CHAPTER THREE SOLUTIONS

CHAPTER 3The Accounting Cycle

QUESTIONS

Q3-1.Much more judgement is required for accrual accounting than for cash accounting because there is greater uncertainty at the time events are recorded in the accounting system. There is no uncertainty around the point in time when the cash is paid or collected. Accrual accounting records economic events, not cash flows. When an economic event occurs can be ambiguous. Its less certain when revenue has been earned than when cash is received. It can also be unclear what expenses were incurred to earn revenue (matching) whereas the amount of cash expended is rarely ambiguous.

Q3-2.Closing entries are made to reset balances in the temporary (income statement) accounts to zero so that the entity can record the transactions and accumulate information pertaining only to the following period. The effect of the closing entry is to transfer balances in the temporary accounts to retained earnings (in a corporation) or owners equity (proprietorship). Closing entries are made after the end of the reporting period, when financial statements are prepared.

Q3-3.If the temporary accounts were not closed on December 31, 2017, retained earnings would be understated by $100,000 on the 2017balance sheet and income would be overstated by $100,000 in 2018. The individual accounts on the income statements would be misstated by the amount in those accounts at the end of the previous period.

Q3-4.Adjusting entries are necessary in accrual accounting because recognition of revenues and expenses does not always correspond with cash flows. Some economic changes may occur that should be reflected under accrual accounting but that are not triggered by exchanges with external parties. As a result adjusting entries are needed to reflect these changes. Adjusting entries are not required in a cash accounting system because recording is triggered only by the exchange of cash, and so revenues and expenses always correspond with cash flows.

Q3-5.Transactional journal entries are triggered by exchanges between an entity and an external party. Adjusting entries are necessary to reflect economic changes that are not triggered by an exchange with an external party but that should be captured by the accounting system.

Q3-6.The four types are:Deferred expense/prepaid expense:Needed to ensure that expenses that are paid before the benefits are received are recognized as expenses when the benefits are received.

Deferred revenue: Needed to ensure that revenues that are collected before they are earned are recognized when they are earned.

Accrued Expense/Accrued liability:Needed to ensure that expenses that are incurred before they are paid are recognized in the period when they are incurred.

Accrued Revenue/Accrued asset:Needed to ensure that revenues that are earned before they are collected are recognized in the period when they are earned.

Q3-7.The following table indicates the impacts if the particular entry was not made:Deferred expense/prepaid expense:Deferred revenueAccrued Expense/Accrued liability:Accrued Revenue/Accrued asset:

AssetsOverstatedNo effectNo effectUnderstated

LiabilitiesNo effectOverstatedUnderstatedNo effect

Owners equityOverstatedUnderstatedOverstatedUnderstated

RevenueNo effectUnderstatedNo effectUnderstated

ExpensesUnderstatedNo effectUnderstatedNo effect

Net incomeOverstatedUnderstatedOverstatedUnderstated

Q3-8.Adjusting entries have to be made when the financial statements are prepared to ensure that all appropriate economic events are properly reflected in the financial statements. Even though many of the economic changes reflected by adjusting entries (depreciation, earning of interest, etc.) happen throughout the accounting period, there is no need to record these changes until the financial statements are actually prepared.

Q3-9.The terms simply refer to whether the balance in an account has increased or decreased. A debit refers to an increase in an asset or expense or a decrease in a liability, owners equity, or revenue. A credit refers to a decrease in an asset or expense or an increase in a liability, owners equity, or revenue.

Q3-10.A contra-asset account is used to accumulate subtractions from a related asset account (such as an account to accumulate the depreciation of property, plant, and equipment). Its used so that the amount originally recorded for the asset can be readily determined. If subtractions were made directly to the original asset, it would be time-consuming to determine the amount originally recorded for the asset and the amount that had been deducted against the asset. (Note that contra-liability accounts also exist but these were not discussed in the chapter.)

Q3-11.A dividend is a distribution of earnings to the shareholders of a corporation. Earnings are accumulated in a corporations retained earnings account so when earnings are distributed, the retained earnings account is decreased. Since a dividend decreases the amount a shareholder has invested in the corporation (by distributing assets of the corporation to shareholders), a debit must be made to retained earnings (owners equity) to reduce the amount by which the owners investment has decreased (which is the amount of the dividend). A dividend is not an expense and is not reported on the income statement.

Q3-12.On the balance sheet of the customer, there will be an increase in liabilities (accounts payable) of $1,000. There will also be an increase in assets of $1,000 (inventory, supplies, property, plant, and equipment, etc.) (This assumes the merchandise has not been used as of the balance sheet date). On the balance sheet of the selling company there will be an increase in assets (accounts receivable) of $1,000. The salewould increase revenue on the sellers income statement by $1,000. When the closing entryis prepared the sale would flow through to the balance sheet and retained earnings would increase by $1,000. Inventory would decrease by the cost of the inventory sold and cost of goods sold would increase by that amount.

Q3-13.Permanent accounts are balance sheet accounts.The balances in these accounts carry forward from period to period.Temporary accounts are income statement accounts and are closed at the end of each accounting period to bring their balance to zero.This is done so that the amounts reported on the income statement reflect only the economic events that occurred in the current fiscal period. The balance in the temporary accounts is closed to retained earnings,which is a permanent account.

Q3-14.Recording of transactions can require judgement as it may not be apparent when and where an economic event should be recorded (for example, revenue recognition). Adjusting journal entries also require judgement as many of the adjustments are based on the judgement of management. Management has some flexibility in determining how much to adjust the various accounts by. Posting of entries, preparation of the trial balance, and the posting of closing entries require the least amount of judgement as the amounts related to these items are indicated in the original journal entries.

Q3-15.Dividends are not treated as an expense because they are not a cost of doing business. When dividends are paid, the profit of the company is being distributed to shareholders. Retained earnings (owners equity) decrease to reflect the assets being distributed to the owners.

Q3-16.At the end of a fiscal period revenue and expenses are closed to retained earnings (an equity account). Revenue increases retained earnings, while expenses decrease retained earnings. This is because revenue represents an inflow of wealth to the entity.Expenses represent an outflow of wealth as they represent costs the entity must incur to operate.

Q3-17.The bank credits your account since from the perspective of the bank, the amount that you have on deposit is a liability and an increase in a liability is a credit. The bank views your deposit as a liability since it owes you the money you have on deposit.

Q3-18.An executory contract is an exchange of promises where one party promises to supply goods or services and the other party promises to pay for them, but neither side has yet fulfilled its side of the bargain. Under IFRS (and ASPE) these arrangements are not usually recorded in the accounting system.

Q3-19.The things that must be known are:1. Which elements of the accounting equation are affected?2. Which specific asset, liability, owners equity, revenue, and expense accounts are affected?3. How the accounts are affecteddoes the amount in each account increase or decrease?4. By how much has each specific asset, liability, owners equity, revenue, and expense account increased or decreased?

Q3-20.Dividing accounts into sub-accounts provides detailed information about the different types of assets, liabilities, owners equity, revenues, and expenses. Without such detail it would not be possible, for example, to tell the amount the entity is owed by customers, the amount it paid for its buildings, and the amount it owes to suppliers. Also, it couldnt determine the different types of expenses it incurred and the amounts. Without the detail provided by sub-accounts it would be very difficult to obtain much useful information from the financial statements.

Q3-21. The number of accounts is determined by the information needs of management and financial reporting requirements. There are no rules inIFRS or ASPE that specify the exact accounts an entity should keep, although they do specify that certain information must be provided, which requires that information be accumulated separately. Constraints such as tax law will require an entity to have certain information and this will lead an entity to organize its accounting system to accumulate that information.

Q3-22.Under accrual accounting its not always clear when an economic event takes place. As a result judgement must be exercised by the managers to determine when, how, and how much should be recorded in the financial statements. Revenue recognition and matching of expenses are not always straightforward, requiring that judgement be exercised based on the facts of the specific situation. Under accrual accounting its not always clear when (and sometimes how much) revenue should be recognized and what and how much expenses should be matched to the revenue. The implication of choices in recognizing revenues and expenses is that alternative choices could result in different amounts of revenues and/or expenses, and, as a result, income could vary depending on the accounting choices that are made. As well the amount of assets, liabilities, and owners equity could be affected by the accounting choices managers make. While different ways of measuring economic activity in the financial statements has no effect on the actual economic activity of the entity, different ways of measuring economic activity can have economic consequences for stakeholders (amount of taxes the entity pays, the amount of bonus managers receive, etc.) and the perceptions of users of financial statements regarding the profitability and financial health of the company could be changed.

Q3-23.The fact that all economic events are not captured by an accounting system means that the information provided by the system is not comprehensive or complete. As a result, users of the financial statements may have false beliefs about the future profitability and financial health of the company and may draw incorrect conclusions. Of course, if a stakeholder is aware of the information, regardless of whether its captured by the accounting system, the stakeholder may be able to adjust the accounting information to reflect that knowledge. For example, if a major customer declares bankruptcy, the companys bank may be aware of the event and its implications for the company. A small investor may not be aware of either the event or its implications and purchase shares at a higher price than if the information was known.

Q3-24.Many examples could be provided. Some examples are the signing of a large contract with a customer that does not come into effect until a later period, an improving economy, or a favourable mention in the media, changes in tax laws, new senior executives, and increases in the market value of assets.

