to $15,000 of cash received in advance was performed this period.
e. The Prepaid Rent account had a $6,800 debit balance at December 31, before adjusting for the
costs of prepaid rent expired. An analysis of the rental agreement showed that $5,800 of prepaid
rent had expired.
f. Wage expenses of $3,200 have been incurred but are not paid as of December 31.
Purpose
Everyof
Adjusting
Adjusting
Entry
Entries
Affects
Ensure
one
that
balance
all assets
sheet
andaccount
liabilities
(Asset
(andor
the
Liability)
resultingand
one
revenues
incomeand
statement
expenses) account
are properly
(Revenue valued
or Expense),
prior to the
but
preparationNEVER
of financial
CASHstatements.
4
Step 1: Determine what the current account balance equals. $0

Step 2: Determine what the current account balance should equal. $18,000
Depreciation Expense Accumulated Depreciation

Unadjusted 0
Adjustment 18,000 Adjustment 18,000
Dec. 31 18,000
Step 3: Record an adjusting entry to get from step 1 to step 2.
Date General Journal Debit Credit

Dec. 31 Depreciation Expense 18,000
Accumulated Depreciation 18,000
Income Statement Balance Sheet

Revenue Asset - CREDIT
Expense - DEBIT Liability
5
b. The Prepaid Insurance account had a $6,000 debit balance at December 31, before adjusting for the costs
of any expired coverage. An analysis of the company’s insurance policies showed that $1,100 of unexpired
insurance coverage remains.
Step 1: Determine what the current account balance equals. $6,000

Prepaid Insurance Insurance Expense

Unadjusted 6,000
Dec. 31 1,100

Dec. 31 Insurance Expense 4,900
Prepaid Insurance 4,900

6
c. The Supplies account had a $700 debit balance on December 31 of the prior year; and $3,480 of
supplies were purchased during the year. The December 31 physical count showed $300 of
supplies available.
Step 1: Determine what the current account balance equals. $700 + $3,480 = $4,180
Step 2: Determine what the current account balance should equal. $300
Supplies Supplies Expense

Unadjusted 4,180
Dec. 31 300

Dec. 31 Supplies Expense 3,880
Supplies 3,880

7

Unearned Revenue Revenue

Unadjusted 15,000
Dec. 31 5,000

Dec. 31 Unearned Revenue 10,000
Revenue 10,000

Revenue - CREDIT Asset
Expense Liability - DEBIT
8
e. The Prepaid Rent account had a $6,800 debit balance at December 31, before adjusting for the
costs of prepaid rent expired. An analysis of the rental agreement showed that $5,800 of prepaid
rent had expired.


Unadjusted 6,800
Dec. 31 1,000


9
f. Wage expenses of $3,200 have been incurred but are not paid as of December 31.

Wages Payable Wages Expense

Unadjusted 0
Dec. 31 3,200

Dec. 31 Wages Expense 3,200
Wages Payable 3,200

Revenue Asset
Expense - DEBIT Liability - CREDIT
10
Prepare adjusting journal entries for the year ended December 31, for each of these separate
situations. Assume that prepaid expenses are initially recorded in asset accounts. Also assume that fees collected
in advance of work are initially recorded as liabilities.
b. The Prepaid Insurance account had a $4,000 debit balance at December 31, before adjusting for
the costs of any expired coverage. An analysis of the company’s insurance policies showed that $1,500
of unexpired insurance coverage remains.
c. The Office Supplies account had a $900 debit balance at the beginning of December; and $4,100 of
office supplies were purchased in December. The December 31 physical count showed $300 of supplies
available.
e. The Prepaid Insurance account had a $3,500 debit balance at December 31, before adjusting for
the costs of any expired coverage. An analysis of insurance policies showed that $2,200 of coverage
had expired.
f. Wage expenses of $900 have been incurred but are not paid as of December 31.
Purpose
Everyof
Adjusting
Adjusting
Entry
Entries
Ensure
Affectsthat
oneall
balance
assetssheet
and liabilities
account (and
(Assetthe
orresulting
Liability) revenues
and one income
and expenses)
statement
are
properlyaccount
valued prior
(Revenue
to theorpreparation
Expense), butof financial
NEVER CASH
statements.

Revenue Asset
Expense Liability
11
Exercise 3-3 page 124 Alternate


Unadjusted 0
Dec. 31 20,000


12
b. The Prepaid Insurance account had a $4,000 debit balance at December 31, before adjusting for the costs
of any expired coverage. An analysis of the company’s insurance policies showed that $1,500 of unexpired
insurance coverage remains.


Unadjusted 4,000
Dec. 31 1,500


13
c. The Supplies account had a $900 debit balance on December 31 of the prior year; and $4,100 of
supplies were purchased during the year. The December 31 physical count showed $300 of
supplies available.

Unadjusted 5,000
Dec. 31 300

Supplies 4,700

14

Unearned Revenue Revenue

Unadjusted 24,000
Dec. 31 8,000

Dec. 31 Unearned Revenue 16,000
Revenue 16,000

Revenue - CREDIT Asset
Expense Liability - DEBIT
15
e. The Prepaid Rent account had a $3,500 debit balance at December 31, before adjusting
for the costs of prepaid rent expired. An analysis on the rental agreement showed that
$2,200 of prepaid rent had expired.

