Solution manual accounting 25th editon warren chapter 03

CHAPTER 3
THE ADJUSTING PROCESS
DISCUSSION QUESTIONS
1.

a.

Under cash-basis accounting, revenues are reported in the period in which cash is received and
expenses are reported in the period in which cash is paid.

b.

Under accrual-basis accounting, revenues are reported in the period in which they are earned and
expenses are reported in the same period as the revenues to which they relate.

2.

The matching concept is related to the accrual basis of accounting.

3.

Adjusting entries are necessary at the end of an accounting period to bring the ledger up to date.

4.

Adjusting entries bring the ledger up to date as a normal part of the accounting cycle. Correcting
entries correct errors in the ledger.

5.

Four different categories of adjusting entries include prepaid expenses (deferred expenses), unearned

revenues (deferred revenues), accrued expenses (accrued liabilities), and accrued revenues (accrued
assets).

6.

Statement (a): Increases the balance of a revenue account.

7.

Statement (b): Increases the balance of an expense account.

8.

Yes, because every adjusting entry affects expenses or revenues.

9.

a.

The rights acquired represent an asset.

b.

The justification for debiting Rent Expense is that when the ledger is summarized in a trial
balance at the end of the month and statements are prepared, the rent will have become an
expense. Hence, no adjusting entry will be necessary.

a.

The portion of the cost of a fixed asset deducted from revenue of the period is debited to

Depreciation Expense. It is the expired cost for the period. The reduction in the fixed asset
account is recorded by a credit to Accumulated Depreciation rather than to the fixed asset
account. The use of the contra asset account facilitates the presentation of original cost and
accumulated depreciation on the balance sheet.

b.

Depreciation Expense—debit balance; Accumulated Depreciation—credit balance.

c.

No, it is not customary for the balances of the two accounts to be equal in amount.

d.

Depreciation Expense appears on the income statement; Accumulated Depreciation appears on
the balance sheet.

10.

3-1
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CHAPTER 3

The Adjusting Process

PRACTICE EXERCISES
PE 3–1A

a.
b.

Yes
No

c.
d.

No
Yes

e.
f.

Yes
Yes

c.
d.

Yes
No

e.
f.

No
Yes

PE 3–1B
a.
b.

No
No

PE 3–2A
a.
b.

Unearned revenue
Prepaid expense

c.
d.

Accrued revenue
Accrued expense

c.
d.

Accrued expense
Prepaid expense

PE 3–2B
a.
b.

Unearned revenue
Accrued revenue

PE 3–3A
Supplies Expense
Supplies
Supplies used ($1,975 + $4,125 – $1,850).

4,250
4,250

PE 3–3B
Insurance Expense
Prepaid Insurance
Insurance expired ($9,600 + $12,900 – $7,360).

15,140
15,140

PE 3–4A
Unearned Fees
Fees Earned
Fees earned ($78,500 – $33,675).

44,825
44,825

PE 3–4B
Unearned Rent
Rent Revenue

Rent earned [($18,900 ÷ 12 months) × 7 months].

11,025
11,025


PE 3–5A
Accounts Receivable
Fees Earned
Accrued fees.

12,840
12,840

PE 3–5B
Accounts Receivable
Fees Earned
Accrued fees.

17,555
17,555

PE 3–6A
Salaries Expense
Salaries Payable
Accrued salaries [($16,250 ÷ 5 days) × 3 days].

9,750
9,750

PE 3–6B
Salaries Expense
Salaries Payable
Accrued salaries [($27,600 ÷ 6 days) × 5 days].

23,000
23,000

PE 3–7A
Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation on equipment.

9,100
9,100

PE 3–7B
Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation on equipment.

7,700
7,700


PE 3–8A
a.
b.
c.

Revenues were understated by $44,500.
Expenses were understated by $13,100 ($5,800 + $7,300).
Net income was understated by $31,400 ($44,500 – $13,100).

PE 3–8B
a.
b.
c.

Revenues were understated by $6,600.
Expenses were understated by $10,400 ($1,400 + $9,000).
Net income was overstated by $3,800 ($10,400 – $6,600).

PE 3–9A
a.
b.