Q3-25.The steps of the accounting cycle are: An economic event happens, which must be recorded as a transaction. Prepare the journal entry, which is recording the transaction in the general journal. Post the journal entry to the general ledger, which is recording the amounts in the journal entry in the appropriate specific accounts in the general ledger. Prepare and post the adjusting journal entries, which results in the necessary adjustments to the related accounts. Prepare the trial balance, which is a listing of any debit and credit balances in all the accounts in the general ledger. Prepare the financial statements from the information in the trial balance. Prepare and post-closing entries to reduce the balances in temporary accounts to zero. Prepare the post-closing trial balance, which is a listing of the debit and credit balances in the permanent accounts in the general ledger (balances in the temporary accounts are zero).

Q3-26.A T-account is a device used to represent a general ledger account for teaching purposes. A T-account is set up to record the transactions and economic events that affect each asset, liability, equity, revenue, or expense account.

Q3-27.Posting a journal entry to the general ledger is the process of transferring each line of a journal entry to the corresponding account in the general ledger. Posting updates the balance in the account to reflect the effect of the transaction or economic event recorded in the journal entry.

Q3-28.A trial balance is a listing of all the accounts in the general ledger with their balances. The purpose is to ensure that the debits equal the credits and to provide a summary of the balances in each account. Some errors would result in the trial balance having debit and credit totals that are unequal. Other errors, such as posting the same entry twice or not posting it at all, or entries made to an incorrect account, would not be evident simply by examining the trial balance.

Q3-29.Cross-referencing transactions from the journal to the general ledger facilitates the tracing of transactions through the accounting system at a later time.

Q3-30.Information in the general ledger is organized by account. Each account represents a specific type of asset, liability, equity, revenue, or expense. The general journal is a chronological listing of entries made to the accounting system. By examining the general ledger one could see all the entries that affected each account. For example, by looking at the cash account one could see all the entries to cash. To find the entries to cash in the general journal, it would be necessary to track through the ledger those transactions specifically involving cash.

Q3-31.Bookkeeping is the process of recording financial transactions and maintaining financial records. Bookkeeping is only part of the entire accounting process. Accounting involves much more, including the design and management of information systems, decisions involving how to account for and report an entitys economic activity and interpretation/analysis of financial information.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-1Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.EXERCISES

E3-1.a. adjusting entryb. transactional entryc. adjusting entryd. adjusting entrye. no entryf. transactional entryg. adjusting entryh. transactional entryi. transactional entryj. transactional entryk. adjusting entry

E3-2. There are many possible answers that is acceptable (one example provided)a) Asset increases, asset decreases A customer pays an amount owing (pays an account receivable).b) Asset increases, liability increases Borrow money from bankc) Asset increases, shareholders equity increases A shareholder purchases shares in the corporation for cash.d) Asset increases, revenue increases A customer purchases merchandise for cash or on credit.e) Liability decreases, asset decreases Cash used to pay off amounts owed to suppliersf) Asset decreases, expense increase - Pay employees for work they have done for the business g) Liability decrease, revenue increase Performed work for customer where customer paid for the work in advanceh) Asset decreases, shareholders equity decreases Pay cash dividends i) Liability increase, expense increase Accrue an expense at the end of a period (e.g. for utilities or warranty costs)j) Asset decreases, revenue decreases A dissatisfied customer returns merchandise for a refund

E3-3.a.Balance before closing entry onRetained earningsRevenueExpenses

December 31, 2017$13,750,000$5,125,000($3,225,000)

Closing entry5,125,000(5,125,000)

Closing entry(3,225,000)3,225,000

Balance after closing entry onDecember 31, 201715,650,000

-

-

b.Dr. Revenue5,125,000Cr. Expenses3,225,000Cr.Retained earnings 1,900,000

c.The primary purposes of closing entries are to reset the balances in the temporary (income statement) accounts to zero and to transfer the amounts in those accounts to retained earnings.

d.Net income for 2018would be overstated by $1,900,000 because all revenues and expenses from 2017would be included in 2018revenues and expenses.

E3-4.a.Retained EarningsSalesCost of salesSelling andmarketingGeneral andadministrativeResearch and developmentDepreciation.InterestOtherIncome taxes

Balance on August 31, 2016, before closing entry0225,720(76,200)(22,740)($15,450)($9,675)($9,420)($4,500)($3,315)($30,390)

225,720(225,720)

Closing (76,200)76,200

Closing (22,740)22,740

Closing ($15,450)$15,450

Closing ($9,675)$9,675

Closing ($9,420)$9,420

Closing ($4,500)$4,500

Closing ($3,315)$3,315

Closing ($30,390)$30,390

Balance on August 31, 2016, after closing entry54,030$0 $0 $0 $0 $0 $0 $0 $0 $0

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-10Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.b.DRSales225,720

CRCost of Sales76,200

Selling and marketing22,740

General and administrative15,450

Research and development9,675

Depreciation.9,420

Interest4,500

Other3,315

Income taxes30,390

Retained Earnings54,030

c.The primary purposes of closing entries are to reset the balances in the temporary accounts to zero and to transfer the amounts in those accounts to the retained earnings account.

d.Net income for 2017would be overstated by $54,030 because all revenues and expenses from 2016would be included in the 2017 revenues and expenses.

E3-5.a. Increase assets, increase liabilitiesb. Decrease assets, decrease retained earnings (increase in expenses)c. No impact (cash increases, accounts receivable decreases)d. Decrease assets, decrease liabilitiese. Decrease assets, decrease retained earnings (increase in expenses)f. No impact (cash decreases, prepaid insurance increases)g. Increase assets, increase liabilitiesh. Increase liabilities, decrease retained earnings (increase in expenses)i. Increase assets, increase retained earnings (increase inrevenue)

E3-6.a.debitb.creditc.creditd.credite.debitf.creditg.credith.debit

E3-7.a.creditb.debitc.creditd.debite.debitf.debitg.credith.debit

E3-8.a.Deferred expense/prepaid expense since cash is paid for the supplies before they are expensed (supplies are expensed as they are used).b.Accrued expense/accrued liability assuming Beulah received some advertising services in December, that portion would be accrued and expensed regardless of the fact it wont be paid until next year.c.Deferred expense/prepaid expense since cash is paid before the expense is recognized.d.Deferred revenue since cash is received before the revenue is recognized (not recognized until gift card is actually used to purchase goods/services.e.Accrued expense/accrued liabilitysince the bonus expense is recognized in the period in which its earned, not when the bonus is actually paid out in cash to management.f.Accrued revenue/accrued asset since the revenues must be recognized (royalties have been earned prior to the year-end) before the cash is received.g.Accrued expense/accrued liability since the expense must be recognized before the cash is paid (loan has been outstanding during the period so that interest must be accrued as it will eventually have to be paid).

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-12Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-9.

Assets =Liabilities+ Owners Equity

CashAccountsReceivableInventoryAutomobileLoanPayableDividends PayableCommon sharesRetainedEarningsSalesCost of sales

a.($25,000)$25,000

b.($15,000)$25,000$10,000

c.$100,000$100,000

d.($1,000,000)($1,000,000)

e.$1,000,000($1,000,000)

f.($1,000,000)($1,000,000)

g.$300($200)$300($200)

h.$300($200)$300($200)

i.$1,000($1,000)

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-13Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-10.

a.Dr. Automobile (assets +)25,000Cr. Cash (assets -)25,000

b.Dr. Automobile (assets +)25,000Cr. Cash (assets -)15,000Cr.Loan payable10,000(liabilities +)

c.Dr. Cash (assets +)100,000Cr. Common shares100,000(owners equity +)

d.Dr. Retained earnings1,000,000(owners equity -)Cr. Cash (assets -)1,000,000

e.Dr. Retained earnings1,000,000(owners equity -)Cr. Dividends payable1,000,000(liabilities +)

f.Dr. Dividends payable 1,000,000(liabilities -)Cr. Cash (assets -)1,000,000

g.Dr. Cash (assets +)300Cr. Sales300 (revenue +, owners equity +)

Dr. Cost of sales200(expenses +, owners equity -)Cr. Inventory (assets -)200

h.Dr. Accounts receivable (assets +)300Cr. Sales300 (revenue +, owners equity +)

Dr. Cost of sales200(expenses +, owners equity -)Cr. Inventory (assets -)200

i.Dr. Cash (assets +)1,000Cr. Accounts receivable (assets -)1,000

CashAccounts receivable

a 25,000 h300

b15,000 i.1,000

c100,000

d1,000,000

f1,000,000

g300

i 1,000

Automobile Inventory

a 25,000 g 200

b 25,000 h 200

Loan PayableDividends PayableCommon Stock

b 10,000 e 1,000,000 c 100,000

f1,000,000

Retained Earnings Sales Cost of sales

d1,000,000 g 300 g 200

e1,000,000 h 300 h 200

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-15Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.

E3-11.

Assets (=) Liabilities (+) Partners Equity

TransCashAccounts receivableBuildingReal estateBank LoanAccounts payableWages payableUnearned revenuePartners EquityRevenueWageexpenseOtherexpenses

a5,0005,000

b425,000(425,000)

c(2,500)(2,500)

d50,00050,000

e18,00018,000

f25,000(25,000)

g*

h7,0007,000

i3,700(3,700)

j(1,500)(1,500)

g*: There is no impact on the financial statements at this time.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-16Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-12.