Prepaid Rent Rent Expense

Unadjusted 3,500
Dec. 31 1,300

Dec. 31 Rent Expense 2,200
Prepaid Rent 2,200

16
f. Wage expenses of $900 have been incurred but are not paid as of December 31.


Unadjusted 0
Adjustment 900 Adjustment 900
Dec. 31 900

Dec. 31 Wages Expense 900
Wages Payable 900

Revenue Asset
Expense - DEBIT Liability - CREDIT
17
18
Pablo Management has five employees, each of whom earns $250 per day. They are normally paid on Fridays
for work completed Monday through Friday of the same week. Near year-end, the five employees
worked Monday, December 31, and Wednesday through Friday, January 2, 3 and 4. New Year’s Day (January 1)
was an unpaid holiday.
(a) Prepare the December 31 year-end adjusting entry for wages expense.
(b) Prepare the journal entry that would be made to record payment of the employees’ wages on Friday, January 4.

Dec. 31, 20X1 Wages Expense 1,250
Wages Payable 1,250
Jan. 4, 20X2 Wages Expense 3,750

Wages Payable 1,250
Cash 5,000
X 3 days @ $1,250 per day
1 day @ $1,250
per day
19
Pablo Management has five employees, each of whom earns $300 per day. They are normally paid on Fridays
for work completed Monday through Friday of the same week. Near year-end, the five employees
worked Monday, December 31, and Wednesday through Friday, January 2, 3 and 4. New Year’s Day (January 1)
was an unpaid holiday.
(a) Prepare the December 31 year-end adjusting entry for wages expense.
(b) Prepare the journal entry that would be made to record payment of the employees’ wages on Friday, January 4.

December 31 Wages Expense 1,500
Wages Payable 1,500
January 4 Wages Expense 4,500

Wages Payable 1,500
Cash 6,000
X 3 days @ $1,500 per day
1 day @ $1,500
per day
20
21
The following three separate situations require adjusting journal entries to prepare financial statements as
of April 30. For each situation, present both the April 30 adjusting entry and the subsequent entry during
May to record the payment of the accrued expenses.
a. On April 1, the company retained an attorney for a flat monthly fee of $3,500. Payment for April
legal services is paid on May 12.
b. As of April 30, $3,000 of interest expense has accrued on a note payable. The full interest payment of
$9,000 on the note is due on May 20.
c. Total weekly salaries expense for all employees is $10,000. This amount is paid at the end of the day
on Friday of each five-day workweek. April 30 falls on Tuesday of this year, which means that the
employees had worked two days since the last payday. The next payday is May 3.
22

Apr. 30 Legal Fees Expense 3,500
Legal Fees Payable 3,500
May 12 Legal Fees Payable 3,500

Cash 3,500
b. As of April 30, $3,000 of interest expense has accrued on a note payable. The full interest payment of

Apr. 30 Interest Expense 3,000
Interest Payable 3,000
May 20 Interest Expense 6,000

Cash 9,000
23

Apr. 30 Salaries Expense 4,000
Salaries Payable 4,000
May 3 Salaries Expense 6,000

Cash 10,000
24
The following three separate situations require adjusting journal entries to prepare financial statements as
of April 30. For each situation, present both the April 30 adjusting entry and the subsequent entry during
May to record the payment of the accrued expenses.
b. As of April 30, $700 of interest expense has accrued on a note payable. The full interest payment of
25

Apr. 30 Legal Fees Expense 2,500
Legal Fees Payable 2,500
May 12 Legal Fees Payable 2,500

Cash 2,500
b. As of April 30, $700 of interest expense has accrued on a note payable. The full interest payment of

Apr. 30 Interest Expense 700
Interest Payable 700
May 20 Interest Expense 1,400

Cash 2,100
26

Apr. 30 Salaries Expense 6,000
May 3 Salaries Expense 9,000

Cash 15,000
27
28
For each of the following separate cases, prepare adjusting entries required of financial statements for the
year ended December 31. (Assume that prepaid expenses are initially recorded in asset
accounts and that fees collected in advance of work are initially recorded as liabilities.)
a. Wages of $8,000 are earned by workers but not paid as of December 31.
b. Depreciation on the company’s equipment for the year is $18,000.
c. The Supplies account had a $240 debit balance at the beginning of December. During December,
$5,200 of supplies are purchased. A physical count of supplies at December 31, shows $440 of supplies
available.
d. The Prepaid Insurance account had a $4,000 balance at the beginning of December. An analysis of
insurance policies shows that $1,200 of unexpired insurance benefits remain at December 31.
e. The company has earned (but not recorded) $1,050 of interest revenue for the year ended
December 31. The interest payment will be received 10 days after the year-end on January 10.
f. The company has a bank loan and has incurred (but not recorded) interest expense of $2,500 for the
year ended December 31. The company will pay the interest five days after the year-end on January 5.
29
a. Wage expenses of $8,000 have been incurred but are not paid as of December 31.


Unadjusted 0
Dec. 31 8,000

Wages Payable 8,000
30
b. Depreciation on the company’s equipment for the current year is $18,000.


Unadjusted 0
Dec. 31 18,000

31
c. The Supplies account had a $240 debit balance at the beginning of December. During
December, $5,200 of supplies are purchased. A physical count of supplies at December 31,
shows $440 of supplies available.

Unadjusted 5,440
Dec. 31 440

Supplies 5,000
32
d. The Prepaid Insurance account had a $4,000 balance at the beginning of December. An
analysis of insurance policies shows that $1,200 of unexpired insurance benefits remain at
December 31.


