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Chapter 03 - Adjusting Accounts and Preparing Financial Statements
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Chapter 3 Adjusting Accounts and Preparing Financial Statements
QUESTIONS
1. The cash basis of accounting reports revenues when cash is received while the accrual basis reports revenues when they are earned. The cash basis reports expenses when cash is paid while the accrual basis reports expenses when they are incurred and matched with revenues they generated.
2. The accrual basis of accounting generally provides a better indication of company performance and financial condition than does the cash basis. Also, the accrual basis increases the comparability of financial statements from one period to the next. Thus, business decision makers generally prefer the accrual basis.
3. Businesses that have major seasonal variations in sales are most likely to select the natural business year as the fiscal year.
4. A prepaid expense is an item paid for in advance of receiving its benefits. As such, it is reported as an asset on the balance sheet.
5. Long-term tangible plant assets such as equipment, buildings, and machinery lead to adjustments for depreciation. Generally, land is the only long-term tangible plant asset that does not require depreciation.
6. The Accumulated Depreciation contra asset account is used for depreciation. It provides financial statement users with additional information about the relative age of the assets. Without the contra account information, the reader would not be able to tell whether the assets are new or in need of replacement.
7. Unearned revenue refers to cash received in advance of providing products and services. Another name for unearned revenue is deferred revenue. It is reported as a liability on the balance sheet.
8. Accrued revenue is revenue that is earned but is not yet received in cash (and/or other assets) and the customer has not been billed prior to the end of the period. Therefore, end-of-period adjustments are made to record accrued revenue. Examples are interest income that has been earned but not collected and revenues from services performed that are neither collected nor billed.
9.A If prepaid expenses are initially recorded with debits to expense accounts, then the prepaid expenses asset accounts are debited in the adjusting entries.
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10. For Research In Motion, all of the accounts under the category of Property and Equipment (except for Land), require adjusting entries. The expense related to the Depreciation Expense account would be understated on the income statement if Research In Motion fails to adjust these asset accounts. If the adjusting entries are not made, net income would be overstated. Note: Students might also correctly identify accounts receivable (for bad debts), Intangible assets (for amortization), Inventories (for shrinkage), and Short- and Long-term investments (for fair value) as needing adjustment.
11. Nokia reports 1,867 EUR (000,000s) for property, plant and equipment. For its adjusting entry, it would need to record Depreciation Expense (debit) on the plant and equipment and Accumulated Depreciation (credit) as the contra to the Property, plant and equipment account.
12. The accrued wages would be reported as part of the liability ―Other Accrued Liabilities‖ on Palm’s balance sheet.
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QUICK STUDIES
Quick Study 3-1 (10 minutes) a. UR Unearned revenue b. PE Prepaid expenses (Depreciation) c. AE Accrued expenses d. AR Accrued revenue e. PE Prepaid expenses Quick Study 3-2 (10 minutes) a. Insurance Expense ....................................................... 1,800 Prepaid Insurance ................................................. 1,800 To record 6-month insurance coverage expired.
b. Supplies Expense ......................................................... 2,700 Supplies .................................................................. 2,700 To record supplies used during the year. ($1,000 + $3,000 – [?] = $1,300)
Quick Study 3-3 (10 minutes) a. Depreciation Expense—Equipment ............................ 5,000 Accumulated Depreciation—Equipment ............. 5,000 To record depreciation expense for the year.
($30,000 - $5,000) / 5 years = $5,000
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b. No depreciation adjustments are made for land as it is expected to last
indefinitely. Quick Study 3-4 (15 minutes) a. Unearned Revenue ........................................................ 15,000 Legal Revenue ....................................................... 15,000 To recognize legal revenue earned (20,000 x 3/4).
b. Unearned Subscription Revenue ................................ 2,400 Subscription Revenue ........................................... 2,400 To recognize subscription revenue earned. [100 x ($48 / 12 month) x 6 months]
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Quick Study 3-5 (10 minutes) Salaries Expense ........................................................... 400 Salaries Payable .................................................... 400 To record salaries incurred but not yet paid. [One student earns, $100 x 4 days, M-R]
Quick Study 3-6 (15 minutes) Accounts Debited and Credited Financial Statement
a. Debit Unearned Revenue Balance Sheet Credit Revenue Earned Income Statement b. Debit Depreciation Expense Income Statement Credit Accumulated Depreciation Balance Sheet c. Debit Wages Expense Income Statement Credit Wages Payable Balance Sheet d. Debit Accounts Receivable Balance Sheet Credit Revenue Earned Income Statement e. Debit Insurance Expense Income Statement Credit Prepaid Insurance Balance Sheet
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Quick Study 3-7 (10 minutes) Cash Accounting: Revenues (cash receipts) ...................................................... $33,000 Expenses (cash payments: $22,500 - $2,250 + $3,750) ...... 24,000 Net income ............................................................................. $ 9,000 Accrual Accounting: Revenues (earned) ................................................................ $39,000 Expenses (incurred) .............................................................. 22,500 Net income .............................................................................. $16,500 Quick Study 3-8 (10 minutes) The answer is c. Explanation: The debit balance in Prepaid Insurance was reduced by $400, implying a $400 debit to Insurance Expense. The credit balance in Interest Payable increased by $800, which implies an $800 debit to Interest Expense.