TransDRCR

aAccounts receivable5,000

Revenue5,000

bBuilding425,000

Real estate425,000

cAccounts payable2,500

Cash2,500

dCash50,000

Partners equity50,000

eCash18,000

Bank loan18,000

fWage expense25,000

Wages payable25,000

gNo entry

hCash7,000

Unearned revenue7,000

iCash3,700

Accounts receivable3,700

jOther expenses1,500

Cash1,500

CashAccounts receivableBuilding

c2,500a5,000b425,000

d50,000i3,700

e18,000

h7,000

i3,700

j1,500Real estate

b425,000

Bank loan Accounts payable Unearned revenue

e18,000c2,500h7,000

Wages payable Partners equityRevenue

f25,000d50,000a5,000

Wage expense Other expenses

f25,000j1,500

E3-13.a.Equipment was purchasedfor cash.b.Goods/services were provided to a customer on credit.c.Common shares of a corporation were issued for cash.d.Land was purchased in exchange for a note.e.Salary earned by employees but not paid was accrued at the end of the period.f.A company provided goods/services to customers that had been paid for in a previous period. g.The company paid a supplier the amount owed.h.Insurance that was originally paid in advance is expensed when the insurance period is over. i. Interest has been earned but will not be paid until the next accounting periodis accrued at the end of the period.

E3-14.a.Equipment was purchased in part for cash and the remainder in exchanged for a note payable.b.A bank loan is received in cash from the bank. c.Land was sold for cash and an amount that is to be receivedmore than one year from the date of the sale.d.The company made a rental payment for a specified period before that period actually begins (prepayment of rent to be used in the future).e. Dividends have been declared and will be paid in the future.f.Shares of a corporation were issued in exchange for a patent.g.Cash of $35,000 was received for $10,000 in goods/services to be provided in the future and $25,000 of goods/services already provided.h.As a result of selling products with a warranty, the estimated cost of providing warranty service is accrued when the products are sold to match the cost with the revenue earned.

E3-15.Trans DRCR

1Accounts receivable10,000

Revenue10,000

To record a sale on credit.

2Cash8,000

Accounts receivable8,000

To record collection of cash from a customer.

3Inventory15,000

Accounts payable15,000

To record the purchase of inventory on credit.

4Accounts payable11,000

Cash11,000

To record payment to a supplier

5Cash25,000

Common shares25,000

To record the sale of the companys shares for cash.

6Equipment52,000

Cash21,000

Accounts payable31,000

To record purchase of equipment partially for cash and partially on credit.

7Cash75,000

Bank loan75,000

To record a bank loan.

8Cost of goods sold4,000

Inventory4,000

To record the expensing of inventory.

E3-16.

Trans DRCR

1Salaries expense31,000

Cash31,000

To record salary expense paid in cash.

2Depreciation expense15,000

Accumulated depreciation15,000

To record depreciation expense.

3Cash11,000

Unearned revenue11,000

To record unearned revenue

4Unearned revenue6,000

Revenue6,000

To recognize previously unearned revenue.

5Retained earnings50,000

Cash50,000

To record declaration and payment of a dividend.

6Utilities expense8,000

Accrued liabilitiesComment by Robert Ducharme: TEXT TYPO: this entry #6 is shown as a DEBIT in the text T-Account to Accrued Liabilities it should be on the CREDIT side of the T-Account8,000

To accrue a utility expense.

7Bank loan18,000

Interest expense2,000

Cash20,000

To record repayment of a bank loan and interest

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-20Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.

E3-17. a-c.

Assets(=)Liabilities(+)Shareholder Equity

AccountsSuppliesPrepaidRenovationEquipmentAccumulatedAccounts WagesCommonRetainedRevenuesExpenses

DateTransCashReceivablerentdepreciation payablepayable sharesearningsSuppliesRentWagesUtilitiesDepreciation

Beg

Sept 11125,000125,000

Sept 32(3,000)3,000

Sept 3-203(20,000)20,000

Sept 214(75,000)125,00050,000

Sept 2555,0005,000

Sept&Oct652,50052,500105,000

Sept&Oct7(10,000)1,200 (11,200)

Sept&Oct8(2,000) (2,000)

Sept&Oct9(2,700)(2,700)

Sept&Oct1030,000(30,000)

Sept&Oct11(3,900)(3,900)

adj(1,500) (1,500)

adj(4,167) (4,167)

adj(1,111) (1,111)

Balance94,80022,5001,1001,50020,000125,000(5,278)52,3001,200125,0000105,000(3,900)(1,500)(11,200)(2,000)(5,278)

Closing Entries

81,122(105,000)3,9001,50011,200 2,000 5,278

Ending Balance94,80022,5001,1001,50020,000125,000(5,278)52,3001,200125,00081,122000 0 0 0

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-21Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.d.Fitness for All Ltd.Balance SheetAs of October 31, 2017

AssetsCurrent AssetsCash$ 94,800Accounts receivable22,500Supplies1,100Prepaid rent1,500119,900

Renovations20,000Equipment125,000Accumulated depreciation (5,278)Total$259,622

Liabilities and Shareholders EquityCurrent LiabilitiesAccounts payable$ 52,300Wages payable 1,20053,500

Common shares125,000Retained Earnings 81,122206,122Total Liabilities and Shareholders Equity$259,622

Fitness for All Ltd.Income Statement and Statement of Retained EarningsFor the two months ended October 31, 2017

Sales$ 105,000*Expenses Rent expense$ 1,500 Wages expense11,200 Utilities expense2,000 Supplies expense3,900Depreciation expense5,278**Total expenses23,878Net income81,122Retained earnings on September 1, 2017 0Retained earnings on October 31, 2017$ 81,122

*The full amount of memberships was recognized in the Octoberincome statement. It would have been reasonable to recognize two months of revenue ($17,500), which would have resulted in a dramatically different income statement (probably a more realistic one). In this case net income and ending retained earnings would have been $-6,378.**The renovations are depreciated over three years, the period of the lease ($20,000/36months * 2 months = $1,111) and the equipment is depreciated over five years ($125,000/60 months * 2 months).

E3-18.

a. Under cash accounting, $120,000($600 * 200) would be recorded as revenue for the year ended December 31, 2017. The reason for this is that each memberhas to pay the entire $600 in cash up front.b. Under accrual accounting, only $40,000 ($200 * 200) would be recorded as revenue for the year ended December 31, 2017, The reason for this is that members pay $600 for the use of the gym for a period of three years or $200 for each year $600/3 years). Accrual accounting seeks to record revenue on the basis as its earned, it does not matter when cash is received.c. Under cash accounting, ending retained earnings would include $120,000 of revenue instead of the $40,000 recognized under accrual accounting. Disregarding expenses (as we do not know what they are), retained earnings would be $80,000 higher under cash accounting. Under accrual accounting, there would be an unearned revenue liability of $80,000 on December 31, 2017, representing the cash collected from members but not recognized as revenue. This liability would not exist under cash accounting. Cash would increase by $120,000 under both methods.d. Cash and accrual accounting each provide different measures of the revenues of the company. Accrual accounting isa more relevant measure of revenue from an economic perspective because it reflects the amount Saanich has earned providing service to members.Revenue under cash accounting represents the amount of cash collected in the period. This depiction does not capture the economic activity of Saanich as well as accrual accounting but it does reflect an important aspect of operations; cash inflows. Care has to be taking in concluding a particular method is always more relevant than another. Its likely that accrual accounting will be more relevant for most stakeholders and uses of financial information, but probably not all.

E3-19.

a. Dr. Depreciation Expense $25,000Cr. Accumulated Depreciation$25,000b. Dr. Interest Receivable$5,000Cr. Interest Revenue$5,000c. Dr. Consulting Expense $10,000Cr. Accounts Payable $10,000d. Dr. Unearned Revenue $6,000Cr. Revenue $6,000

E3-20.DateTypeDRCR

a12-SepTransLoan Receivable25,000

Cash25,000

31-DecAdjInterest Receivable490

Interest Revenue490

$750*(111/170 days)

1-MarTransCash25,750

Interest Revenue260

Loan Receivable 25,000

Interest Receivable 490

Interest revenue = $750 - $490 = $260

b31-DecAdjWages Expense4,500

Wages Payable4,500

15-JanTransWages Expense4,500

Wages Payable4,500

Cash9,000

c10-JulTransCash10,000

Unearned revenue10,000

31-DecAdjUnearned revenue5,000

Revenue5,000

10,000/10 months*5 months

d2-NovTransInventory 32,000

Cash32,000

31-DecAdjInventory loss5,000

Inventory5,000

e30-JunTransBuilding 10,000,000

Cash10,000,000

31-DecAdjDepreciation Expense200,000

Accumulated Depreciation 200,000

(10,000,000/25)*(6/12)

E3-21.DateTypeDRCR

a31-JulAdjAccounts Receivable60,000

Royalty revenue60,000

Dec 31TransCash60,000

Accounts Receivable60,000

b15-FebTransAdvance payment for inventory100,000

Cash100,000

31-JulAdjInventory60,000

Advance payment for inventory 60,000

c31-JulAdjUtilities expense 5,000

Utilities payable 5,000

8-SeptTransUtilities payable 5,000

Cash 5,000

dDuring yrTransCash 50,000

Unearned Revenue 50,000

31-JulAdjUnearned Revenue30,000

Revenue30,000

e1-MarTransCash100,000

Bank Loan100,000

31-JulAdjInterest expense2,917

Interest Payable 2,917

$7,000 * (5/12) = $2,917

28-FebInterest Payable2,917

Interest Expense4,083

Cash 7,000

Interest expense = $7,000 - $2,917

f1-DecTransPrepaid Insurance12,000

Cash12,000

31-JulAdjInsurance Expense 8,000

Prepaid Insurance 8,000

$12,000*(8/12) = $8,000

E3-22.a.Dr. Depreciation Expense70,000(expense +, owners equity -)Cr. Accumulated Depreciation70,000(Contra-asset +)The entity recorded a $70,000 depreciation expense to reflect consumption of depreciable assets.

b.Dr. Unearned Revenue 5,000(liability -)Cr. Revenue5,000(revenue +, owners equity +)The entity performed services for customers that had paid deposits in advance.

c.Dr. Interest receivable (asset +)4,000Cr. Interest revenue4,000(revenue +, owners equity +)The entity earned interest of $4,000on an investment or bank deposit in the current period but the interest will not be paid until after the year end.

d.Dr. Interestexpense5,000(expense +, owners equity -)Cr. Interest payable (liability +)5,000Interest on a loan accrued but does not have to be paid until after the year-end.

e.Dr. Insuranceexpense6,000(expense +, owners equity -)Cr. Prepaid insurance (asset -)6,000The entity used up some of its insurance that it had paid for in advance. When an entity purchased insurance in advance, it records it as an asset and expenses it when it uses it up.

f.Dr. Supplies expense 14,000(expense +, owners equity -)Cr. Supplies Inventory (asset -)14,000 A supplies inventory count revealed that $14,000 of supplies previously purchased had been used up and therefore have to be expensed.

g.Dr. Utilities expense9,000(expense +, owners equity -)Cr. Utilitiespayable (liability +)9,000Utilities consumed have been estimated (accrued) as the entity has used utilities but will not be billed until after the year-end.

