Wiley Plus Intermediate Accounting 17th Edition Chapter 3 Solutions

Presentation on theme: "Chapter 3-1 The Accounting Information System The Accounting Information System Chapter3 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield."— Presentation transcript:

1 Chapter 3-1 The Accounting Information System The Accounting Information System Chapter3 Intermediate Accounting 12th Edition Kieso, Weygandt, and Warfield Prepared by Coby Harmon, University of California, Santa Barbara

2 Chapter 3-2 Basic Accounting Equation LO 2 Explain double-entry rules. Relationship among the assets, liabilities and stockholders' equity of a business: The equation must be in balance after every transaction. For every Debit there must be a Credit. Illustration 3-3

3 Chapter 3-3 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 1. Owner Invest $32,000 cash and equipment valued at $14,000 in the business. + 32,000 + 14,000 + 46,000 LO 2 Explain double-entry rules.

4 Chapter 3-4 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 2. Paid office rent of $600 for the month. - 600 - 600 (expense) LO 2 Explain double-entry rules.

5 Chapter 3-5 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 3. Received $3,200 advance on a management consulting engagement. + 3,200 LO 2 Explain double-entry rules.

6 Chapter 3-6 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 4. Received cash of $2,300 for services completed for Shuler Co. + 2,300 + 2,300 (revenue) LO 2 Explain double-entry rules.

7 Chapter 3-7 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 5. Purchased a computer for $6,100. (cash) + 6,100 - 6,100 LO 2 Explain double-entry rules.

8 Chapter 3-8 Double-Entry System Exercise AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 6. Paid off liabilities of $7,000. - 7,000 LO 2 Explain double-entry rules.

9 Chapter 3-9 AssetsAssetsLiabilitiesLiabilities Stockholders' Equity = + 7. Declared a cash dividend of $10,000. + 10,000 - 10,000 Note that the accounting equation equality is maintained after recording each transaction. LO 2 Explain double-entry rules. Double-Entry System Exercise

10 Chapter 3-10 Ownership structure dictates the types of accounts that are part of the equity section. Proprietorship or Partnership CorporationCorporation Capital Account Drawing Account Common Stock Additional Paid-in Capital Dividends Declared Retained Earnings Ownership Structure LO 2 Explain double-entry rules.

11 Chapter 3-11 Corporation Ownership Structure LO 2 Explain double-entry rules. Stockholders' Equity Balance Sheet Statement of Retained Earnings (Revenues less expenses) Net income or Net loss (Revenues less expenses) Income Statement (Revenues less expenses) Net income or Net loss (Revenues less expenses) Income Statement Dividends Retained Earnings (Net income retained in business) Common Stock (Investment by stockholders) Illustration 3-4

12 Chapter 3-12 The Accounting Cycle LO 3 Identify steps in the accounting cycle. Transactions 1. Journalization 6. Financial Statements 7. Closing entries 8. Post-closing trail balance 9. Reversing entries 3. Trial balance 2. Posting 5. Adjusted trial balance 4. Adjustments Work Sheet optional Work Sheet optional Illustration 3-6

13 Chapter 3-13 Transactions and Events What to Record? FASB states, "transactions and other events and circumstances that affect a business enterprise." LO 3 Identify steps in the accounting cycle. Types of Events: External – between a business and its environment. Internal – event occurring entirely within a business.

14 Chapter 3-14 1.A supplier of a company's raw material is paid an amount owed on account. External Not Recorded 2.A customer pays its open account. External 3.A new chief executive officer is hired. Not Recorded 4.The biweekly payroll is paid. 5.Raw materials are entered into production. Internal External 6.A new advertising agency is hired. Not Recorded 7.The accountant determines the federal income taxes owed based on the income earned. Internal Review "Transactions and Events" LO 3 Identify steps in the accounting cycle. ExternalInternal

15 Chapter 3-15 General Journal General Journal – a chronological record of transactions. Journal Entries are recorded in the journal. 1. Journalizing LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance. General Journal

16 Chapter 3-16 Posting Posting – the process of transferring amounts from the journal to the ledger accounts. General Ledger General Journal Jan. 3Sale of stockGJ1100,000 100 GJ1 2. Posting LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.

17 Chapter 3-17 Trial Balance Trial Balance – a list of each account and its balance; used to prove equality of debit and credit balances. 3. Trial Balance LO 4 Record transactions in journals, post to ledger accounts, and prepare a trial balance.

18 Chapter 3-18 4. Adjusting Entries Revenues - recorded in the period in which they are earned Revenues - recorded in the period in which they are earned. Expenses - recognized in the period in which they are incurred Expenses - recognized in the period in which they are incurred. Adjusting entries- needed to ensure that the revenue recognition and matching principles are followed. Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed. LO 5 Explain the reasons for preparing adjusting entries.

19 Chapter 3-19 Classes of Adjusting Entries 1.Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. Prepayments 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. Accruals LO 5 Explain the reasons for preparing adjusting entries. Illustration 3-20

20 Chapter 3-20 Payment of cash that is recorded as an asset because service or benefit will be received in the future. Adjusting Entries – "Prepaid Expenses" insurancesuppliesadvertising Cash Payment Expense Recorded BEFORE LO 5 Explain the reasons for preparing adjusting entries. rent maintenance on equipment fixed assets Prepayments often occur in regard to:

21 Chapter 3-21 Example: On Jan. 1 st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the journal entry to record the payment on Jan. 1 st. Adjusting Entries – "Prepaid Expenses" Cash12,000 Prepaid insurance12,000Jan. 1 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Prepaid Insurance 12,00012,000 DebitCredit Cash