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Quick Study 3-9 (15 minutes) The answer is 2. Explanation: Insurance premium error: Understates expenses (and overstates assets) by .......... $1,600 Accrued salaries error: Understates expenses (and understates liabilities) by .... 1,000 Combination of errors:
Understates expenses by ..................................................... $2,600 Overstates assets by ............................................................. $1,600 Understates liabilities by ...................................................... $1,000
Quick Study 3-10 (15 minutes) Adjusting entry Debit Credit
1. Accrue salaries expense b d
2. Adjust the Unearned Services Revenue account to recognize earned revenue
g c
3. Record the earning of services revenue for which cash will be received the following period
h c
Quick Study 3-11 (10 minutes) Profit margin = $37,925 / $390,000 = 9.7% Interpretation: For each one dollar that Yang Company records as revenue, it earns 9.7 cents in net income. Yang’s 9.7% is markedly lower than the competitors’ average profit margin of 15%. Thus, it must improve performance. Quick Study 3-12A (5 minutes)
The answer is d.
Quick Study 3-13 (10 minutes)
a. Under IFRS, financial statements normally present assets from least
liquid to most liquid. b. Under IFRS, financial statements normally present liabilities from
furthest from maturity to nearest to maturity.
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EXERCISES Exercise 3-1 (10 minutes) 1. B 4. F
2. E 5. D
3. C 6. A Exercise 3-2 (30 minutes) a. Unearned Fee Revenue .................................................... 10,000 Fee Revenue .................................................................. 10,000 To record earned portion of fee received in advance. b. Wages Expense ................................................................. 9,000 Wages Payable .............................................................. 9,000 To record wages accrued but not yet paid. c. Depreciation Expense—Equipment ................................ 19,127 Accumulated Depreciation—Equipment..................... 19,127 To record depreciation expense for the year. d. Office Supplies Expense .................................................. 5,242 Office Supplies
* ............................................................. 5,242
To record office supplies used ($480 + $5,349 - $587). e. Insurance Expense ........................................................... 2,800 Prepaid Insurance
** ....................................................... 2,800
To record insurance coverage expired ($5,000 - $2,200). f. Interest Receivable ......................................................... 750 Interest Revenue ........................................................ 750 To record interest earned but not yet received. g. Interest Expense ............................................................. 3,500 Interest Payable........................................................... 3,500 To record interest incurred but not yet paid.
Notes:
Office Supplies* Prepaid Insurance**
Beg. Bal. 480 Beg. Bal. 5,000 Purch. 5,349
? Used ? Used
End. Bal. 587 End. Bal. 2,200
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Exercise 3-3 (25 minutes) a. Depreciation Expense—Equipment ................................ 16,000 Accumulated Depreciation—Equipment..................... 16,000 To record depreciation expense for the year.
b. Insurance Expense ........................................................... 5,960 Prepaid Insurance
* ........................................................ 5,960
To record insurance coverage that expired ($7,000 - $1,040).
c. Office Supplies Expense .................................................. 2,626 Office Supplies
** ............................................................ 2,626
To record office supplies used ($300 + $2,680 - $354).
d. Unearned Fee Revenue .................................................... 5,000 Fee Revenue .................................................................. 5,000 To record earned portion of fee received in advance
($10,000 x 1/2).
e. Insurance Expense ........................................................... 4,600 Prepaid Insurance ......................................................... 4,600 To record insurance coverage that expired.
f. Wages Expense ................................................................. 4,000 Wages Payable .............................................................. 4,000 To record wages accrued but not yet paid.
Notes:
Prepaid Insurance* Office Supplies**
Bal. Bal. 7,000 Beg. Bal. 300 Purch. 2,680 ? Used ? Used
End. Bal. 1,040 End. Bal. 354
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Exercise 3-4 (25 minutes)
a. Apr. 30 Legal Fees Expense ........................................... 2,500 Legal Fees Payable ..................................... 2,500 To record accrued legal fees.
May 12 Legal Fees Payable ............................................ 2,500 Cash ............................................................. 2,500 To pay accrued legal fees.
b. Apr. 30 Interest Expense ................................................ 2,080 Interest Payable .......................................... 2,080 To record accrued interest expense (9.6% x
$780,000 x 10/360) or ($6,240 x 10/30).
May 20 Interest Payable .................................................. 2,080 Interest Expense ................................................. 4,160 Cash ............................................................ 6,240 To record payment of accrued and current
interest expense (9.6% x $780,000 x 20/360).
c. Apr. 30 Salaries Expense ................................................. 3,600 Salaries Payable.......................................... 3,600 To record accrued salaries ($9,000 x 2/5 week).