E3-23.

Charnys Ltd.Income StatementFor the year ended December 31, 2016

Sales 650,000

Interest revenue 3,000

Total revenue 653,000

Expenses

Cost of goods sold 225,000

Wage expense 125,000

Advertising expense 35,000

Depreciation expense 25,000

Selling and administrative expense 32,000

Interest expense 12,500

Rent expense 18,000

Miscellaneous expense 9,500

Income tax expense 59,000

Total expenses 541,000

Net income 112,000

E3-24.

a.Net income would be overstated because expenses would be understated (no depreciation expense). The adjusting entry would record adepreciation expense and an increase in a contra-asset.b.Net income would be understated because earned revenue isnt recorded. The adjusting entry would record an increase in revenue and an increase in an asset.c.Net income would be understated because earned revenue isnt recorded. The adjusting entry would record an increase in revenue and a decrease in the unearned revenue liability.d.Net income would be overstatedbecause expenses would be understated (no insurance expense). The adjusting entry would record an increase in insurance expense and a decrease in the asset prepaid insurance.e.Net income would be overstatedbecause expenses would be understated (no interest expense). The adjusting entry would record an increase in interest expense and an increase in interest payable. f. Net income would be overstatedbecause expenses would be understated (understated wage expense). The adjusting entry would record an increase in wage expense and an increase in wages payable.

E3-25.a. Expenses will be understated, owners equity will be overstated, and assets will be overstated. The adjusting entry would record an expense and increase a contra-asset account (accumulated depreciation) which would increase expenses and decrease assets.b. Revenue will be understated, owners equity will be understated, and assets would be understated. The adjusting entry would record revenue, which increases owners equity as well as a receivable, which increases assets.c. Revenue and owners equity will be understated, liabilities will be overstated. Recognizing revenue would decrease the unearned revenue liability and increase revenue and owners equity.d. Assets and owners equity will be overstated, expenses will be understated. An adjusting entry would reduce prepaid insurance and recognize the reduction as an expense which decreases owners equity. e. Liabilities and expenses will be understated; owners equity will be overstated. An adjusting entry would recognize the portion of interest that is owed which will create a liability and recognize an expense.f. Liabilities and expenses will be understated; owners equity will be overstated. An adjusting entry would recognize the wages that are owed to employees and the related wage expense.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-28Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-26.

Reversal of transactions:

CashAccountsreceivableEquipmentUnearnedrevenueAccountspayableBankloanSalesWageexpenseOtherexpenses

Beginning ?

a15-Mar(20,000)100,00080,000

b20-Mar(10,000)(10,000)

cDuring 25,000150,000175,000

dDuring 110,000(110,000)

(90,000)(90,000)

eDuring (32,000)32,000

fDuring 4,5004,500

gDuring(8,000)8,000

Ending31-Mar125,000

Ending balance =Beginning balance+Changes to cash during March

125,000?(20,500)

145,500

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-29Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-27.TransDateCashAccountsreceivableSales

Opening bal1-Nov350,000

CollectionsDuring410,000(410,000)

AdditionsDuring440,000440,000

Ending bal30-Nov410,000380,000440,000

Ending balance = Beginning balance + Increases Decreases380,000350,000?410,000Credit sales =440,000

Amount of credit sales during November were $440,000.

E3-28.

TransDateCashSuppliesAccounts payable

Opening bal1-Jun150,000

PurchasesDuring760,000760,000

PaymentsDuring730,000(730,000)

Ending bal30-Jun180,000

Ending balance = Beginning balance Payments + Purchases180,000150,000?760,000Amount paid to suppliers = 730,000

Amount of payments during June was $730,000.

.

E3-29.Ending accounts receivable = Beginning accounts receivable+ Transactions that increase accounts receivable Transactions that decrease accounts receivable

Ending accounts receivable= $20,000 + $150,000 $152,000= $18,000

E3-30.a.Dr. Inventory(asset +)15,000Cr. Cost of sales (expenses +, owners equity -)15,000

b.Dr. Revenue (revenue -, shareholders equity -)200,000Cr. Common shares (shareholders equity +)200,000

c.Dr.Equipment (asset +)10,000Cr.Computer expense (expenses -, owners equity +)10,000

d.Dr.Revenue(revenue -, shareholders equity -)3,000Cr.Accounts receivable (asset -)3,000

E3-31.Note: the following responses address only the impact on the current period financial statements. If the error was not corrected:a.Expenses would be overstated meaning net income and shareholders equity would be understated. Also, assets would be understated.b.Revenue would be overstated so net income would be overstated. Common shares would be understated but no overall effect to shareholders equity (because retained earnings would be overstated). c.Assets would be understated because these computers were expensed immediately. Expenses would be overstated meaning net income and shareholders equity would be understated.d.Revenue would be overstated meaning net income and shareholders equity would be overstated. Assets would also be overstated as the balance paid would still be in accounts receivable.

E3-32.a.Dr.Revenue (OE-, R-)175,000Cr.Bank Loan (L +)175,000

b.Dr.Prepaid Rent (A+)15,000Cr.Rent Expense (OE+, E-)15,000

c.Dr.Retained Earnings (OE-)50,000Cr.Dividend Expense (E -, OE+)50,000

d.Dr.Long-term debt (L -)100,000Cr.Interest Expense (OE+, E-)100,000

E3-33.Note: the following responses address only the impact on the current period financial statements. If the error was not corrected:a.Revenue would be overstated sonet income and shareholders equity would be overstated. Liabilities would be understated.b.Expenses would be overstated sonet income and shareholders equity would be understated. Assets would be understated as the rent should have been recorded as a prepaid asset.c.Expenses would be overstated so net income would be understated. Overall shareholders equity would be unaffected as the dividend expense and to the failure to debit retained earnings offset.d.Expenses would be overstated so net income and shareholders equity would be understated. Liabilities would be overstated because long-term debt hasnt been debited.

E3-34.

Kuskonook Inc.

Balance Sheet

As of December 31, 2017

AssetsLiabilities and Shareholders Equity

Current Assets:Current Liabilities

Cash$25,000Bank loan payable$150,000

Accounts receivable125,000Accounts payable and accrued liabilities200,000

Inventory224,000Salaries and commissions payable29,000

Loan receivable48,000Income taxes payable15,000

Prepaid assets18,000Interest payable12,000

440,000Unearned Revenue100,000

Dividends Payable18,000

Note payable - current portion300,000

824,000

Long-term loan receivable110,000

Property, plant and equipment 5,825,000Note payable2,100,000

Accumulated depreciation(825,000)

Intangible Assets1,000,000Common shares1,250,000

Retained earnings2,376,000

3,626,000

Total Assets$6,550,000Total Liabilities and Shareholders Equity$6,550,000

Kuskonook Inc.

Income Statement

For the year ended December 31, 2017

Revenue$6,650,000

Cost of goods sold2,445,000

Gross margin4,205,000

Expenses

Selling, general and administrative expense$725,000

Salaries and commissions expense950,000

Interest expense180,000

Depreciation expense250,000

Income tax expense350,000

Other expense182,000

Total expenses2,637,000

Net income1,568,000

Retained earnings at the beginning of the year 808,000

Retained earnings at the end of the year$2,376,000

E3-35.Closing Entry December 31, 2017:DRCR

Revenue6,650,000

Cost of sales2,445,000

Depreciation expense250,000

Interest expense180,000

Selling, general, and administrative expense725,000

Salaries and commissions expense950,000

Other expenses182,000

Income tax expense350,000

Retained earnings1,568,000

Kuskonook Inc.Post-closing Trial BalanceDecember 31, 2017

AccountDebitCredit

Accounts receivable125,000

Cash25,000

Intangible Assets1,000,000

Inventory224,000

Loan receivable48,000

Long-term loan receivable110,000

Prepaid assets18,000

Property, plant and equipment5,825,000

Accounts payable and accrued liabilities200,000

Accumulated depreciation825,000

Bank loan payable150,000

Common shares1,250,000

Dividends Payable 18,000

Income taxes payable15,000

Interest payable12,000

Note payable - current portion300,000

Note payable2,100,000

Retained earnings2,376,000

Salaries and commissions payable29,000

Unearned Revenue100,000

Revenue0

Cost of sales0

Depreciation expense0

Income tax expense0

Interest expense0

Other expenses0

Selling, general, and administrative expense0

Salaries and commissions expense0

7,375,0007,375,000

E3-36.a. CashInventoryPrepaidrentPrepaidadvertisingFurniture andfixturesAccountspayableLoanpayableOwners' equity

Sept Opening10,00010,000

7,0007,000

15-Oct(2,000)2,000

(3,000)3,000

29-Oct(10,000)22,00012,000

(500)500

Total1,50022,0002,0005003,00012,0007,00010,000

b. Denis' Great Gifts

Balance Sheet

As of October 31 2017

AssetsLiabilities

Cash$1,500Accounts payable$12,000

Inventory22,000Loan payable7,000

Prepaid rent2,000

Prepaid advertising500Owners' equity10,000

Furniture and fixtures3,000

Total assets$29,000Total liabilities and owners' equity$29,000

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-35Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.E3-37.