Unadjusted 4,000
Dec. 31 1,200

33
e. The company has earned (but not recorded) $1,050 of interest revenue for the year ended December 31.
The interest payment will be received 10 days after the year-end on January 10.

Interest Receivable Interest Revenue

Unadjusted 0
Dec. 31 1,050

Dec. 31 Interest Receivable 1,050
Interest Revenue 1,050
34

Interest Payable Interest Expense

Unadjusted 0
Dec. 31 2,500

Dec. 31 Interest Expense 2,500
35
For each of the following separate cases, prepare adjusting entries required of financial statements for the
year ended December 31. (Assume that prepaid expenses are initially recorded in asset
accounts and that fees collected in advance of work are initially recorded as liabilities.)
a. Wages of $3,000 are earned by workers but not paid as of December 31.
$6,400 of supplies are purchased. A physical count of supplies at December 31, shows $500 of supplies
available.
d. The Prepaid Insurance account had a $5,000 balance on December 31 of the prior year. An analysis of insurance
policies shows that $900 of unexpired insurance benefits remain at December 31.
e. The company has earned (but not recorded) $800 of interest revenue from investments in CDs for the year
ended December 31. The interest payment will be received 10 days after the year-end on January 10.
36
a. Wage expenses of $3,000 have been incurred but are not paid as of December 31.


Unadjusted 0
Dec. 31 3,000

Wages Payable 3,000
37


Unadjusted 0
Dec. 31 8,500

38
$6,400 of office supplies are purchased. A physical count of supplies at December 31, shows $500 of supplies
available.

Unadjusted 6,600
Dec. 31 500

Supplies 6,100
39
d. The Prepaid Insurance account had a $5,000 balance at the beginning of December. An analysis
of insurance policies shows that $900 of unexpired insurance benefits remain at December 31.


Unadjusted 5,000
Dec. 31 900

40
e. The company has earned (but not recorded) $800 of interest revenue for the year ended
December 31. The interest payment will be received 10 days after the year-end on January 10.


Unadjusted 0
Dec. 31 800

Dec. 31 Interest Receivable 800
Interest Revenue 800
41
f. The company has a bank loan and has incurred (but not recorded) interest expense of $1,400 for the year
ended December 31. The company will pay the interest five days after the year-end on January 5.


Unadjusted 0
Dec. 31 1,400

Dec. 31 Interest Expense 1,400
42
43
Prepare year-end adjusting journal entries for M&R Company as of December 31, for each of the
following separate cases. (Entries can draw from the following partial chart of accounts: Cash; Accounts
Receivable; Interest Receivable; Equipment; Wages Payable; Salary Payable; Interest Payable; Lawn
Services Payable; Unearned Revenue; Revenue; Interest Revenue; Wages Expense; Salary Expense;
Supplies Expense; Lawn Services Expense; Interest Expense.)
a. M&R Company provided $2,000 in services to customers that are expected to pay the company sometime
in January following the company’s year-end.
b. Wage expenses of $1,000 have been incurred but are not paid as of December 31.
c. M&R Company has a $5,000 bank loan and has incurred (but not recorded) 8% interest expense of
$400 for the year ended December 31. The company will pay the $400 interest in cash on January 2
following the company’s year-end.
d. M&R Company hired a firm to provide lawn services during December for $500.
M&R will pay for December lawn services on January 15 following the company’s year-end.
e. M&R Company has earned $200 in interest revenue from investments for the year ended December
31. The interest revenue will be received on January 15 following the company’s year-end.
f. Salary expenses of $900 have been earned by supervisors but not paid as of December 31.
44

Accounts Receivable Services Revenue

Unadjusted 0
Dec. 31 2,000

Dec. 31 Accounts Receivable 2,000
Services Revenue 2,000
45


Unadjusted 0
Dec. 31 1,000

Wages Payable 1,000
46


Unadjusted 0
Dec. 31 400

Dec. 31 Interest Expense 400
47

Lawn Services Payable Lawn Services Expense

Unadjusted 0
Dec. 31 500

Dec. 31 Lawn Services Expense 500
Lawn Services Payable 500
48


Unadjusted 0
Dec. 31 200

49

Salaries Payable Salaries Expense

Unadjusted 0
Dec. 31 900

Dec. 31 Salaries Expense 900
Salaries Payable 900
50
Prepare year-end adjusting journal entries for M&R Company as of December 31, for each of the
following separate cases. (Entries can draw from the following partial chart of accounts: Cash; Accounts
Receivable; Interest Receivable; Equipment; Wages Payable; Salary Payable; Interest Payable; Lawn
Services Payable; Unearned Revenue; Revenue; Interest Revenue; Wages Expense; Salary Expense;
Supplies Expense; Lawn Services Expense; Interest Expense.)
51