The totals are unequal. The debit total is higher by $900 ($9,800 – $8,900).
The totals are equal, since the adjusting entry was omitted.

PE 3–9B
a.

The totals are equal even though the credit should have been to Wages
Payable instead of Accounts Payable.

b.

The totals are unequal. The credit total is higher by $27 ($1,152 – $1,125).

PE 3–10A
HEMLOCK COMPANY
Income Statements
For Years Ended December 31

a.

2014
Amount

Fees earned
Operating expenses
Operating income
b.

2013
Percent

$725,000
435,000
$290,000

100%
60%
40%

Amount

Percent

$615,000
356,700
$258,300

100%
58%
42%

An unfavorable trend of increasing operating expenses and decreasing
operating income is indicated.

PE 3–10B
CORNEA COMPANY
Income Statements
For Years Ended December 31

a.

2014
Amount

Fees earned
Operating expenses
Operating income
b.

$1,640,000
869,200
$ 770,800

2013
Percent

100%
53%
47%

Amount

$1,300,000
715,000
$ 585,000

A favorable trend of decreasing operating expenses and increasing operating
income is indicated.

Percent

100%
55%
45%


EXERCISES
Ex. 3–1
1.
2.
3.
4.

Prepaid expense
Accrued revenue
Unearned revenue
Accrued expense

Ex. 3–2

Account

Accounts Receivable.................................
Cash............................................................
Interest Expense.........................................
Interest Receivable.....................................
Johann Atkins, Capital................................
Land.............................................................
Office Equipment........................................
Prepaid Rent...............................................
Supplies......................................................
Unearned Fees............................................
Wages Expense............................................

5.
6.
7.
8.

Unearned revenue
Prepaid expense
Accrued expense

Accrued expense

Answer
Normally requires adjustment (AR).
Does not normally require adjustment.
Normally requires adjustment (AE).
Normally requires adjustment (AR).
Does not normally require adjustment.
Does not normally require adjustment.
Does not normally require adjustment.
Normally requires adjustment (PE).
Normally requires adjustment (PE).
Normally requires adjustment (UR).
Normally requires adjustment (AE).

Ex. 3–3
Supplies Expense
Supplies
Supplies used ($2,389 – $830).

1,559

Ex. 3–4
$5,810 ($1,560 + $4,250).

Ex. 3–5
a.

Insurance expense (or expenses) will be understated. Net income will be
overstated.

b.

Prepaid insurance (or assets) will be overstated. Owner’s equity will be
overstated.

1,559


Ex. 3–6
a.

b.

Insurance Expense
Prepaid Insurance
Insurance expired.

16,450

Insurance Expense
Prepaid Insurance
Insurance expired ($21,700 – $5,250).

16,450

16,450

16,450

Ex. 3–7
a.

b.

Insurance Expense
Prepaid Insurance
Insurance expired ($12,000 + $18,000 – $13,600).

16,400

Insurance Expense
Prepaid Insurance
Insurance expired.

16,400

16,400

16,400

Ex. 3–8
Unearned Fees
Fees Earned
Fees earned ($37,500 – $12,300).

25,200
25,200

Ex. 3–9

a.

Rent revenue (or revenues) will be understated. Net income will be
understated.

b.

Unearned rent (liabilities) will be overstated. Owner’s equity at the end of the
period will be understated.

Ex. 3–10
a.

b.

Accounts Receivable
Fees Earned
Accrued fees.

8,450

No. If the cash basis of accounting is used, revenues are recognized only
when the cash is received. Therefore, earned but unbilled revenues would not
be recognized in the accounts, and no adjusting entry would be necessary.

8,450


Ex. 3–11
a.

b.

Unearned Fees
Fees Earned
Unearned fees earned during year.

71,600

Accounts Receivable
Fees Earned
Accrued fees earned.

47,400

71,600

47,400

Ex. 3–12
a.

Fees earned (or revenues) will be understated. Net income will be understated.

b.

Accounts (fees) receivable (or assets) will be understated. Owner’s equity will
be understated.

Ex. 3–13

a.

b.

Salaries Expense
Salaries Payable
Accrued salaries [($11,750 ÷ 5 days) × 3 days].