CashAccounts receivableInventoryPrepaidrentPrepaidadvertisingFurniture andfixturesAccountspayableWages payableLoanpayableOwners' equityRevenueCost of salesWageExpenseAdvertising expenseRent expenseUtilities expenseDepreciation expense

Sept Opening10,00010,000

7,0007,000

15-Oct(2,000)2,000

(3,000)3,000

29-Oct(10,000)22,00012,000

(500)500

Total1,50022,0002,0005003,00012,0007,00010,000

Nov-Dec50,8001,20052,000

Nov-Dec(12,000)(12,000)

Nov-Dec(8,250)10,0001,750

Nov-Dec(31,400)(31,400)

Nov-Dec(3,000)400(3,400)

Nov-Dec

Nov-Dec(1,500)(500)(2,000)

Nov-Dec500(500)

Nov-Dec(2,000)(2,000)

Nov-Dec(1,000)*(1,000)

27,5501,200600002,0002,2504007,00010,00052,000(31,400)(3,400)(2,000)(2,000)(500)(1,000)

Closing11,700(52,000)31,4003,4002,0002,0005001,000

27,5501,200600002,0002,2504007,00021,7000000000

*Depreciation expense assumes straight-line depreciation over three years. Other reasonable assumptions are possible.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-36Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.

a.Denis' Great Gifts

Income Sheet

As of December 31

(Prepared using the cash basis)

Revenue ($52,000 - $1,200)$50,800

Cost of sales ($22,000 +$10,000 - $1,750) 30,250

Gross margin 20,550

Expenses:

Wage expense $ 3,000

Advertising ($500 + $1,500) 2,000

Rent expense 2,000

Total Expenses 7,000

Net income $13,550

Denis' Great Gifts

Income Sheet

As of December 31

(Prepared using the accrual basis)

Revenue $52,000

Cost of sales ($22,000 +$10,000 - $600) 31,400

Gross margin 20,600

Expenses:

Wage expense $3,400

Advertising ($500 + $1,500) 2,000

Utilities expense 500

Rent expense 2,000

Depreciation expense* 1,000

Total Expenses 8,900

Net income $ 11,700

*Different assumptions are possible for depreciation. The solution assumes a three-year life for the depreciable assets. Its a good and important habit for students to develop to recognize the need to fill in missing information.

b. The two income statements are different because two different bases of accounting methods were used to determine net income. Cash accounting only recognizes cash transactions. Revenue is recognized only when cash is received thus the accounts receivable of $1,200 is not included as Revenue. The cost of sales does not include the accounts payable because its not paid and goods paid for are expensed, not goods sold.

Accrual accounting tries to recognize the economic events of an entity over a set period. Revenue is recognized,as its earned when performance occurs, not when cash is collected. Cost of sales is determined by how much the cost of inventory was sold during November and December, not the amount paid for inventory during the period. This takes into account not just all the inventory purchased in this time but also the amount of inventory left over at the end. With accrual accounting all expenses incurred during the two months are recognized regardless of whether they have been paid or not. Regardless of the accounting method used the real economic performance of the entity was the same. What differs is the accounting representation of that activity.

c. Denis' Great Gifts

Balance Sheet

As of December 31 2017

AssetsLiabilities

Cash$27,550Accounts payable$2,250

Accounts receivable1,200Wages payable400

Inventory600Loan payable7,000

Prepaid rent0

Prepaid advertising0Owners' equity21,700

Furniture and fixtures2,000

Total assets$31,350Total liabilities and owners' equity$31,350

Denis is $11,700 better off than he was two months ago (on an accrual basis). Its difficult to say for sure how he did but almost $6,000 a month in income seems pretty good. From the balance sheet you can see Denis has more than enough cash to pay off his liabilities and has significant amount remaining in his account. It would be helpful to evaluate this business if a similar business could be found to compare results with. ItsDenis first year in business so these statements can be used to compare future years and help analyze those years. He could compare the gross margin percentage of his business with other retail stores to get an idea of how hes doing. Otherwise, the costs seem reasonable for the size of business (his profit margin percentage is 22.5%). Additional non-financial information would be helpful such as interviewing Denis and obtaining information such as how many hours he worked and how stressful was the ordeal. Its very difficult to assess performance with only a single income statement. In regards to Denis inventory, its likely of little value unless Denis plans to operate a Christmas business next year. As the Christmas season is over there is likely little demand for these products and as a result the $600 remaining in inventory may need to be written down to reflect its market value. Similarly, it might be appropriate to write down the furniture and fixtures to what they could be sold for unless Denis is planning to use them again.

PROBLEMS

P3-1.a. Given Transaction EntryJanuary 2, 2017Dr. Insurance Expense (E+, OE -)$15,000Cr. Cash (A-)$15,000Adjusting EntryJune 30, 2017Dr.Prepaid Insurance (A+)$11,250Cr. Insurance Expense (E-, OE+)$11,250$15,000/24 months * 18 months remaining

b. Given Transaction Entry April 1, 2017Dr. Cash (A+)25,000Cr. Revenue (R+, OE +)25,000

Adjusting EntryJune 30, 2017Dr. Revenue (R-, OE-)15,000Cr. Unearned revenue (L+)15,000[$25,000/5 months *3 months remaining = $15,000] Revenue should not have been initially recognized.

c. Given Transaction Entry March 1, 2017Dr.Investment certificate (A+)100,000Cr. Cash (A-)100,000Dr.Interest receivable (A+)6,000Cr. Interest revenue (R+, OE+)6,000

AdjustingDr. Interest revenue (R-, OE-)4,000Cr. Interest receivable (A-)4,000[$6,000/12 months * 8 months remaining] Revenue should not have been initially recognized.

P3-2.a. Given Transaction EntryApril 1, 2016Dr.Prepaid rent (A+)25,000Cr.Cash (A-)25,000

Adjusting EntryDecember 31, 2016Dr. Rent expense (E+, OE -)9,375Cr.Prepaid rent (A-)9,375[$25,000/24 months * 9 months]The initial entry was correct. No correction required in the adjusting entry.

b. Given Transaction EntryNovember 1, 2016Dr. Cash(A+)10,000Cr. Revenue (R+, OE+)10,000

December 31, 2016Dr.Revenue (R-, OE-)10,000Cr.Unearned revenue ) (L+)10,000No revenue should have been recognized as goods will not be delivered until 2017.

c. Given Transaction EntryJuly 2, 2016Dr.Equipment expense (E+, OE -) 50,000Cr.Cash (A-)50,000

December 31, 2016Dr.Equipment (A+)50,000Cr.Equipment expense (E-, OE +)50,000 Original transactional entry should have debited equipment (asset) rather than an expenseAnother entry required (Adjusting) to record depreciation:

December 31, 2016Dr. Depreciation expense (E+, OE -)5,000Cr. Accumulated depreciation5,000(contra asset +)[$50,000/5 years * 6/12]

P3-3.a.Aug 20Dr. Prepaid rent (asset +)1,000Cr. Cash (asset -)1,000Transactional entry

Sept 30Dr. Rent expense1,000(expense +, partners equity -)Cr. Prepaid rent (asset -)1,000Adjusting entry

On the September 1 balance sheet there would be an asset called prepaid rent for $1,000.On the September 30 income statement a rent expense of $1,000 would appear.

b.Sept 30Dr. Rent expense1,000(expense +, partners equity -)Cr. Rent Payable (liability +)1,000Adjusting entry

Nothing would appear on the September 1 financial statements, but a liability would appear on the September 30 balance sheet and an expense would appear on the income statement.

c.Aug 20Dr. Prepaid rent (asset +)1,000Cr. Cash (asset -)1,000Transactional entry

Sept 15Dr. Prepaid rent (asset +)1,000Cr. Cash (asset -)1,000Transactional entry

Sept 30Dr. Rent expense1,000(expense +, partners equity -)Cr. Prepaid rent (asset -)1,000Adjusting entry

There would be an asset called prepaid rent of $1,000 on the September 1 and September 30 balance sheets and a $1,000 rent expense would appear on the September 30 income statement.

d.Sept 15Dr. Prepaid rent (asset +)1,000Cr. Cash (asset -)1,000Transactional entry

Sept 30Dr. Rent expense1,000(expense +, partners equity -)Cr. Prepaid rent (asset -)1,000Adjusting entry

A $1,000 rent expense would appear on the September 30 income statement. Students could also elect to charge the payment directly to expense when its incurred on September 15 since it covers the rent for the current month.