Accounts Receivable Services Revenue

Unadjusted 0
Dec. 31 4,000

Dec. 31 Accounts Receivable 4,000
Services Revenue 4,000
52


Unadjusted 0
Dec. 31 2,000

Wages Payable 2,000
53


Unadjusted 0
Dec. 31 800

Dec. 31 Interest Expense 800
54

Lawn Services Payable Lawn Services Expense

Unadjusted 0
Dec. 31 300

Dec. 31 Lawn Services Expense 300
Lawn Services Payable 300
55


Unadjusted 0
Dec. 31 400

56

Salaries Payable Salaries Expense

Unadjusted 0
Dec. 31 700

Dec. 31 Salaries Expense 700
Salaries Payable 700
57
58
Following are two income statements for Alexis Co. for the year ended December 31. The left column is
prepared before adjusting entries are recorded, and the right column is prepared after adjusting entries.
Analyze the statements and prepare the seven adjusting entries that likely were recorded.
Hint: Entry for a refers to fees that have been earned but not yet billed.
Alexis Co.
Income Statements
For Year Ended December 31
Unadjusted Adjusted
Revenues
Fees earned $18,000 $25,000
Commissions earned 36,500 36,500
Total revenues 54,500 61,500
Expenses
Depreciation expense—Computers 0 1,600
Depreciation expense—Office furniture 0 1,850
Salaries expense 13,500 15,750
Insurance expense 0 1,400
Rent expense 3,800 3,800
Office supplies expense 0 580
Advertising expense 2,500 2,500
Utilities expense 1,245 1,335
Total expenses 21,045 28,815
Net income $33,455 $32,685
59
Alexis Co.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $18,000 $25,000

Dec. 31 (a) Accounts receivable 7,000
Fees earned 7,000
60
Alexis Co.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $18,000 $25,000
Expenses
Net income $33,455 $32,685

Dec. 31 (b) Depreciation expense—Computers 1,600
Accumulated Depreciation - Computers 1,600
Dec. 31 (c) Depreciation expense—Office furniture 1,850

Accumulated Depreciation - Office furn. 1,850
61
Alexis Co.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $18,000 $25,000
Expenses
Net income $33,455 $32,685

Dec. 31 Salaries expense 2,250
Salaries payable 2,250
Insurance expense 1,400

Prepaid insurance 1,400
62
Alexis Co.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $18,000 $25,000
Expenses
Net income $33,455 $32,685

Dec. 31 Office supplies expense 580
Office supplies 580
Utilities expense 90
Utilities payable 90
63
ALEXIS CO.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $12,000 $21,000
Expenses
Depreciation expense—Computers 0 800
Utilities expense 850 1,000
Net income $37,050 $40,900
64
ALEXIS CO.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $12,000 $21,000

Dec. 31 (a) Accounts receivable 9,000
Fees earned 9,000
65
ALEXIS CO.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $12,000 $21,000
Expenses
Net income $37,050 $40,900
Dec. 31 Depreciation expense—Computers 800
Accumulated Depreciation - Computers 800
Depreciation expense—Office furniture 1,000

Accumulated Depreciation - Office furn. 1,000
66
ALEXIS CO.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $12,000 $21,000
Expenses
Net income $37,050 $40,900
Dec. 31 Salaries expense 1,100
Salaries payable 1,100

67
ALEXIS CO.
Income Statements
Unadjusted Adjusted
Revenues
Fees earned $12,000 $21,000
Expenses
Net income $37,050 $40,900
Dec. 31 Office supplies expense 600
Office supplies 600
Utilities expense 150

Utilities payable 150
68
69
Stark Company has the following adjusted accounts and balances (normal balances) at its December 31 year-end.
Prepare the December 31 year-end adjusted trial balance for Stark Company.
Notes payable $11,000 Accumulated depreciation - Bldgs. $15,000

Prepaid insurance 2,500 Accounts receivable 4,000
Interest expense 500 Utilities expense 1,300
Accounts payable 1,500 Interest payable 100
Wages payable 400 Unearned revenue 800
Cash 10,000 Supplies expense 200
Wages expense 7,500 Buildings 40,000
Insurance expense 1,800 Dividends 3,000
Common stock 10,000 Depreciation expense - Bldgs. 2,000
Retained earnings 14,800 Supplies 800
Services revenue 20,000
70
STARK COMPANY
Adjusted Trial Balance
December 31
Debit Credit
Cash $10,000
Accounts receivable 4,000
Supplies 800
Buildings 40,000
Accumulated depreciation - Bldgs. $15,000
Accounts payable 1,500
Wages payable 400
Interest payable 100
Unearned revenue 800
Notes payable 11,000
Common stock 10,000
Retained earnings 14,800
Dividends 3,000
Interest expense 500
Wages expense 7,500
Utilities expense 1,300
Supplies expense 200
Depreciation expense - Bldgs. 2,000 71
Exercise 3-13 page 126 Totals $73,600 $73,600
Prepare the December 31 year-end adjusted trial balance for Stark Company.

Wages payable 800 Unearned revenue 1,600
Cash 14,000 Supplies expense 2,700
Retained earnings 25,900 Supplies 1,200
72
STARK COMPANY
December 31
Debit Credit
Cash $14,000
Supplies 1,200
Buildings 80,000
Accumulated depreciation - Bldgs. $10,000
Wages payable 800
Interest payable 400
Unearned revenue 1,600
Common stock 30,000
Dividends 2,000
Wages expense 12,000
Supplies expense 2,700
Depreciation expense - Bldgs. 2,000
Totals $130,700 $130,700 73
74
Prepare the (1) income statement and (2) statement of retained earnings for the year ended December 31, and (3)
balance sheet at December 31. The retained earnings account balance was $14,800 on December 31 of the prior year.