7,050

Salaries Expense
Salaries Payable
Accrued salaries [($11,750 ÷ 5 days) × 4 days].

9,400

7,050

9,400

Ex. 3–14
$66,075 ($73,250 – $7,175)

Ex. 3–15
a.

Salary expense (or expenses) will be understated. Net income will be
overstated.

b.

Salaries payable (or liabilities) will be understated. Owner’s equity will be
overstated.

Ex. 3–16
a.

Salary expense (or expenses) will be overstated. Net income will be understated.

b.

The balance sheet will be correct. This is because salaries payable has been
satisfied, and the net income errors have offset each other. Thus, owner’s
equity is correct.


Ex. 3–17
a.

b.

Taxes Expense
Prepaid Taxes
Prepaid taxes expired [($28,800 ÷ 12 months) × 9
months].
Taxes Expense
Taxes Payable
Accrued taxes.

21,600

21,600

49,800
49,800

$71,400 ($21,600 + $49,800)

Ex. 3–18
Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation on equipment.

6,760

Ex. 3–19
a.

$650,000 ($1,375,000 – $725,000)

b.

No. Depreciation is an allocation of the cost of the equipment to the periods
benefiting from its use. It does not necessarily relate to value or loss of value.

Ex. 3–20
a.

$7,630 million ($16,259 – $8,629)

b.

No. Depreciation is an allocation method, not a valuation method. That is,
depreciation allocates the cost of a fixed asset over its useful life. Depreciation
does not attempt to measure market values, which may vary significantly from
year to year.

Ex. 3–21
Income: $3,947 million ($2,054 + $1,893)

Ex. 3–22
a.

$560 million

b.

45.1% ($560 ÷ $1,242)

6,760


Ex. 3–23

1.

Revenue for the year would be………………

2.

Expenses for the year would be……………..

3.

Net income for the year would be…………...

4.

Assets at August 31 would be……………….

5.

Liabilities at August 31 would be……………

6.

Owner’s equity at August 31 would be…….

Error (a)
OverUnderstated
stated
$
0
$23,250
0
0
0
23,250
0
0
23,250

0
0
23,250

Error (b)
OverUnderstated
stated
$
0
$
0
0
4,000
4,000
0
0
0
0
4,000
4,000
0

Ex. 3–24
$132,900 ($113,650 + $23,250 – $4,000)

Ex. 3–25
Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation on equipment.

a.

b.

13,900

(1)

Depreciation expense would be understated. Net income would be
overstated.

(2)

Accumulated depreciation would be understated, and total assets would
be overstated. Owner’s equity would be overstated.

13,900


Ex. 3–26
1.

2.

3.

4.

5.

Accounts Receivable
Fees Earned
Accrued fees earned.

3

Supplies Expense
Supplies
Supplies used.

1

Insurance Expense
Prepaid Insurance
Insurance expired.

6

Depreciation Expense
Accumulated Depreciation—Equipment
Equipment depreciation.

2

Wages Expense
Wages Payable
Accrued wages.

1

3

1

6

2

1


Ex. 3–27

5.

1.

The accountant debited Accounts Receivable for $5,000 but did not credit
Laundry Revenue. This adjusting entry represents accrued laundry revenue.

2.

The accountant debited rather than credited Laundry Supplies for $3,000.

3.

The accountant credited the prepaid insurance account for $3,600, but debited
the insurance expense account for only $600.

4.

The accountant credited Laundry Equipment for the depreciation expense of
$13,000, instead of crediting the accumulated depreciation account.
The accountant did not debit Wages Expense for $1,000.

The corrected adjusted trial balance is shown below.
EVA'S LAUNDRY
Adjusted Trial Balance
May 31, 2014
Debit
Balances

Cash
Accounts Receivable
Laundry Supplies
Prepaid Insurance
Laundry Equipment
Accumulated Depreciation—Laundry Equipment
Accounts Payable
Wages Payable
Eva Bruns, Capital
Eva Bruns, Drawing
Laundry Revenue
Wages Expense
Rent Expense
Utilities Expense
Depreciation Expense
Laundry Supplies Expense
Insurance Expense
Miscellaneous Expense

Credit
Balances

7,500
23,250
750
1,600
190,000
61,000
9,600
1,000
110,300
28,775
187,100
50,200
25,575
18,500
13,000
3,000
3,600
3,250
369,000

369,000


Ex. 3–28
a.