P3-4.a.Aug 20Dr. Cash (asset +)1,000Cr. Unearned Revenue (liability +)1,000Transactional entry

Sept 30Dr. Unearned Revenue (liability -)1,000Cr. Rental revenue1,000(revenue +, shareholders equity +)Adjusting entry

On the September 1 balance sheet, there would be a liability called unearned revenue for $1,000.On the September 30 income statement revenue for $1,000 would appear.

b.Sept 30Dr. Rent receivable (asset +)1,000Cr. Rental revenue1,000(revenue +, shareholders equity +)Adjusting entry

Nothing would appear on the September 1 financial statements, but an asset, rent receivable, would appear on the September 30 balance sheet and revenue would appear on the income statement.

c.Aug 20Dr. Cash (asset +)1,000Cr. Unearned revenue (liability +)1,000Transactional entry

Sept 15Dr. Cash (asset +)1,000Cr. Unearned revenue (liability +)1,000Transactional entry

Sept 30Dr. Unearned revenue (liability -)1,000Cr. Rental revenue1,000(revenue +, shareholders equity +)Adjusting entry

There would be an unearned revenue liability of $1,000 on the September 1 and September 30 balance sheets and $1,000 of revenue would appear on the September 30 income statement.

d.Sept 15Dr. Cash (asset +)1,000Cr. Unearned revenue (liability +)1,000Transactional entry

Sept 30Dr. Unearned revenue (liability -)1,000Cr. Rental revenue1,000(revenue +, shareholders equity +)Adjusting entry

Revenue would appear on the September 30 income statement. Students could also elect to post the cash receipt directly to rental revenue when its received on September 15 since it covers the rent for the current month.

P3-5.a. Cayley should recognize the sale of gift cards as unearned revenue. The balance in this account should be (at January 31, 2017):

Unredeemed amount on February 1, 2016 $110,000Plus: Gift card purchases during year 370,000Less: Gift card redemptions during year (325,000)Balance, January 31, 2017: $155,000

b. The $155,000 should be recorded as a liability (unearned revenue) on the balance sheet. Cayley Gifts has an obligation to sacrifice resources (inventory) in the future when customers redeem their gift cards. Cayley can only recognize revenue when gift cards are redeemed because that is when goods are provided to customers. Until they are redeemed, they are a liability because Cayley received the cash for the gift cards but has not delivered any goods; They owe customers goods in the future (present obligation involving a future sacrifice).

c. If there was a solid basis for saying that about 5 percent of gift cards go unredeemed, then Cayley should reduce its liability by 5 percent. Financial statements should report the expected amount of the liability, which is estimated to be 95 percent of the amount of gift cards outstanding. If Cayley does not adjust its unearned revenue balance related to gift cards that never will be redeemed, its liabilities would be overstated.When a customer does not redeem a gift card, Cayley effectively gets money for doing nothing as no goods are provided to customers. Unredeemed gift cards are good for Cayley since the money received is a windfallno sacrifice of inventory is required. However, a large proportion of gift cards not being redeemed may indicate a problem with the attractiveness of the gift cards (maybe people cant find anything to buy).

P3-6CashAccounts receivableUnearned revenueRevenue

Beginning75,00010,000

Credit sales393,000(7,000)400,000

Collection of receivables355,000(355,000)

Collection of advances12,00012,000

Ending367,000113,00015,000

This is a tricky question. The yellow boxes in the spreadsheet show the information that was given. The key is recognizing that to get the unearned revenue account to balance there has to be a reduction (debit) of $7,000. When unearned revenue is debited, revenue would be credited. As a result the amount of credit sales is $393,000 because $7,000 of the revenue is from unearned revenue.

P3-7.SituationAssetsLiabilitiesOwners EquityRevenuesExpenses

a.OverstatedNEOverstatedNEUnderstated

b.NEUnderstatedOverstatedOverstatedNE

c.NEUnderstatedOverstatedNEUnderstated

d.NEUnderstatedOverstatedNEUnderstated

e.NENENENENE

Explanations:a.Assets are overstated because accumulated depreciation was not increased. Expenses are understated and therefore owners equity is overstated because no expense was recorded.b.Liabilities are understated because the obligation to provide admission to games in the future is not recorded. Revenue and owners equity are overstated because revenue that was not earned is included in income. c.Liabilities are understated because the amount owed to the water supplier is not recorded. Expenses are understated because the cost of water is not recorded. Owners equity is overstated because expenses are understated. d.Liabilities are understated because the interest owed at the balance sheet date is not recorded. Expenses are understated since the cost of borrowing the money for the period is not recorded and, therefore, income is overstated. As a result, owners equity is overstated. e.Cash will be understated since the cash account was credited for less than the amount paid and capital assets will be overstated by an equal amount. As a result the accounting equation is in balance but individual assets are not correct.

P3-8SituationAssetsLiabilitiesOwners EquityRevenuesExpenses

a.OverstatedNEOverstatedNEUnderstated

b.NEUnderstatedOverstatedOverstatedNE

c.NEUnderstatedOverstatedNEUnderstated

d.UnderstatedNEUnderstatedUnderstatedNE

e.UnderstatedNEUnderstatedNEOverstated

Explanations:a.Due to the failure to record an adjusting entry, the balance in prepaid insurance was not reduced to reflect the use of the asset and so assets are overstated. Expenses are understated because the adjusting entry was required to record the insurance expense. As a result of the understatement of expenses, owners equity is overstated. b.Because the liability for the services to be provided in 2018 was not recorded, the liabilities are understated. Since the revenue is inappropriately included in 2017, revenues are overstated in 2017 as is owners equity. c.Liabilities are understated because the amount owed for electricity is not reported. Expenses are understated because the cost of electricity is not recorded and therefore owners equity is overstated. d.Assets are understated because the interest that has been earned is not reported. Interest revenue is understated since the interest earned by lending the money for the period is not recorded and therefore owners equity is understated.e.Cash will be understated since the cash account was credited by an amount greater than the amount paid. The net effect is that total assets will be understated by the amount of the error and expenses will overstated by the same amount. As a result, owners equity will be understated.

P3-9.

`Current ratio

Current assets/ Current liabilitiesDebt-to-equity ratio

Total debt/ Total equityProfit margin

Net income/ SalesReturn on Equity

Net income/ Shareholders equity

a.DecreaseNo effectNo effectNo effect

CA -

b.IncreaseIncreaseNo effectNo effect

CA+L+

c.IncreaseDecreaseIncrease*Increase

CA+OE+NI+, Sales+NI+, OE+

d.DecreaseIncreaseDecreaseDecrease

L+L+, OE-NI-NI-, OE-

e.IncreaseDecreaseNo effectDecrease

CA+OE+OE+

*Ignores the impact of any costs associated with the sale.

P3-10.

`Current ratio

Current assets/ Current liabilitiesDebt-to-equity ratio

Total debt/ Total equityProfit margin

Net income/ SalesReturn on Equity

Net income/ Shareholders equity

a.No effectNo effectNo effectNo effect

b.DecreaseIncreaseDecreaseDecrease

CA-OE-NI-NI-, OE-

c.IncreaseDecreaseNo effectNo effect

CA-, CL-L-

d.DecreaseIncreaseNo effectIncrease

CA-OE-OE-

P3-11.

`Current ratio

Current assets/ Current liabilitiesDebt-to-equity ratio

Total debt/ Total equityProfit margin

Net income/ SalesReturn on Equity

Net income/ Shareholders equity (opening)

a.No effectIncreaseDecreaseDecrease

OE-NI-NI-

b.IncreaseDecreaseIncreaseIncrease

CL-L-,OE+NI+,Sales+NI+

c.IncreaseDecreaseIncreaseIncrease

CA+OE+NI+NI+

d.DecreaseIncreaseDecreaseDecrease

CL+L+, OE-NI-NI-

e.DecreaseIncreaseDecreaseDecrease

CA-OE-NI-NI-

P3-12

`Current ratio

Current assets/ Current liabilitiesDebt-to-equity ratio

Total debt/ Total equityProfit margin

Net income/ SalesReturn on Equity

Net income/ Shareholders equity (opening)

a.No effectUnderstatedOverstatedOverstated

b.UnderstatedOverstatedUnderstatedUnderstated

c.UnderstatedOverstatedUnderstatedUnderstated

d.OverstatedUnderstatedOverstatedOverstated

e.OverstatedUnderstatedOverstatedOverstated

P3-13.a. During July there was $5,900 of supplies available for use ($2,000 + $3,900). At the end of the month there was $900 on hand so the amount of supplies used and the expense on the income statement for July would be $5,000 ($5,900 $900). This will reduce retained earnings on the balance sheet by $5,000 and supplies, an asset on the balance sheet, will be reduced by the same amount to $900 at the end of July.b. No revenue should be reported in July because no work has been performed. On the balance sheet, the cash received will be in the asset section. Also, $2,000 would appear as unearned revenue (a liability) as Woking Ltd. has a present obligation to provide services in the future. c. For the month of July, $2,000 ($14,000/7 months) should be reported as a rent expense for the use of the equipment. Also, prepaid assets on the balance sheet would be reduced by $2,000. The balance in prepaid assets on the balance sheet at the end of July would be $6,000. Retained earnings would decrease by $2,000.d. For the month of July, $2,000 should be reported as an expense as this relates to services used by Woking during the month. The other $500 would appear as an expense in the month of June. The $500 would have been reported on the balance sheet on July 1 as an account payable. When paid accounts payable would have decreased by $500. Retained earnings would fall by $2,000 as a result of this transaction. Cash would have decreased by $2,500.e. The payment in June would have been recorded as unearned revenue (a liability) on the balance sheet. For the month of July, $3,000 should be reported as revenue ($5,000*60 percent) as this amount relates to the work that was actually done in July. In the month of July, the unearned revenue balance in the liability section of the balance sheet would be reduced by $3,000. Also, retained earnings (equity) would increase by $3,000 as a result of the work performed.f. For July, $3,000 would be reported as wages expense as this is the amount that was earned by Wokings employees. At the beginning of July there would have been wages payable (liability) of $1,100, which would be removed when paid in July. The $600 owed to employees at the end of July would appear as wages payable on the balance sheet at the end of July. Retained earnings (equity) would decrease by $3,000. The cash paid to employees during the month would decrease the cash balance by $3,500.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-47Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.P3-14.