May 3 Salaries Payable ................................................. 3,600 Salaries Expense ................................................ 5,400 Cash ............................................................. 9,000 To record payment of accrued and
current salaries ($9,000 x 3/5 week).
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Exercise 3-5 (15 minutes) a. $ 1,650
b. $ 5,700
c. $10,080
d. $ 1,375 Proof:
(a) (b) (c) (d)
Supplies available – prior year-end ......... $ 300 $1,600 $ 1,360 $1,375
Supplies purchased in current year ........ 2,100 5,400 10,080 6,000
Total supplies available ............................ 2,400 7,000 11,440 7,375
Supplies available – current year-end ..... (750) (5,700) (1,840) (800)
Supplies expense for current year........... $1,650 $1,300 $ 9,600 $6,575
Exercise 3-6 (15 minutes) a. Adjusting entry:
2011
Dec. 31 Wages Expense.............................................................. 500
Wages Payable ...................................................... 500 To record accrued wages for one day.
(5 workers x $100 x 1 day)
b. Payday entry: 2012 Jan. 4 Wages Expense.............................................................. 1,500
Wages Payable ............................................................... 500
Cash ........................................................................ 2,000 To record accrued and current wages.
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Exercise 3-7 (25 minutes) Dec. 31 Accounts Receivable .............................................. 1,800 Fees Earned ..................................................... 1,800 To record earned but unbilled fees
(30% x $6,000). 31 Unearned Fees ......................................................... 4,200 Fees Earned ..................................................... 4,200 To record earned fees collected in
advance (70% x $6,000). 31 Depreciation Expense—Computers ...................... 1,500 Accumulated Depreciation—Computers ...... 1,500 To record depreciation on computers.
31 Depreciation Expense—Office Furniture .............. 1,750 Accumulated Depreciation—Office Furniture ... 1,750 To record depreciation on office furniture.
31 Salaries Expense ..................................................... 2,450 Salaries Payable.............................................. 2,450 To record accrued salaries.
31 Insurance Expense .................................................. 1,300 Prepaid Insurance ........................................... 1,300 To record expired prepaid insurance.
31 Office Supplies Expense ......................................... 480 Office Supplies ................................................ 480 To record use of office supplies.
31 Utilities Expense ...................................................... 70 Utilities Payable .............................................. 70 To record incurred and unpaid utility costs.
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Exercise 3-8 (20 minutes)
Balance Sheet Insurance Asset using Insurance Expense using
Accrual Basis*
Cash Basis
Accrual Basis**
Cash Basis
Dec. 31, 2009 ................... $11,700 $0 2009 .................................. $ 4,500 $16,200
Dec. 31, 2010 ................... 6,300 0 2010 .................................. 5,400 0
Dec. 31, 2011 ................... 900 0 2011 .................................. 5,400 0
Dec. 31, 2012 ................... 0 0 2012 .................................. 900 0
Total ................................. $16,200 $16,200
EXPLANATIONS: *Accrual asset balance equals months left in the policy x $450 per month (monthly cost is computed as $450, from $16,200 divided by 36 months).
Months Left Balance
12/31/2009 .... 26 $11,700 12/31/2010 .... 14 6,300 12/31/2011 .... 2 900 12/31/2012 .... 0 0 **Accrual insurance expense equals months covered in the year x $450 per month.
Months Covered Expense
2009 .................................. 10 $ 4,500 2010 .................................. 12 5,400 2011 .................................. 12 5,400 2012 .................................. 2 900 $16,200
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Exercise 3-9 (10 minutes)
a. $5,390 / $44,830 = 12.0%
b. $87,644 / $398,954 = 22.0%
c. $93,385 / $257,082 = 36.3%
d. $55,234 / $1,458,999 = 3.8%
e. $70,158 / $435,925 = 16.1%
Analysis and Interpretation: Company c has the highest profitability according to the profit margin ratio. Company c earns 36.3 cents in net income for each one dollar of net sales recorded.
Exercise 3-10A (25 minutes) a. Initial credit recorded in the Unearned Fees account:
July 1 Cash ....................................................................... 2,000 Unearned Fees .............................................. 2,000 Received fees for work to be done.
6 Cash ....................................................................... 8,400 Unearned Fees .............................................. 8,400 Received fees for work to be done.
12 Unearned Fees ...................................................... 2,000 Fees Earned ................................................... 2,000
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Completed work for customer.
18 Cash ....................................................................... 7,500 Unearned Fees .............................................. 7,500 Received fees for work to be done.
27 Unearned Fees ...................................................... 8,400 Fees Earned ................................................... 8,400 Completed work for customer.
31 No adjusting entries required. b. Initial credit recorded in the Fees Earned account:
July 1 Cash ....................................................................... 2,000 Fees Earned ................................................... 2,000 Received fees for work to be done.
6 Cash ....................................................................... 8,400 Fees Earned ................................................... 8,400 Received fees for work to be done.