$420 million increase ($1,907 – $1,487)
28.2% ($420 ÷ $1,487) increase

b.

Year 2: 10.0% ($1,907 ÷ $19,014)
Year 1: 7.8% ($1,487 ÷ $19,176)

c.

The net income increased during Year 2 by $420 million from Year 1. Net income as a
percent of net sales also increased from 7.8% in Year 1 to 10.0% in Year 2. Both
of these results are favorable trends for Nike.

Ex. 3–29
a.

Dell Inc.
Amount

Net sales
Cost of goods sold
Operating expenses
Operating income (loss)
b.

$61,494
(50,098)
(7,963)
$ 3,433

100.0%
81.5%
12.9%
5.6%

Hewlett-Packard Company (HP)
Amount

Net sales
Cost of goods sold
Operating expenses
Operating income (loss)
c.

Percent

$126,033
(96,089)
(18,465)
$ 11,479

Percent

100.0%
76.2%
14.7%
9.1%

Hewlett-Packard (HP) is more profitable than Dell. Specifically, HP’s cost of goods

sold of 76.2% is 5.3% (81.5% – 76.2%) less than Dell’s cost of goods sold. This is
partially offset by HP’s higher operating expenses of 14.7% as compared to Dell's
operating expenses of 12.9%. The net result is that HP generates an operating
income of 9.1% of sales, while Dell generates operating income of 5.6% of sales.
Dell must improve its operations if it is to remain competitive with HP.


PROBLEMS
Prob. 3–1A
1.

b.

c.

d.

e.

2.

a.

Supplies Expense
Supplies
Supplies used ($6,880 – $2,200).

4,680

Unearned Rent

Rent Revenue
Rent earned ($9,200 ÷ 4 months).

2,300

Wages Expense
Wages Payable
Accrued wages.

1,850

Accounts Receivable
Fees Earned
Accrued fees earned.
Depreciation Expense
Accumulated Depreciation—Office Equipment
Depreciation expense.

4,680

2,300

1,850

11,700
11,700

3,500

Adjusting entries are a planned part of the accounting process to update the

accounts. Correcting entries are not planned, but arise only when necessary
to correct errors.

3,500


Prob. 3–2A
1.

b.

c.

d.

e.

f.

a.

Accounts Receivable
Fees Earned
Accrued fees earned.

9,150

Supplies Expense
Supplies
Supplies used ($3,000 – $675).

2,325

Rent Expense
Prepaid Rent
Prepaid rent expired.

5,000

Depreciation Expense
Accumulated Depreciation—Equipment
Equipment depreciation.

3,300

Unearned Fees
Fees Earned
Fees earned ($10,500 – $3,000).

7,500

Wages Expense
Wages Payable
Accrued wages.

3,100

9,150

2,325

5,000

3,300

7,500

2.

Fees Earned would be understated by $9,150; Wages Expense would be
understated by $3,100; and net income would be understated by $6,050
($9,150 – $3,100).

3.

Accounts Receivable would be understated by $9,150; total assets would be
understated by $9,150; Wages Payable would be understated by $3,100;
total liabilities would be understated by $3,100; owner’s capital would be
understated by $6,050 ($9,150 – $3,100); and total liabilities and owner’s
equity would be understated by $9,150 ($3,100 + $6,050).

4.

There is no effect on the “Net increase or decrease in cash” on the statement
of cash flows, since adjusting entries do not affect cash.

3,100


Prob. 3–3A

1.

b.

c.

d.

e.

a.

Accounts Receivable
Fees Earned
Accrued fees earned.

12,700

Supplies Expense
Supplies
Supplies used ($21,600 – $4,175).

17,425

12,700

Depreciation Expense
Accumulated Depreciation—Equipment
Equipment depreciation.
Unearned Fees

Fees Earned
Fees earned.
Wages Expense
Wages Payable
Accrued wages.

17,425

7,400
7,400

14,200
14,200

1,100
1,100

2.