Paul's Dogsa.Assets(=)(+)Shareholder Equity

AccountsreceivableInventoryPrepaidlicenceCapital assetsAccum.deprn. Wages payableLoan Owners EquitySales Expenses

DateTransCashCost of SalesMaintenanceWagesOtherDepreciationLicence

Beg

1-Apra2,000 a a 2,000

8-Aprb(1,000)1,500 b 500 b

begc(300) c c (300)

begd(250)250 d d

duringe15,750 e e 15,750

Augustf1,115 f f 1,115

duringg(8,525)8,525 g g

endh(7,775) h h (7,775)

duringi(375) i 75 i (450)

duringj(1,000) j j (1,000)

15-Augk(1,500) k k (1,500)

5-Sepl(500) l (500) l

Adj-m(375) adj adj (375)

Adj-n(125) adj adj (125)

Balance4,300 1,115 750 125 1,500 (375)75 0 500 16,865 (7,775)(300)(450)(1,000)(375)(125)

Closing Entry-o

6,840 (16,865) 7,775 300 450 1,000 375 125

End Bal7,340 0 0 0 0 0 0 0

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-48Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.b. Explanations for entries (some of these explanations may be more detailed than would be expected from a student at this point in the book):a. To record the contribution of cash to the business by the owner. Cash increases because cash has been received and owners capital increases because the owner has made an investment. b. To record the purchase of the cart for cash and a promise to pay later. The cart is an asset because it will provide future benefit to the business over the next three or four years. According to IFRS/ASPE, capital assets increase by the cost of the cart. Paul paid $1,000 to his friend so cash decreases by $1,000 and he promised to pay the remainder, $500 later. The promise to pay is an obligation or liability. Notice that the asset account increases by the full cost of the cart, not just the amount paid in cash.c. To record amount paid to repair the cart. The cost of repairing the cart reduces cash by $300 because Paul paid for the repairs in cash. There are actually two ways the cost of repairs could have been treated. The spreadsheet treats the cost as an expense. This makes sense because repairs are considered a cost of doing business and are expensed as incurred. The $300 could also be classified as an asset. If the cost was necessary to get the asset in shape to use (perhaps without the repairs it was not usable) then the cost could be treated as an asset and included in capital assets. In that case the cost of the repairs would have to be depreciated.d. To record purchase of the license for $250. The license is an asset because it provides the benefit of allowing Paul to operate his business for two years. As a result the asset account license increases and cash decreases. The cost of the license has to be amortized over the two years.e. To record sales during the summer. Cash increases by the amount sold as does the account sales.f. To record sales at the tournament. This is also a sales transaction, but its on credit. Paul recorded the sales when the hot dogs were provided, but cash will be coming later when the organizers pay the bill. Therefore, an asset accounts receivable is recorded to reflect the amount of money owing.g. To record the purchase of supplies for cash. The supplies are assets until they are sold, so when the purchase is made the inventory account increases. The supplies were paid for in cash so the cash account decreases.h. To record the cost of supplies used. During the summer Paul used up $7,775 of his supplies. That means that at the end of the summer he had inventory of $750 remaining. Therefore the entry reduces the inventory account by $7,775 to reflect the supplies used and an expense called cost of sales is recorded to reflect the amount of inventory used to generate the sales recorded. There is another aspect of this question that some students might have considered. Is the remaining inventory really worth anything at the end of the summer?i. To record the cost of wages. Paul agreed to pay his brother to operate the cart. Since the wages relate to work done during the current summer, they are accounted for as expenses. The full amount is expensed in the period and the amount owing ($75) is recorded as a liability.j. To record other expense incurred. Expenses are costs of doing business and are recorded in the period they help earn revenue. Paul paid $1,000 for things to help run the business (we dont know exactly what). As a result, cash decreases and an expense is recorded, which is a decrease in owners equity because some of the owners assets (his cash) are being paid to the suppliers.k. To record cash withdrawn from the business. When an owner removes assets from the entity, owners equity decreases. The owner is taking his/her wealth that is reflected in ownership of the entity and transferring that wealth to him/herself. Thus the ownership interest decreases (the owner owns less) and assets, in this case cash, decrease.l. To record payment of the amount owing to the friend. Paul paid his friend $500 so cash decreases. The loan liability also decreases because Paul has fulfilled his obligation to the friend. m. To record deprecation of the cart. The cart will contribute to Pauls business for three or four years. The first year of use has passed so part of the cost of the cart is expensed or depreciated to reflect its usage. The cost of assets that contribute to earning revenue over a number of periods is expensed over the period that it will be contributing. Notice there is some judgement here. The solution based the calculation on an estimated four-year life ($375 = $1,500/4). It would have also been reasonable to use three years. Estimating the life of an asset is an educated guess. Some accountants would say that using the three-year period is more appropriate because its conservative. More will be said about this later in the book.n. To record amortization of the license. The license has a two-year life, meaning Paul can use it for two summers. One summer has passed so half of the license has been used up. Its possible the amortization of the license may be subtracted out of the prepaid license column as opposed to the accumulated amortization column; either way is acceptable. o. The closing entry resets the temporary income statement accounts to zero and records the balance in retained earnings.

c.Pauls DogsBalance SheetAs of September 10

AssetsLiabilities and Equity

Cash$4,300Wages payable$75

Accounts receivables1,115

Inventory750

License (net of amortization)125

Cart1,500

Accumulated depreciation(375)Owner's capital7,340

Total assets$7,415Total liabilities and equity$7,415

Pauls DogsIncome StatementFor the period ended September 10

Sales$16,865

Expenses

Cost of sales7,775

Depreciation expense375

License expense125

Wage expense450

Other expenses1,000

Maintenance expense300

Income$6,840

Pauls DogsStatement of Owners EquityFor the period ended September 10

Owners equity at beginning$0

Investment by owner2,000

Net income6,840

Less drawings(1,500)

Owners equity at end$7,340

d.(This is a sample answer rather than the right one. Good answers should have addressed some of these issues, but the discussion could have approached them from different perspectives)

The financial statements provide a useful summary of how Pauls Dogs did during the summer. It provides Paul with information that will allow him to assess whether he should do it again next summer. If he wants to do something else, he will have information that he could show to the next owner of the cart. The income statement offers some detail on the costs Paul incurred operating his business and could be the starting point for looking at how he could do even better next summer.

The balance sheet tells Paul the resources he has on hand at the end of the summer. The information might be somewhat misleading because one has to wonder whether all the $750 of non-perishable inventory would keep for the entire winter. Napkins and plastic cutlery would but condiments might have to be replaced. The balance sheet also reminds Paul that he is owed $1,115, but given that this is from a single group, he probably would remember anyway. The closing balance of cash lets Paul know how much extra cash he has in addition to his initial investment. The wages payable reminds him that he owes his brother $75, but his brother would probably remind him if he forgot.

The format of these statements is quite simple, probably suitable for the situation.

e.(This is a sample answer rather than the right one. Good answers should have addressed some of these issues, but the discussion could have approached them from different perspectives)

The statements suggest that Paul had a fairly successful summer. $6,840 for a summer job is pretty good although from the statements we cant tell how much Paul worked to earn the money (on an hourly basis he may have earned a relatively small amount). Its interesting to see that even though Pauls income is $6,840, on a cash basis he is only $3,800 better off (he invested $2,000 and now has $4,300 plus the withdrawal of $1,500). The cash position will improve once he collects the $1,115 that is owed to him. The difference between income and the increase in cash is the investment that had to be made in the cart, license, and inventory. These amounts did not affect income during the year but did cost cash.

There seems to be a large amount of inventory on hand at the end of the year. Will it be usable next year? If some has to be disposed of (like condiments), the cost of the amounts thrown away should be expensed this year since they really are a cost of doing business this year.

The statements dont tell Paul anything about the market value of the cart. He needs to know what he could sell the cart for if he wants complete information about whether he should continue in business or sell the cart and get cash for it. The book value of the cart simply tells how much the cart cost less the amount depreciated (really not a very useful number). The statements also do not tell whether the license could be sold.

In examining the performance of Pauls business, its difficult to fully assess it because there is no basis of comparison. In predicting how Paul would do next year one might wonder whether it will be necessary to spend $300 on repairs. It would be useful to find out how other vendors do.

Its possible to do some ratio analysis such as profit margin and return on equity. The current ratio and debt to equity would not be relevant because the debt is too small. (Profit margin = .41) (Return on equity = 1.86). However, we dont have benchmarks to compare these ratios with.

Questions remain on how good Pauls locations were, how much food was wasted, whether Paul priced his products well, etc. This information is not available in the financial statements.