75
STARK COMPANY STARK COMPANY

Income Statement Statement of Retained Earnings
For year ended December 31 For year ended December 31
Revenues: Retained earnings, beginning $14,800
Services revenue $20,000 Add: Net income 6,700
Expenses: 21,500
Interest expense $500 Less: Dividends (3,000)
Wages expense 7,500 Retained earnings, ending $18,500
Total expenses 13,300
Net income $6,700
76
STARK COMPANY
Balance Sheet
December 31
Assets Liabilities
Cash $10,000 Accounts payable $1,500
Accounts receivable 4,000 Wages payable 400
Supplies 800 Interest payable 100
Prepaid insurance 2,500 Unearned revenue 800
Buildings $40,000 Total liabilities $13,800
Accumulated depreciation - Bldgs. (15,000) Stockholders' Equity
Buildings, net 25,000 Common stock 10,000
Total stockholders' equity 28,500
Total assets $42,300 Total liabilities and equity $42,300
77
balance sheet at December 31. The retained earnings account balance was $25,900 on December 31 of the prior year.

78
Following are the accounts and balances (in random order) from the adjusted trial balance of Stark Company.
balance sheet at December 31. Retained earnings account balance was $25,900 on December 31 of the prior year.

STARK COMPANY STARK COMPANY

Income Statement Statement of Retained Earnings
For year ended December 31 For year ended December 31
Revenues: Retained earnings, beginning $25,900
Services revenue $45,000 Add: Net income 25,000
Expenses: 50,900
Interest expense $600 Less: Dividends (2,000)
Wages expense 12,000 Retained earnings, ending $48,900
Total expenses 20,000
Net income $25,000
79
STARK COMPANY
Balance Sheet
December 31
Assets Liabilities
Cash $14,000 Accounts payable $2,000
Accounts receivable 12,000 Wages payable 800
Supplies 1,200 Interest payable 400
Prepaid insurance 1,500 Unearned revenue 1,600
Buildings $80,000 Total liabilities $19,800
Accumulated depreciation - Bldgs. (10,000) Stockholders' Equity
Buildings, net 70,000 Common stock 30,000
Total stockholders' equity 78,900
Total assets $98,700 Total liabilities and equity $98,700
80
Use the following adjusted trial balance accounts for Stark Company to prepare its closing entries.
Closing entries Debit Credit

Income summary 45,000
To close revenues

Wages expense 12,000
To close expenses

To close Income Summary

Dividends 2,000
To close Dividends
Use the following adjusted trial balance accounts for Stark Company to prepare its closing entries.
Closing entries Debit Credit
To close revenues

Wages expense 7,500
To close expenses

To close Income Summary

Dividends 3,000
To close Dividends
The following adjusted trial balance contains the accounts and year-end balances of Cruz Company as of
December 31. (1) Prepare the December 31 closing entries for Cruz Company. Assume the account number for
Retained Earnings is 901. (2) Prepare the December, 31, post-closing trial balance for Cruz Company.
Note: The Retained Earnings account balance was $37,600 on December 31 of the prior year.
Cruz Company
December 31
No. Account Title Debit Credit
101 Cash $ 19,000
126 Supplies 13,000
128 Prepaid insurance 3,000
167 Equipment 24,000
168 Accumulated depreciation - Equipment $ 7,500
307 Common stock 10,000
318 Retained earnings 37,600
319 Dividends 7,000
404 Services revenue 44,000
612 Depreciation expense - Equipment 3,000
622 Salaries expense 22,000
637 Insurance expense 2,500
640 Rent expense 3,400
652 Supplies expense 2,200
901 Income summary
Totals $ 99,100 $ 99,100

101 Cash $ 19,000
126 Supplies 13,000
319 Dividends 7,000
901 Income summary
Totals $ 99,100 $ 99,100
Closing Entries PR Debit Credit

(1) Services revenue 404 44,000
Income summary 901 44,000
To close the revenue account
(2) Income summary 901 33,100
Depreciation expense - Equipment 612 3,000
Salaries expense 622 22,000
Rent expense 640 3,400
Supplies expense 652 2,200
To close the expense accounts
Retained earnings 318 10,900
To close income summary
(4) Retained earnings 318 7,000
Dividends 319 7,000
To close the dividends account

Dividends 319 7,000
Retained Earnings No. 318

Dec 31 37,600
(3) 10,900
(4) 7,000
Balance 41,500

101 Cash $ 19,000
126 Supplies 13,000
319 Dividends 7,000
901 Income summary
Totals $ 99,100 $ 99,100
Cruz Company
Post-Closing Trial Balance
December 31
101 Cash $ 19,000
126 Supplies 13,000
Totals $ 59,000 $ 59,000

Dec 31 37,600
(3) 10,900
(4) 7,000
Exercise 3-16 page 127 Balance 41,500
Cruz Company
December 31
101 Cash $ 23,500
126 Supplies 12,500
319 Dividends 5,000
901 Income summary
Totals $ 105,000 $ 105,000

101 Cash $ 23,500
126 Supplies 12,500
319 Dividends 5,000
901 Income summary
Totals $ 105,000 $ 105,000

Dividends 319 5,000


(1) Services Revenue 404 48,000
Income Summary 901 48,000
(2) Income Summary 901 37,000
Depreciation Expense - Equipment 612 5,000
Salaries Expense 622 25,000
Insurance Expense 637 2,000
Rent Expense 640 4,000
(3) Income Summary 901 11,000
Dividends 319 5,000