Revenues……………………
Expenses……………………
Net Income…………………

$393,000
301,800 ($126,000 + $96,000 + $69,000 + $10,800)
$ 91,200

3.

Revenues……………………

Expenses……………………
Net Income……………………

$419,900 ($393,000 + $12,700 + $14,200)
327,725 ($301,800 + $17,425 + $7,400 + $1,100)
$ 92,175

4.

The effect of the adjusting entries on Amy Wolf, Capital is the difference in net
income in (2) and (3) of $975 ($92,175 – $91,200), which increases Amy Wolf, Capital.


Prob. 3–4A
2014
Nov.

30 Supplies Expense
Supplies
Supplies used ($11,250 – $2,400).

8,850
8,850

30 Insurance Expense
Prepaid Insurance
Insurance expired ($14,250 – $3,850).

10,400

30 Depreciation Expense—Equipment
Accumulated Depreciation—Equipment
Equipment depreciation
($106,100 – $94,500).

11,600

10,400

11,600

30 Depreciation Expense—Automobiles
Accumulated Depreciation—Automobiles
Automobile depreciation
($62,050 – $54,750).

7,300

30 Utilities Expense
Accounts Payable
Accrued utilities expense
($26,130 – $24,930, or $14,100 – $12,900).

1,200

30 Salary Expense
Salaries Payable
Accrued salary ($525,000 – $516,900).

8,100

30 Unearned Service Fees
Service Fees Earned
Service fees earned ($18,000 – $9,000, or
$742,800 – $733,800).

9,000

7,300

1,200

8,100

9,000


Prob. 3–5A
1.

b.

c.

d.

e.

f.

g.

a.

Insurance Expense
Prepaid Insurance
Insurance expired ($7,200 – $5,400).

1,800

Supplies Expense
Supplies
Supplies used ($1,980 – $375).

1,605

Depreciation Expense—Building
Accumulated Depreciation—Building
Building depreciation.

6,000

Depreciation Expense—Equipment
Accumulated Depreciation—Equipment
Equipment depreciation.

3,000

Unearned Rent
Rent Revenue

Rent revenue earned ($6,750 – $1,350).

5,400

Salaries and Wages Expense
Salaries and Wages Payable
Accrued salaries and wages.

2,900

Accounts Receivable
Fees Earned
Accrued fees earned.

1,800

1,605

6,000

3,000

5,400

2,900

18,600
18,600

Prob. 3–5A (Concluded)
2.
DICKENS COMPANY
Adjusted Trial Balance
October 31, 2014
Debit
Balances

Cash
Accounts Receivable
Prepaid Insurance
Supplies
Land
Building
Accumulated Depreciation—Building
Equipment
Accumulated Depreciation—Equipment
Accounts Payable
Unearned Rent
Salaries and Wages Payable
Monica Baker, Capital
Monica Baker, Drawing
Fees Earned
Rent Revenue
Salaries and Wages Expense
Utilities Expense
Advertising Expense
Repairs Expense
Depreciation Expense—Building
Depreciation Expense—Equipment

Insurance Expense
Supplies Expense
Miscellaneous Expense

Credit
Balances

7,500
57,000
5,400
375
112,500
150,250
93,550
135,300
100,950
12,150
1,350
2,900
221,000
15,000
343,200
5,400
196,270
42,375
22,800
17,250
6,000
3,000
1,800

1,605
6,075
780,500

780,500


Prob. 3–6A
1.

b.

c.

d.

a.

Supplies Expense
Supplies
Supplies used.

2,750
2,750

Accounts Receivable
Fees Earned
Accrued fees earned.

23,700

23,700

Depreciation Expense
Accumulated Depreciation—Equipment
Equipment depreciation.

1,800

Wages Expense
Wages Payable
Accrued wages.

1,400

1,800

1,400

2.

Total
Net

Total

Total

Owner's

Reported amounts
Corrections:
Adjustment (a)
Adjustment (b)
Adjustment (c)
Adjustment (d)
Corrected amounts

Income

Assets

=

Liabilities

+

Equity

$120,000

$750,000

$300,000

$450,000

–2,750
+23,700

–1,800
–1,400
$137,750

–2,750
+23,700
–1,800
0
$769,150

0
0
0
+1,400
$301,400

–2,750
+23,700
–1,800
–1,400
$467,750


Prob. 3–1B
1.

b.

c.

d.

e.