P3-15.a.Dr. Cash2,000Cr.Owners equity2,000

b.Dr.Capital assets (cart)1,500Cr.Cash 1,000Loan 500

c.Dr.Repairs Expense300Cr.Cash300

d.Dr.Prepaid License250Cr.Cash250

e.Dr.Cash15,750Cr.Sales15,750

f.Dr.Accounts Receivable1,115Cr.Sales1,115

g.Dr.Inventory8,525Cr.Cash8,525

h.Dr.Cost of sales7,775Cr.Inventory7,775

i.Dr.Wage expense 450Cr.Cash375Wages payable 75j.Dr.Other expenses1,000Cr.Cash1,000k.Dr.Owners Capital1,500Cr.Cash1,500l.Dr.Loan500Cr.Cash500

m.Dr.Depreciation expense375Cr.Accumulated depreciation375

n.Dr.License expense125Cr.Prepaid license125Part B & C CashAccounts receivablesInventory

a. 2,000b. 1,000f. 1,115g. 8,525h. 7,775

e. 15,750c. 300

d. 250

g. 8,525

i. 375

j. 1,000

k. 1,500

l. 5001,115750

4,300

LicenseCartAccumulated depreciation

d. 250b. 1,500m. 375

n. 125

1251,500375

Loan

l. 500b. 500

0

Wages payableOwners CapitalSales

i. 75k. 1,500a. 2,000e. 15,750

f. 1,115

16,865

75500

Cost of SalesRepairs ExpenseWage Expense

h. 7,775c. 300i. 450

7,775300450

Other ExpenseDepreciationexpense (cart)License expense

j. 1,000m. 375n. 125

1,000375125

Part D Pauls DogsTrial BalanceSeptember 10

DebitsCredits

Cash$ 4,300

Accounts receivable1,115

Inventory750

License125

Cart1,500

Accumulated depreciation$375

Wages payable75

Owners equity500

Sales16,865

Cost of sales7,775

Repairs expense300

Wage expense450

License expense125

Other expense1,000

Depreciation expense375

$ 17,815$ 17,815

Part E.Pauls DogsBalance SheetAs of September 10

AssetsLiabilities and Equity

Cash$4,300Wages payable$75

Accounts receivables1,115

Inventory750

License (net of amortization)125

Cart1,500

Accumulated depreciation(375)Owner's capital7,340

Total assets$7,415Total liabilities and equity$7,415

Pauls DogsIncome StatementFor the period ended September 10

Sales$16,865

Expenses

Cost of sales7,775

Depreciation expense375

License expense125

Wage expense450

Other expenses1,000

Maintenance expense300

Income$6,840

Pauls DogsStatement of Owners EquityFor the period ended September 10

Owners equity at beginning$0

Investment by owner2,000

Net income6,840

Less drawings(1,500)

Owners equity at end$7,340

Part F(o.) Closing entry Dr.Sales16,865Cr.Cost of sales7,775Depreciation expense375Wage expense450Other expense1,000Repairs expense300License expense125Owners capital6,840

Owners CapitalSalesOther Expense

k. 1,500a. 2,000e. 15,750j. 1,000

f. 1,115

50016,8651,000

o. 6,840o. 16,865o. 1,000

7,34000

Cost of SalesRepairs ExpenseWage ExpenseDepreciationExpense (cart)

h. 7,775c. 300i. 450m. 375

7,775300450375

o. 7,775o. 300o. 450o. 375

0000

LicenseExpense

n. 125

125

o. 125

0

Part G Pauls DogsPost-closing Trial BalanceAs of September 10

Debits Credits

Cash$ 4,300

Accounts receivables1,115

Inventory750

License (net of amortization)125

Cart1,500

Accumulated depreciation$375

Wages payable 75

Owners capital7,340

$ 7,790$ 7,790

h (This is a sample answer rather than the right one. Good answers should have addressed some of these issues, but the discussion could have approached them from different perspectives)

The financial statements provide a useful summary of how Pauls Dogs did during the summer. It provides Paul with information that will allow him to assess whether he should do it again next summer. If he wants to do something else, he will have information that he could show to the next owner of the cart. The income statement offers some detail on the costs Paul incurred operating his business and could be the starting point for looking at how he could do even better next summer.

The balance sheet tells Paul the resources he has on hand at the end of the summer. The information might be somewhat misleading because one has to wonder whether all the $750 of non-perishable inventory would keep for the entire winter. Napkins and plastic cutlery would but condiments might have to be replaced. The balance sheet also reminds Paul that he is owed $1,115, but given that this is from a single group, he probably would remember anyway. The closing balance of cash lets Paul know how much extra cash he has in addition to his initial investment. The wages payable reminds him that he owes his brother $75, but his brother would probably remind him if he forgot.

The format of these statements is quite simple, probably suitable for the situation.

i.(This is a sample answer rather than the right one. Good answers should have addressed some of these issues, but the discussion could have approached them from different perspectives)

The statements suggest that Paul had a fairly successful summer. $6,840 for a summer job is pretty good although from the statements we cant tell how much Paul worked to earn the money (on an hourly basis he may have earned a relatively small amount). Its interesting to see that even though Pauls income is $6,840, on a cash basis he is only $3,800 better off (he invested $2,000 and now has $4,300 plus the withdrawal of $1,500). The cash position will improve once he collects the $1,115 that is owed to him. The difference between income and the increase in cash is the investment that had to be made in the cart, license, and inventory. These amounts did not affect income during the year but did cost cash.

There seems to be a large amount of inventory on hand at the end of the year. Will it be usable next year? If some has to be disposed of (like condiments), the cost of the amounts thrown away should be expensed this year since they really are a cost of doing business this year.

The statements dont tell Paul anything about the market value of the cart. He needs to know what he could sell the cart for if he wants complete information about whether he should continue in business or sell the cart and get cash for it. The book value of the cart simply tells how much the cart cost less the amount depreciated (really not a very useful number). The statements also do not tell whether the license could be sold.

In examining the performance of Pauls business, its difficult to fully assess it because there is no basis of comparison. In predicting how Paul would do next year one might wonder whether it will be necessary to spend $300 on repairs. It would be useful to find out how other vendors do.

Its possible to do some ratio analysis such as profit margin and return on equity. The current ratio and debt to equity would not be relevant because the debt is too small. (Profit margin = .41) (Return on equity = 1.86). However, we dont have benchmarks to compare these ratios with.

Questions remain on how good Pauls locations were, how much food was wasted, whether Paul priced his products well, etc. This information is not available in the financial statements.

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-59Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.P3-16.

Assets(=)Liabilities(+)Shareholder Equity

CashAccountsreceivablePrepaidAssetsAccum.depreciation.Accounts PayableCurr. portion of noteWages PayableInterestPayableLong-termCommonsharesRetainedearningsCost of Expenses

DateTransInventoryPPENoteSalesCost ofsalesRentWagesOtherDepreciation InterestUtilities

Beg

7/04/17i.20,000i.i.20,000

8/01/17ii.(3,000)3,000ii.ii.

8/04/17iii.(12,000)22,000iii.10,000iii.

8/10/17iv.20,000iv.10,00010,000iv.

During Augustv.(7,000)7,000v.v.

9/01/17vi.(1,600)1,600vi.vi.

11/01/17vii.(3,000)3,000vii.vii.

12/18/17viii.300viii.viii.300

During ix.(18,000)18,000ix.ix.

During ix.(17,200)ix.ix.(17,200)

During x.42,000x.x.42,000

During xi.(11,200)xi.xi.(11,200)

During xii.(1,200)xii.xii.(1,200)

During xiii.(9,500)xiii.xiii.(9,500)

During xiv.(5,000)xiv.xiv.(5,000)

adj.xv.xv.846xv.(846)

adj.xvi.(1,933)xvi.xvi.(1,933)

adj.xviixvii710xvii(710)

adj.xviii(400)xviiixviii(400)

adj.xix.(4,000)xix.xix.(4,000)

adj.xx.xx.500xx.(500)

End Balance10,5003008003,20029,000(1,933)10,84610,00050071010,00020,000(5,000)42,300(17,200)(4,846)(11,700)(9,900)(1,933)(710)(1,200)

xxi.Closing Entry(5,189)(42,300)17,2004,84611,7009,9001,9337101,200

End Balance

10,5003008003,20029,000(1,933)010,84610,00050071010,000(10,189)00000000

John Friedlan, Financial Accounting: A Critical Approach, 4th editionPage 3-60Solutions ManualCopyright 2013 McGraw-Hill Ryerson Ltd.2. Explanations for entries (some of these explanations may be more detailed than would be expected from a student at this point in the book):i. To record the contribution of $20,000 to the corporation by the owner. Cash increases because cash has been received and common shares increases because the owner has made an investment. ai. To record the payment of rent in advance.Cash decreases as it has been used up in prepaying the rent. Prepaid rent (an asset) increases. Prepaid rent is an asset because it represents a future benefit (the right to use the rented space in the future which will help generate revenues for Cookie.bi. To record the purchase of capital assets. The oven, refrigerator, display cases, etc. are capital assets (PPE) and this account increases. These items are capital assets as they will contribute to the revenue generating process for more than one accounting period. Cash decreases by $12,000 as this amount was used to pay partially for the items. Accounts payable (a liability) increases as Cookie has the obligation to pay the final $10,000 owing on February 15, 2018.iv. To record the acquisition of a loan. Cash increases by $20,000, the amount of the loan. Liabilities increase by the same amount. One part of the liability is current as $10,000 is due within one year (current portion of note payable). The other portion the note is long-term as its not due within one year (Long-term note payable).v. To record repairs and renovations to the shop. Since the work is necessary to ready the shop for business the $7,000 is capitalized and will be depreciated over its useful life. (For purposes of the question these costs will be depreciated over five years (the lives of the other capital assets) but the period would more likely be different, perhaps the period of the lease.)vi. To record the