22 Chapter 3-22 Example: On Jan. 1 st, Phoenix Corp. paid $12,000 for 12 months of insurance coverage. Show the adjusting journal entry required at Jan. 31 st. Adjusting Entries – "Prepaid Expenses" Prepaid insurance1,000 Insurance expense1,000Jan. 31 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Prepaid Insurance 12,0001,000 DebitCredit Insurance expense 1,000 11,000

23 Chapter 3-23 Receipt of cash that is recorded as a liability because the revenue has not been earned. Adjusting Entries – "Unearned Revenues" rent airline tickets school tuition Cash Receipt Revenue Recorded BEFORE LO 5 Explain the reasons for preparing adjusting entries. magazine subscriptions customer deposits Unearned revenues often occur in regard to:

24 Chapter 3-24 Example: On Nov. 1 st, Phoenix Corp. received $24,000 from Arcadia High School for 3 months rent in advance. Show the journal entry to record the receipt on Nov. 1 st. Unearned rent revenue24,000 Cash24,000Nov. 1 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Cash 24,00024,000 DebitCredit Unearned Rent Revenue Adjusting Entries – "Unearned Revenues"

25 Chapter 3-25 Example: On Nov. 1 st, Phoenix Corp. received $24,000 from Arcadia High School for 3 months rent in advance. Show the adjusting journal entry required on Nov. 30 th. Rent revenue8,000 Unearned rent revenue8,000Nov. 30 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Rent Revenue 8,00024,000 DebitCredit Unearned Rent Revenue Adjusting Entries – "Unearned Revenues" 8,000 16,000

26 Chapter 3-26 Revenues earned but not yet received in cash or recorded. Adjusting Entries – "Accrued Revenues" rentinterest services performed BEFORE LO 5 Explain the reasons for preparing adjusting entries. Accrued revenues often occur in regard to: Cash Receipt Revenue Recorded Adjusting entry results in:

27 Chapter 3-27 Example: On July 1 st, Phoenix Corp. invested $300,000 in securities that return 5% interest per year. Show the journal entry to record the investment on July 1 st. Cash300,000 Investments300,000July 1 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Investments 300,000300,000 DebitCredit Cash Adjusting Entries – "Accrued Revenues"

28 Chapter 3-28 Example: On July 1 st, Phoenix Corp. invested $300,000 in securities that return 5% interest per year. Show the adjusting journal entry required on July 31 st. Interest revenue1,250 Interest receivable1,250July 31 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Interest Receivable 1,2501,250 DebitCredit Interest Revenue Adjusting Entries – "Accrued Revenues"

29 Chapter 3-29 Expenses incurred but not yet paid in cash or recorded. Adjusting Entries – "Accrued Expenses" rentinteresttaxes BEFORE LO 5 Explain the reasons for preparing adjusting entries. Accrued expenses often occur in regard to: Cash Payment, if any* Expense Recorded salaries bad debts* Adjusting entry results in:

30 Chapter 3-30 Notes payable200,000 Cash200,000Feb. 2 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Cash 200,000200,000 DebitCredit Notes Payable Adjusting Entries – "Accrued Expenses" Example: On Feb. 2 nd, Phoenix Corp. borrowed $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the journal entry to record the borrowing on Feb. 2 nd.

31 Chapter 3-31 Example: On Feb. 2 nd, Phoenix Corp. borrowed $200,000 at a rate of 9% per year. Interest is due on first of each month. Show the adjusting journal entry required on Feb. 28 th. Interest payable1,500 Interest expense1,500Feb. 28 LO 5 Explain the reasons for preparing adjusting entries. DebitCredit Interest Expense 1,5001,500 DebitCredit Interest Payable Adjusting Entries – "Accrued Expenses"

32 Chapter 3-32 Shows the balance of all accounts, after adjusting entries, at the end of the accounting period. 5. Adjusted Trial Balance LO 5 Explain the reasons for preparing adjusting entries.

33 Chapter 3-33 6. Preparing Financial Statements LO 6 Prepare financial statement from the adjusted trial balance. Financial Statements are prepared directly from the Adjusted Trial Balance. Balance Sheet Income Statement Statement of Cash Flows Statement of Retained Earnings

34 Chapter 3-34 6. Preparing Financial Statements Balance Sheet LO 6 Prepare financial statement from the adjusted trial balance. Assume the following Adjusted Trial Balance

35 Chapter 3-35 6. Preparing Financial Statements LO 6 Prepare financial statement from the adjusted trial balance. Income Statement Assume the following Adjusted Trial Balance

36 Chapter 3-36 6. Preparing Financial Statements LO 6 Prepare financial statement from the adjusted trial balance. Statement of Retained Earnings Assume the following Adjusted Trial Balance

37 Chapter 3-37 7. Closing Entries LO 7 Prepare closing entries. To reduce the balance of the income statement (revenue and expense) accounts to zero. To transfer net income or net loss to owner's equity. Balance sheet (asset, liability, and equity) accounts are not closed. Dividends are closed directly to the Retained Earnings account.

38 Chapter 3-38 7. Closing Entries LO 7 Prepare closing entries. Example : Assume the following Adjusted Trial Balance

39 Chapter 3-39 Example: Prepare the Closing journal entry from the adjusted trial balance on the previous slide. 7. Closing Entries LO 7 Prepare closing entries. Sales185,000 Income summary202,000 Interest income17,000 Income summary115,000 Cost of goods sold47,000 Salary expense25,000 Depreciation expense43,000 Income summary87,000 Retained earnings87,000 Retained earnings10,000 Dividends declared10,000

Wiley Plus Intermediate Accounting 17th Edition Chapter 3 Solutions

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