12 No entry required.
18 Cash ....................................................................... 7,500 Fees Earned ................................................... 7,500 Received fees for work to be done.
27 No entry required.
31 Fees Earned .......................................................... 7,500 Unearned Fees .............................................. 7,500 Adjusted to reflect unearned fees for unfinished job.
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Exercise 3-10A - (Continued)
c. Under the first method (and using entries from a):
Unearned Fees = $2,000 + $8,400 - $2,000 + $7,500 - $8,400 = $7,500 Fees Earned = $2,000 + $8,400 = $10,400 Under the second method (and using entries from b):
Unearned Fees = $7,500 Fees Earned = $2,000 + $8,400 + $7,500 - $7,500 = $10,400
[Note: Both procedures yield identical results in the financial statements.]
Exercise 3-11A (30 minutes) a. Dec. 1 Supplies Expense ............................................ 3,000 Cash .......................................................... 3,000 Purchased supplies.
b. Dec. 2 Insurance Expense .......................................... 1,440 Cash .......................................................... 1,440 Paid insurance premiums.
c. Dec. 15 Cash .................................................................. 12,000 Remodeling Fees Earned ........................ 12,000 Received fees for work to be done.
d. Dec. 28 Cash .................................................................. 3,600 Remodeling Fees Earned ........................ 3,600 Received fees for work to be done.
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e. Dec. 31 Supplies ............................................................. 1,920 Supplies Expense .................................... 1,920 Adjust expenses for unused supplies.
f. Dec. 31 Prepaid Insurance ($1,440 - $240).................. 1,200 Insurance Expense .................................. 1,200 Adjust expenses for unexpired coverage.
g. Dec. 31 Remodeling Fees Earned .............................. 9,300 Unearned Remodeling Fees ................... 9,300 Adjusted revenues for unfinished
projects ($12,000 + $3,600 - $6,300).
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Exercise 3-12 (20 minutes)
adidas AG Balance Sheet
December 31, 2009 (Euros in millions)
Assets Noncurrent assets
Intangible assets ................................................... € 2,980
Tangible and other assets .................................... 1,410
Total noncurrent assets ........................................ 4,390
Current assets
Other current assets ............................................. 486
Inventories ............................................................. 1,471
Receivables and financial assets ........................ 1,753
Cash and cash equivalents .................................. 775
Total current assets .............................................. 4,485
Total assets .............................................................. € 8,875
Equity
Total equity .............................................................. € 3,776
Liabilities Total noncurrent liabilities ..................................... 2,263
Total current liabilities ............................................ 2,836
Total liabilities ......................................................... 5,099
Total equity and liabilities ...................................... € 8,875
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PROBLEM SET A Problem 3-1A (35 minutes) Part 1
Adjustment (a)
Dec. 31 Office Supplies Expense ............................. 12,760 Office Supplies ...................................... 12,760 To record cost of supplies used ($3,000 + $12,400 - $2,640).
Adjustment (b)
31 Insurance Expense ....................................... 12,312 Prepaid Insurance ................................. 12,312 To record annual insurance coverage expense.
Policy Cost per Month Months Active in 2011 2011 Cost
A $660 ($15,840/24 mo.) 12 $ 7,920 B 363 ($13,068/36 mo.) 9 3,267 C 225 ($ 2,700 /12 mo.) 5 1,125
Total $12,312
Adjustment (c)
31 Salaries Expense (2 days x $2,100) ............ 4,200 Salaries Payable.................................... 4,200 To record accrued but unpaid wages.
Adjustment (d)
31 Depreciation Expense—Building ................ 27,000 Accumulated Depreciation—Building 27,000 To record annual depreciation expense [($855,000 -$45,000) / 30 years = $27,000].
Adjustment (e)
31 Rent Receivable ............................................ 2,400 Rent Earned ........................................... 2,400 To record earned but unpaid Dec. rent.
Adjustment (f) 31 Unearned Rent .............................................. 4,350 Rent Earned ........................................... 4,350 To record the amount of rent earned for
November and December (2 x 2,175).
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Problem 3-1A (Continued)
Part 2 Cash Payment for (c)
Jan. 6 Salaries Payable ........................................... 4,200 Salaries Expense* ........................................ 6,300 Cash ....................................................... 10,500 To record payment of accrued and
current salaries. *(3 days x $2,100)
Cash Payment for (e)
15 Cash ............................................................... 4,800 Rent Receivable .................................... 2,400 Rent Earned ........................................... 2,400 To record past due rent for two months.