Dec 31 22,000
(3) 11,000
(4) 5,000
Balance 28,000

101 Cash $ 23,500
126 Supplies 12,500
319 Dividends 5,000
404 Services Revenue 48,000
612 Depreciation Expense - Equipment 5,000
622 Salaries Expense 25,000
637 Insurance Expense 2,000
640 Rent Expense 4,000
901 Income Summary
Totals $ 105,000 $ 105,000
Cruz Company
Post-Closing Trial Balance
December 31
101 Cash $ 23,500
126 Supplies 12,500
Totals $ 63,000 $ 63,000

Dec 31 22,000
(3) 11,000
(4) 5,000
Exercise 3-16 page 127 Alternate Balance 28,000
Use the following adjusted trial balance of Wilson Trucking Company to prepare the (1) income statement and
(2) statement of retained earnings, for the year ended December 31, 2018, and (3) its unclassified balance sheet
as of December 31, 2018. The Retained earnings account balance is $155,000 at December 31, 2017.
Wilson Trucking Company
Trial Balance
December 31, 2018
Account Title Debit Credit
Cash $ 8,000
Office supplies 3,000
Trucks 172,000
Accumulated depreciation - Trucks $ 36,000
Land 85,000
Interest payable 4,000
Long-term notes payable 53,000
Common stock 20,000
Dividends 20,000
Trucking fees earned 130,000
Depreciation expense - Trucks 23,500
Salaries expense 61,000
Office supplies expense 8,000
Repairs expense - Trucks 12,000
Total $ 410,000 $ 410,000

Wilson Trucking Company Wilson Trucking Company
Trial Balance Income Statement
December 31 For Year Ended December 31
Account Title Debit Credit Revenues:
Cash $ 8,000 Trucking fees earned $ 130,000
Office supplies 3,000 Expenses:
Trucks 172,000 Depreciation expense - Trucks $ 23,500
Accumulated depreciation - Trucks $ 36,000 Salaries expense 61,000
Land 85,000 Office supplies expense 8,000
Accounts payable 12,000 Repairs expense - Trucks 12,000
Common Stock 20,000 Total expenses 104,500
Retained earnings 155,000 Net income (loss) $ 25,500
Dividends 20,000
Trucking fees earned 130,000 Wilson Trucking Company
Depreciation expense - Trucks 23,500 Statement of Retained Earnings
Salaries expense 61,000 For Year Ended December 31
Office supplies expense 8,000 Retained earnings, December 31, 2017 $ 155,000
Repairs expense - Trucks 12,000 Add: Net income 25,500
Total $ 410,000 $ 410,000 180,500
Less: Dividends (20,000)
Retained earnings, December 31, 2018 $ 160,500

Balance Sheet
December 31
Assets Liabilities
Cash $ 8,000 Accounts payable $ 12,000
Accounts receivable 17,500 Interest payable 4,000
Office supplies 3,000 Long-term notes payable 53,000
Trucks $172,000 Total liabilities 69,000
Accumulated depreciation - Trucks (36,000) 136,000 Equity
Land 85,000 Common Stock 20,000
Total equity 180,500
Total assets $ 249,500 Total liabilities and equity $ 249,500
Use the following adjusted trial balance of Wilson Trucking Company to prepare the (1) income statement
and (2) statement of retained earnings, for the year ended December 31 and the balance sheet as of
December 31. The Retained earnings account balance is $125,000 at December 31, 2017.

Trial Balance
December 31
Cash $ 12,000
Trucks 190,000
Land 50,000
Common Stock 30,000
Dividends 12,000
Total $ 333,000 $ 333,000

Wilson Trucking Company Wilson Trucking Company
Trial Balance Income Statement
December 31 For Year Ended December 31
Account Title Debit Credit Revenues:
Cash $ 12,000 Trucking fees earned $ 68,000
Office supplies 3,500 Expenses:
Trucks 190,000 Depreciation expense - Trucks $ 10,000
Accumulated depreciation - Trucks $ 40,000 Salaries expense 20,000
Land 50,000 Office supplies expense 5,000
Accounts payable 19,000 Repairs expense - Trucks 8,000
Common Stock 30,000 Total expenses 43,000
Retained earnings 125,000 Net income (loss) $ 25,000
Dividends 12,000
Trucking fees earned 68,000 Wilson Trucking Company
Depreciation expense - Trucks 10,000 Statement of Retained Earnings
Salaries expense 20,000 For Year Ended December 31
Office supplies expense 5,000 Retained earnings, December 31, 2017 $125,000
Repairs expense - Trucks 8,000 Add: Net income 25,000
Total $ 333,000 $ 333,000 150,000
Less: Dividends (12,000)
Retained earnings, December 31, 2018 $ 138,000

Balance Sheet
December 31
Assets Liabilities
Office supplies 3,500 Long-term notes payable 45,000
Trucks $190,000 Total liabilities 70,000
Accumulated depreciation - Trucks (40,000) 150,000 Equity
Land 50,000 Common Stock 30,000
Total equity 168,000

Use the following adjusted trial balance of Wilson Trucking Company to prepare the company's classified
balance sheet as of December 31.