2.

a.

Accounts Receivable
Fees Earned
Accrued fees earned.

19,750
19,750

Supplies Expense
Supplies
Supplies used ($12,300 – $4,150).

8,150

Wages Expense
Wages Payable
Accrued wages.

2,700

Unearned Rent
Rent Revenue
Rent earned ($9,000 ÷ 3 months).

3,000

Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation expense.

3,200

8,150

2,700

3,000

Adjusting entries are a planned part of the accounting process to update the
accounts. Correcting entries are not planned, but arise only when necessary to
correct errors.

3,200


Prob. 3–2B
1.

b.

c.

d.

e.

f.

a.

Supplies Expense
Supplies
Supplies used ($3,170 – $550).

2,620

Depreciation Expense
Accumulated Depreciation—Equipment
Depreciation for year.

1,675

Rent Expense
Prepaid Rent
Rent expired.

8,500

Wages Expense
Wages Payable
Accrued wages.

2,000

Unearned Fees
Fees Earned
Fees earned ($10,000 – $4,000).

6,000

Accounts Receivable
Fees Earned
Accrued fees.

5,380

2,620

1,675

8,500

2,000

6,000

5,380

2.

Fees Earned would be understated by $6,000; Depreciation Expense would
be understated by $1,675; and net income would be understated by $4,325
($6,000 – $1,675).

3.

Accumulated Depreciation—Equipment would be understated by $1,675; total assets
would be overstated by $1,675; Unearned Fees would be overstated by $6,000; total
liabilities would be overstated by $6,000; owner’s capital would be understated by
$4,325 ($6,000 – $1,675); and total liabilities and owner’s equity would be
overstated by $1,675 ($6,000 – $4,325).

4.

There is no effect on the “Net increase or decrease in cash” on the statement
of cash flows, since adjusting entries do not affect cash.


Prob. 3–3B
1.

b.

c.

d.

e.

a.

Supplies Expense
Supplies

Supplies used ($7,200 – $1,380).

5,820

Accounts Receivable
Fees Earned
Accrued fees earned.

3,900

Depreciation Expense
Accumulated Depreciation—Equipment
Equipment depreciation.

3,000

Wages Expense
Wages Payable
Accrued wages.

2,475

Unearned Fees
Fees Earned
Fees earned.

5,820

3,900

3,000

2,475

14,140
14,140

2.

Revenues……………………
Expenses……………………
Net Income…………………

$305,800
261,800 ($157,800 + $55,000 + $42,000 + $7,000)
$ 44,000

3.

Revenues……………………
Expenses……………………
Net Income……………………

$323,840 ($305,800 + $3,900 + $14,140)
273,095 ($261,800 + $5,820 + $3,000 + $2,475)
$ 50,745

4.

The effect of the adjusting entries on Diana Keck, Capital is the difference

in net income in (3) and (2) of $6,745 ($50,745 – $44,000), which would increase
Diana Keck, Capital.


Prob. 3–4B
2014
Mar.

31 Supplies Expense
Supplies
Supplies used ($6,200 – $2,175).

4,025

31 Insurance Expense
Prepaid Insurance
Insurance expired ($9,000 – $1,150).

7,850

31 Depreciation Expense—Buildings
Accumulated Depreciation—Buildings
Depreciation ($61,000 – $51,500).

9,500

31 Depreciation Expense—Trucks
Accumulated Depreciation—Trucks
Depreciation ($17,000 – $12,000).

5,000

31 Utilities Expense
Accounts Payable
Accrued utilities expense
($8,750 – $6,920, or $8,030 – $6,200).

1,830

31 Salary Expense
Salaries Payable
Accrued salaries ($81,400 – $80,000).

1,400

31 Unearned Service Fees
Service Fees Earned
Service fees earned ($10,500 – $3,850, or
$169,330 – $162,680).

6,650

4,025

7,850

9,500

5,000

1,830

1,400

6,650