Problem 3-2A (10 minutes) 1. G 5. G 9. F
2. E 6. C 10. D
3. I 7. H 11. A
4. B 8. E 12. D
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Problem 3-3A (90 minutes) Parts 1 and 2
Cash Equipment Unadj. Bal. 26,000 Unadj. Bal. 70,000
Accounts Receivable
Accumulated Depreciation— Equipment
Unadj. Bal. 0 Unadj. Bal. 16,000 (f) 7,500 (c) 12,000 Adj. Bal. 7,500 Adj. Bal. 28,000
Teaching Supplies Accounts Payable Unadj. Bal. 10,000 Unadj. Bal. 36,000 (b) 7,400 Adj. Bal. 2,600 Salaries Payable
Unadj. Bal. 0
Prepaid Insurance (g) 400 Unadj. Bal. 15,000 Adj. Bal. 400 (a) 3,000 Adj. Bal. 12,000 Unearned Training Fees
Unadj. Bal. 11,000
Prepaid Rent (e) 4,400 Unadj. Bal. 2,000 Adj. Bal. 6,600 (h) 2,000 Adj. Bal. 0 T. Watson, Capital
Unadj. Bal. 63,600
Professional Library Unadj. Bal. 30,000 T. Watson, Withdrawals
Unadj. Bal. 40,000
Accumulated Depreciation— Professional Library
Unadj. Bal. 9,000 (d) 6,000 Adj. Bal. 15,000
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Problem 3-3A (Continued)
Tuition Fees Earned Rent Expense Unadj. Bal. 102,000 Unadj. Bal. 22,000 (f) 7,500 (h) 2,000
Adj. Bal. 109,500 Adj. Bal. 24,000
Training Fees Earned Teaching Supplies Expense
Unadj. Bal. 38,000 Unadj. Bal. 0 (e) 4,400 (b) 7,400
Adj. Bal. 42,400 Adj. Bal. 7,400
Depreciation Expense— Professional Library
Advertising Expense
Unadj. Bal. 0 Unadj. Bal. 7,000 (d) 6,000 Adj. Bal. 6,000
Depreciation Expense— Equipment
Utilities Expense
Unadj. Bal. 0 Unadj. Bal. 5,600 (c) 12,000 Adj. Bal. 12,000
Salaries Expense Unadj. Bal. 48,000 (g) 400 Adj. Bal. 48,400
Insurance Expense Unadj. Bal. 0 (a) 3,000 Adj. Bal. 3,000
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Problem 3-3A (Continued)
Part 2
Adjustment (a) Dec. 31 Insurance Expense ...................................................... 3,000 Prepaid Insurance .................................................. 3,000 To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense ....................................... 7,400 Teaching Supplies ................................................. 7,400 To record supplies used ($10,000-$2,600).
Adjustment (c)
31 Depreciation Expense—Equipment ........................... 12,000 Accumulated Depreciation—Equipment .................... 12,000 To record equipment depreciation.
Adjustment (d)
31 Depreciation Expense—Profess. Library .................. 6,000 Accumul. Depreciation—Profess. Library ................ 6,000 To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees .............................................. 4,400 Training Fees Earned ............................................ 4,400 To record training fees earned that were
collected in advance.
Adjustment (f)
31 Accounts Receivable ................................................... 7,500 Tuition Fees Earned............................................... 7,500 To record tuition earned ($3,000 x 2 1/2 months).
Adjustment (g)
31 Salaries Expense ......................................................... 400 Salaries Payable..................................................... 400 To record accrued salaries (2 days x $100 x 2).
Adjustment (h)
31 Rent Expense ............................................................... 2,000 Prepaid Rent ........................................................... 2,000 To record expiration of prepaid rent.
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Problem 3-3A (Continued) Part 3
Watson Technical Institute Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash .......................................................................... $ 26,000
Accounts receivable ................................................ 7,500
Teaching supplies ................................................... 2,600
Prepaid insurance .................................................... 12,000
Prepaid rent .............................................................. 0
Professional library ................................................. 30,000
Accumulated depreciation—Professional library ... $ 15,000
Equipment ................................................................ 70,000
Accumulated depreciation—Equipment ................ 28,000
Accounts payable .................................................... 36,000
Salaries payable ....................................................... 400
Unearned training fees ............................................ 6,600
T. Watson, Capital .................................................... 63,600
T. Watson, Withdrawals .......................................... 40,000
Tuition fees earned .................................................. 109,500
Training fees earned ................................................ 42,400
Depreciation expense—Professional library ........ 6,000
Depreciation expense—Equipment ....................... 12,000
Salaries expense ..................................................... 48,400
Insurance expense .................................................. 3,000
Rent expense ............................................................ 24,000
Teaching supplies expense .................................... 7,400
Advertising expense ................................................ 7,000
Utilities expense....................................................... 5,600 _______
Totals ........................................................................ $301,500 $301,500
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Problem 3-3A (Continued) Part 4
WATSON TECHNICAL INSTITUTE Income Statement
For Year Ended December 31, 2011
Revenues Tuition fees earned ............................................ $109,500 Training fees earned .......................................... 42,400 Total revenues .................................................... $151,900 Expenses Depreciation expense—Professional library ... 6,000 Depreciation expense—Equipment .................. 12,000 Salaries expense ................................................ 48,400 Insurance expense ............................................. 3,000 Rent expense ...................................................... 24,000 Teaching supplies expense ............................... 7,400 Advertising expense .......................................... 7,000 Utilities expense ................................................. 5,600 Total expenses ................................................... 113,400 Net income ............................................................ $ 38,500