Trial Balance
December 31
Cash $ 8,000
Trucks 172,000
Land 85,000
Common stock 20,000
Dividends 20,000
Total $ 410,000 $ 410,000

Trial Balance
December 31
Cash $ 8,000
Trucks 172,000
Land 85,000
Common stock 20,000
Dividends 20,000
Total $ 410,000 $ 410,000

Balance Sheet
December 31
Assets Liabilities
Current assets Current liabilities
Office supplies 3,000 Total current liabilities 16,000
Total current assets 28,500 Long-term liabilities
Plant assets Long-term notes payable 53,000
Trucks $ 172,000 Total liabilities 69,000
Accumulated deprec. - Trucks (36,000) Equity
136,000 Common stock 20,000
Land 85,000 Retained earnings 160,500
Total plant assets 221,000
Use the following adjusted trial balance of Wilson Trucking Company to prepare the company's classified
balance sheet as of December 31.

Trial Balance
December 31
Cash $ 12,000
Trucks 190,000
Land 50,000
Common stock 30,000
Dividends 12,000
Total $ 333,000 $ 333,000

Trial Balance
December 31
Cash $ 12,000
Trucks 190,000
Land 50,000
Common stock 30,000
Dividends 12,000
Total $ 333,000 $ 333,000

Balance Sheet
December 31
Assets Liabilities
Current assets Current liabilities
Office supplies 3,500 Total current liabilities 25,000
Total current assets 38,000 Long-term liabilities
Plant assets Long-term notes payable 45,000
Trucks $ 190,000 Total liabilities 70,000
Accumulated deprec. - Trucks (40,000) 150,000 Equity
Common stock 30,000
Land 50,000 Retained earnings 138,000
Total plant assets 200,000
103
Use the following information to compute profit margin for each separate company a through e.
Net Income ÷ Net Sales = Profit Margin (%)

a. $4,361 $44,500 9.8%
b. $97,706 $398,800 24.5%
c. $111,281 $257,000 43.3%
d. $65,646 $1,458,800 4.5%
e. $80,132 $435,500 18.4%
104
Use the following information to compute profit margin for each separate company a through e.
Net Income ÷ Net Sales = Profit Margin (%)

a. $6,240 $60,000 10.4%
b. $70,200 $300,000 23.4%
c. $44,100 $140,000 31.5%
d. $3,190 $110,000 2.9%
e. $33,250 $190,000 17.5%
Which of the five companies is the most profitable according to the profit margin ratio?
105
Calculate the current ratio in each of the following competing
companies. Identify the company with the strongest liquidity position.
Current Assets / Current Liabilities = Current Ratio

Edison $79,040 divided by $32,000 = 2.47
MAXT 104,880 divided by 76,000 = 1.38
Chatter 45,080 divided by 49,000 = 0.92
TRU 85,680 divided by 81,600 = 1.05
Gleeson 61,000 divided by 100,000 = 0.61

Calculate the current ratio in each of the following competing
companies. Identify the company with the strongest liquidity position.
Current Assets ÷ Current Liabilities = Current Ratio

Edison $124,550 ÷ $47,000 = 2.65
MAXT 115,830 ÷ 81,000 = 1.43
Chatter 110,240 ÷ 53,000 = 2.08
TRU 82,173 ÷ 90,300 = 0.91
Gleeson 66,120 ÷ 87,000 = 0.76

109
Ricardo Construction began operations on December 1. In setting up its accounting procedures, the company
decided to debit expense accounts when it prepays its expenses and to credit revenue accounts when
customers pay for services in advance. Prepare journal entries for items a through d and the adjusting entries
as of its December 31 period-end for items e through g.
a. Supplies are purchased on December 1 for $2,000 cash.

b. The company prepaid its insurance premiums for $1,540 cash on December 2.
c. On December 15, the company receives advance payments of $13,000 cash from customers for
remodeling work.
d. On December 28, the company receives $3,700 cash from another customer for remodeling work to be
performed in January.
e. A physical count on December 31 indicates that the Company has $1,840 of supplies available.
f. An analysis of the insurance policies in effect on December 31 shows that $340 of insurance coverage
had expired.
g. As of December 31, only one remodeling project has been worked on and completed. The $5,570 fee
for this project had been received in advance, and recorded as remodeling fees earned.
110
remodeling work.

Dec 01 Supplies Expense 2,000
Cash 2,000
Dec 02 Insurance Expense 1,540

Cash 1,540
Dec 15 Cash 13,000

Remodeling Fees Earned 13,000
Dec 28 Cash 3,700

111
e. A physical count on December 31 indicates that the Company has $1,840 of supplies available.
had expired.

Cash 2,000

Cash 1,540
Dec 15 Cash 13,000

Dec 28 Cash 3,700

Dec 31 Supplies 1,840

Supplies Expense 1,840
Dec 31 Prepaid Insurance 1,200

Insurance Expense 1,200
Dec 31 Remodeling Fees Earned 11,130

Unearned Remodeling Fees 11,130
112
Ricardo Construction began operations on December 1. In setting up its accounting procedures, the company
decided to debit expense accounts when it prepays its expenses and to credit revenue accounts when
customers pay for services in advance. Prepare journal entries for items a through d and the adjusting entries
as of its December 31 period-end for items e through g.

remodeling work.
e. A physical count on December 31 indicates that the Company has $400 of supplies available.
had expired.
113
In setting up its accounting procedures, the company decided to debit expense accounts when it prepays
its expenses and to credit revenue accounts when customers pay for services in advance.
remodeling work.

Cash 1,500

Cash 1,200
Dec 15 Cash 10,000

Dec 28 Cash 5,000

114
e. A physical count on December 31 indicates that the Company has $400 of supplies available.
had expired.