WATSON TECHNICAL INSTITUTE Statement of Owner’s Equity
For Year Ended December 31, 2011 T. Watson, Capital, December 31, 2010 .............. $ 63,600 Plus: Net income .................................................. 38,500 102,100 Less: Owner withdrawals .................................... 40,000 T. Watson, Capital, December 31, 2011 .............. $ 62,100
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Problem 3-3A (Concluded)
WATSON TECHNICAL INSTITUTE Balance Sheet
December 31, 2011
Assets Cash ................................................................................. $ 26,000 Accounts receivable ...................................................... 7,500 Teaching supplies .......................................................... 2,600 Prepaid insurance .......................................................... 12,000 Professional library ........................................................ $30,000 Accumulated depreciation—Professional library ....... (15,000) 15,000 Equipment ....................................................................... 70,000 Accumulated depreciation—Equipment ...................... (28,000) 42,000 Total assets ..................................................................... $105,100 Liabilities Accounts payable ........................................................... $ 36,000 Salaries payable ............................................................. 400 Unearned training fees .................................................. 6,600 Total liabilities ................................................................ 43,000 Equity T. Watson, Capital .......................................................... 62,100 Total liabilities and equity ............................................. $105,100
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Problem 3-4A (45 minutes) — Part 1
Account
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Cash ............................................. $ 27,000 $ 27,000
Accounts receivable ............... 12,000 (a) 10,460 22,460
Office supplies .......................... 18,000 (b) 15,000 3,000
Prepaid insurance ................... 7,320 (c) 2,440 4,880
Office equipment ..................... 92,000 92,000
Accumulated depreciation —Office equipment ..............
$ 12,000
(d)
6,000
$ 18,000
Accounts payable ................... 9,300 (e) 900 10,200
Interest payable ........................ (f) 800 800
Salaries payable ....................... (g) 6,600 6,600
Unearned consulting fees .... 16,000 (h) 1,700 14,300
Long-term notes payable ..... 44,000 44,000
J. Winner, Capital ..................... 28,420 28,420
J. Winner, Withdrawals .......... 10,000 10,000
Consulting fees earned .......................................
156,000
(a) (h)
10,460 1,700
168,160
Depreciation expense— Office equipment ...................
(d)
6,000
6,000
Salaries expense ..................... 71,000 (g) 6,600 77,600
Interest expense....................... 1,400 (f) 800 2,200
Insurance expense ................. (c) 2,440 2,440
Rent expense ............................ 13,200 13,200
Office supplies expense........ (b) 15,000 15,000
Advertising expense .............. 13,800 _______ (e) 900 ______ 14,700 _______
Totals ........................................... $265,720 $265,720 $43,900 $43,900 $290,480 $290,480
Adjustment description:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
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Problem 3-4A Part 2
JJW COMPANY Income Statement
For Year Ended July 31, 2011
Revenues
Consulting fees earned ................................ $168,160
Expenses
Depreciation expense—Office equipment .. $ 6,000
Salaries expense .......................................... 77,600
Interest expense ........................................... 2,200
Insurance expense ....................................... 2,440
Rent expense ................................................ 13,200
Office supplies expense .............................. 15,000
Advertising expense .................................... 14,700
Total expenses .............................................. 131,140
Net income ....................................................... $ 37,020
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JJW COMPANY Statement of Owner’s Equity For Year Ended July 31, 2011
J. Winner, Capital, July 31, 2010 .................... $28,420
Plus: Net income ............................................. 37,020
65,440
Less: Owner withdrawals ............................... 10,000
J. Winner, Capital, July 31, 2011 .................... $55,440
Problem 3-4A (Concluded)
Part 2 (concluded)
JJW COMPANY Balance Sheet July 31, 2011
Assets
Cash ............................................................................. $ 27,000
Accounts receivable .................................................. 22,460
Office supplies ............................................................ 3,000
Prepaid insurance ...................................................... 4,880
Office equipment ........................................................ $92,000
Accumulated depreciation—Office equipment ....... (18,000) 74,000
Total assets ................................................................. $131,340
Liabilities
Accounts payable ....................................................... $ 10,200
Interest payable .......................................................... 800
Salaries payable ......................................................... 6,600
Unearned consulting fees ......................................... 14,300
Long-term notes payable ........................................... 44,000
Total liabilities ............................................................ 75,900
Equity
J. Winner, Capital ....................................................... 55,440
Total liabilities and equity ......................................... $131,340
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Problem 3-5A (50 minutes)
Part 1
CALLAHAY COMPANY Income Statement
For Year Ended December 31, 2011 Revenues
Fees earned .............................................. $420,000
Interest earned .......................................... 16,000
Total revenues .......................................... $436,000
Expenses
Depreciation expense—Automobiles ..... 18,000
Depreciation expense—Equipment ........ 10,000
Salaries expense ...................................... 180,000
Wages expense ........................................ 32,000
Interest expense ....................................... 24,000
Office supplies expense .......................... 26,000
Advertising expense ................................ 50,000
Repairs expense—Automobiles ............. 16,800
Total expenses ......................................... 356,800
Net income .................................................. $ 79,200
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CALLAHAY COMPANY Statement of Owner's Equity
For Year Ended December 31, 2011 J. Callahay, Capital, December 31, 2010 .. $247,800
Plus: Net income ....................................... 79,200
327,000
Less: Withdrawals by owner .................... 38,000
J. Callahay, Capital, December 31, 2011 .. $289,000
Problem 3-5A (Concluded)
Part 1 (concluded)
CALLAHAY COMPANY Balance Sheet
December 31, 2011
Assets
Cash ........................................................................ $ 22,000
Accounts receivable .............................................. 44,000
Interest receivable.................................................. 10,000
Notes receivable (due in 90 days) ........................ 160,000
Office supplies ....................................................... 8,000
Automobiles ........................................................... $160,000
Accumulated depreciation—Automobiles ........... (42,000) 118,000
Equipment ............................................................... 130,000
Accumulated depreciation—Equipment .............. (10,000) 120,000
Land ......................................................................... 70,000
Total assets ............................................................ $552,000
Liabilities
Accounts payable .................................................. $ 88,000
Interest payable ...................................................... 12,000
Salaries payable ..................................................... 11,000
Unearned fees ........................................................ 22,000
Long-term notes payable ...................................... 130,000
Total liabilities ........................................................ 263,000
Owner’s Equity
J. Callahay, Capital ................................................ 289,000
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Total liabilities and equity ..................................... $552,000
Part 2 Profit margin = $79,200 / $436,000 = 18.2% Problem 3-6AA (40 minutes) Part 1 Assume prepaid expenses are recorded as assets and unearned revenues as liabilities.
Nov. 1 Prepaid Advertising ....................................... 1,500 Cash .......................................................... 1,500 Paid for future advertising.
1 Prepaid Insurance ........................................... 2,160 Cash .......................................................... 2,160 Paid insurance for one year.
30 Cash .................................................................. 3,300 Unearned Service Fees ........................... 3,300 Received fees in advance.
Dec. 1 Prepaid Consulting Fees ............................... 2,700 Cash .......................................................... 2,700 Paid for future consulting.
15 Cash .................................................................. 7,650 Unearned Service Fees ........................... 7,650 Received fees in advance.
31 Advertising Expense ....................................... 600 Prepaid Advertising ................................ 600 To adjust prepaid advertising ($1,500-$900).
31 Insurance Expense .......................................... 360 Prepaid Insurance .................................... 360 To adjust prepaid insurance ($2,160 x 2/12).
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31...........................................Unearned Service Fees 2,100
Service Fees Earned ................................ 2,100 To adjust unearned service fees
($3,300-$1,200).
31 Consulting Fees Expense .............................. 900 Prepaid Consulting Fees ......................... 900 To adjust prepaid consulting fees
($2,700 x 1/3).
31 Unearned Service Fees .................................. 3,000 Service Fees Earned ................................ 3,000 To adjust unearned service fees.
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Problem 3-6AA (Continued)
Part 2
Assume prepaid expenses are recorded as expenses and unearned revenues as revenues.
Nov.1 Advertising Expense ....................................... 1,500 Cash .......................................................... 1,500 Paid for future advertising.
1 Insurance Expense .......................................... 2,160 Cash .......................................................... 2,160 Paid insurance for one year.
30 Cash .................................................................. 3,300 Service Fees Earned ................................ 3,300 Received fees in advance.
Dec. 1 Consulting Fees Expense ............................... 2,700 Cash .......................................................... 2,700 Paid for future consulting.
15 Cash .................................................................. 7,650 Service Fees Earned ................................ 7,650 Received fees in advance.
31 Prepaid Advertising ........................................ 900 Advertising Expense ............................... 900 To adjust for prepaid advertising.
31 Prepaid Insurance ........................................... 1,800 Insurance Expense .................................. 1,800 To adjust for prepaid insurance.
31 Service Fees Earned ....................................... 1,200 Unearned Service Fees ........................... 1,200 To adjust for unearned service fees.
31 Prepaid Consulting Fees ................................ 1,800 Consulting Fees Expense ....................... 1,800 To adjust for prepaid consulting fees.
31 Service Fees Earned ....................................... 4,650 Unearned Service Fees ........................... 4,650 To adjust for unearned service fees.