Cash 1,500

Cash 1,200
Dec 15 Cash 10,000

Dec 28 Cash 5,000

Dec 31 Supplies 400

Supplies Expense 400
Dec 31 Prepaid Insurance 900

Insurance Expense 900
Dec 31 Remodeling Fees Earned 11,000

Unearned Remodeling Fees 11,000
115
The following two events occurred for Trey Co. on October 31, the end of its fiscal year.
a. Trey rents a building from its owner for $2,800 per month. By a prearrangement, the company delayed
paying October’s rent until November 5. On this date, the company paid the rent for both October and
November.
b. Trey rents space in a building it owns to a tenant for $850 per month. By prearrangement, the tenant
delayed paying the October rent until November 8. On this date, the tenant paid the rent for both
October and November.
1. Prepare adjusting entries that the company must record for these events as of October 31.
2. Assuming Trey does not use reversing entries, prepare journal entries to record Trey’s payment of rent
on November 5 and the collection of the tenant’s rent on November 8.
3. Assuming that the company uses reversing entries, prepare reversing entries on November 1 and
the journal entries to record Trey’s payment of rent on November 5 and the collection of the tenant’s
rent on November 8.

November.
Debit Credit
Oct. 31 Rent expense 2,800
Rent payable 2,800
Oct. 31 Rent receivable 850

Rent revenue 850
Rent expense Rent payable

Oct. 31 2,800 Oct. 31 2,800
Closing 2,800
Rent revenue Rent receivable

Oct. 31 850 Oct. 31 850
Closing 850


Oct. 31 2,800 Oct. 31 2,800
Closing 2,800 Nov. 5 2,800
Nov. 1 0 Nov. 30 0
Nov. 5 2,800
Nov. 30 2,800

Oct. 31 850 Oct. 31 850
Closing 850 Nov. 8 850
Nov. 1 0 Nov. 30 0
Nov. 8 850
Nov. 30 850
No reversing entries Debit Credit

Nov. 5 Rent payable 2,800
Rent expense 2,800
Cash 5,600
Nov. 8 Cash 1,700

Rent receivable 850
Rent revenue 850

rent on November 8.

Oct. 31 2,800 Oct. 31 2,800
Closing 2,800 Reversal 2,800
Nov. 1 0 Nov. 1 0
Reversal 2,800
Nov. 5 5,600
Nov. 30 2,800

Oct. 31 850 Oct. 31 850
Closing 850 Reversal 850
Nov. 1 0 Nov. 1 0
Reversal 850 Nov. 8 1,700
Nov. 30 850
With reversing entries Debit Credit

Rent expense 2,800
Nov. 1 Rent revenue 850

Rent receivable 850
Nov. 5 Rent expense 5,600

Cash 5,600
Nov. 8 Cash 1,700

Rent revenue 1,700
The following two events occurred for Trey Co. on October 31, the end of its fiscal year.
November.
rent on November 8.

November.
Debit Credit
Oct. 31 Rent expense 1,700
Rent payable 1,700
Oct. 31 Rent receivable 650

Rent revenue 650

Oct. 31 1,700 Oct. 31 1,700
Closing 1,700

Oct. 31 650 Oct. 31 650
Closing 650


Oct. 31 1,700 Oct. 31 1,700
Closing 1,700 Nov. 5 1,700
Nov. 1 0 Nov. 30 0
Nov. 5 1,700
Nov. 30 1,700

Oct. 31 650 Oct. 31 650
Closing 650 Nov. 8 650
Nov. 1 0 Nov. 30 0
Nov. 8 650
Nov. 30 650
No reversing entries Debit Credit

Rent expense 1,700
Cash 3,400
Nov. 8 Cash 1,300

Rent receivable 650
Rent revenue 650

rent on November 8.

Oct. 31 1,700 Oct. 31 1,700
Closing 1,700 Reversal 1,700
Nov. 1 0 Nov. 1 0
Reversal 1,700
Nov. 5 3,400
Nov. 30 1,700

Oct. 31 650 Oct. 31 650
Closing 650 Reversal 650
Nov. 1 0 Nov. 1 0
Reversal 650 Nov. 8 1,300
Nov. 30 650
With reversing entries Debit Credit

Rent expense 1,700
Nov. 1 Rent revenue 650

Rent receivable 650
Nov. 5 Rent expense 3,400

Cash 3,400
Nov. 8 Cash 1,300

Rent revenue 1,300

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Chapter 3 – Adjusting Accounts for Financial Statements

Copyright © by McGraw-Hill Education, Inc. All rights reserved. 1

Copyright © by McGraw-Hill Education, Inc. All rights reserved. 2

Step 1: Determine what the current account balance equals. $0

Depreciation Expense Accumulated Depreciation

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $6,000

Prepaid Insurance Insurance Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Supplies Supplies Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $15,000

Unearned Revenue Revenue

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $6,800

Prepaid Insurance Insurance Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $0

Wages Payable Wages Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $0

Depreciation Expense Accumulated Depreciation

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $4,000

Prepaid Insurance Insurance Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Supplies Supplies Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $24,000

Unearned Revenue Revenue

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $3,500

Prepaid Rent Rent Expense

Step 3: Record an adjusting entry to get from step 1 to step 2.

Date General Journal Debit Credit

Income Statement Balance Sheet

Step 1: Determine what the current account balance equals. $0

Wages Payable Wages Expense