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Problem 3-6AA (Concluded) Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:
Advertising expense for two months ..................................... $ 600
Prepaid advertising as of December 31 ................................. 900
Insurance expense for two months ........................................ 360
Prepaid insurance as of December 31 ................................... 1,800
Consulting fees expense (1/3 of total paid) ........................... 900
Prepaid consulting fees ........................................................... 1,800
Service fees earned for two months ($2,100 + $3,000) ......... 5,100
Unearned service fees at 12/31 ($1,200 + $4,650) ................. 5,850
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
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PROBLEM SET B Problem 3-1B (30 minutes) Part 1
Adjustment (a)
Oct. 31 Office Supplies Expense ....................................... 3,450 Office Supplies ................................................ 3,450 To record cost of supplies used ($500 + $3,650 - $700).
Adjustment (b)
31 Insurance Expense ................................................. 2,675 Prepaid Insurance ........................................... 2,675 To record annual insurance coverage expense.
Policy
Cost per Month
Months Active in 2011
2011 Expense
A $125 ($3,000/24 mo.) 12 $1,500 B 100 ($3,600/36 mo.) 9 900 C 55 ( $660 / 12 mo.) 5 275
Total $2,675
Adjustment (c)
31 Salaries Expense .................................................... 800 Salaries Payable.............................................. 800 To record accrued but unpaid wages (1 day x $800).
Adjustment (d)
31 Depreciation Expense—Building .......................... 5,400 Accumulated Depreciation—Building .......... 5,400 To record annual depreciation [($155,000-$20,000) / 25 years = $5,400].
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Problem 3-1B (Concluded)
Adjustment (e)
Oct. 31 Rent Receivable ...................................................... 600 Rent Earned ..................................................... 600 To record earned but unpaid Oct. rent.
Adjustment (f)
31 Unearned Rent ........................................................ 1,050 Rent Earned ..................................................... 1,050 To record rent earned for September
and October (2 x $525).
Part 2 Cash Payment for (c)
Nov. 7 Salaries Payable ..................................................... 800 Salaries Expense* .................................................. 3,200 Cash ................................................................. 4,000 To record payment of accrued and
current salaries. *(4 days x $800)
Cash Payment for (e)
15 Cash ......................................................................... 1,200 Rent Receivable .............................................. 600 Rent Earned ..................................................... 600 To record past due rent for two months.
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Problem 3-2B (15 minutes) 1. E 5. D 9. F
2. H 6. B 10. I
3. G 7. F 11. A
4. C 8. I 12. B
Problem 3-3B (90 minutes) Parts 1 and 2
Cash Accounts Payable Unadj. Bal. 50,000 Unadj. Bal. 12,200
Accounts Receivable Salaries Payable Unadj. Bal. 0 Unadj. Bal. 0 (f) 5,500 (g) 540 Adj. Bal. 5,500 Adj. Bal. 540
Teaching Supplies Unearned Training Fees Unadj. Bal. 60,000 Unadj. Bal. 27,600 (b) 57,500 (e) 9,200 Adj. Bal. 2,500 Adj. Bal. 18,400
Prepaid Insurance M. Alcorn, Capital Unadj. Bal. 18,000 Unadj. Bal. 68,500 (a) 6,400 Adj. Bal. 11,600
M. Alcorn, Withdrawals
Prepaid Rent Unadj. Bal. 20,000 Unadj. Bal. 2,600 (h) 2,600 Adj. Bal. 0
Professional Library Unadj. Bal. 10,000
Accumulated Depreciation— Professional Library
Unadj. Bal. 1,500 (d) 2,000
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Adj. Bal. 3,500
Equipment Unadj. Bal. 30,000
Accumulated Depreciation— Equipment
Unadj. Bal. 16,000 (c) 4,000
Adj. Bal. 20,000
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Problem 3-3B (Continued) Parts 1 and 2
Tuition Fees Earned Advertising Expense Unadj. Bal. 105,000 Unadj. Bal. 18,000 (f) 5,500
Adj. Bal. 110,500
Training Fees Earned Utilities Expense
Unadj. Bal. 62,000 Unadj. Bal. 12,400 (e) 9,200
Adj. Bal. 71,200
Depreciation Expense— Professional Library
Unadj. Bal. 0 (d) 2,000 Adj. Bal. 2,000
Depreciation Expense— Equipment
Unadj. Bal. 0 (c) 4,000 Adj. Bal. 4,000
Salaries Expense Unadj. Bal. 43,200 (g) 540 Adj. Bal. 43,740
Insurance Expense Unadj. Bal. 0 (a) 6,400 Adj. Bal. 6,400
Rent Expense Unadj. Bal. 28,600 (h) 2,600 Adj. Bal. 31,200
Teaching Supplies Expense Unadj. Bal. 0 (b) 57,500 Adj. Bal. 57,500
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Problem 3-3B (Continued) Part 2
Adjustment (a)
Dec. 31 Insurance Expense ................................................ 6,400 Prepaid Insurance .......................................... 6,400 To record the insurance expired.
Adjustment (b)
31 Teaching Supplies Expense ................................. 57,500 Teaching Supplies ......................................... 57,500 To record the cost of supplies used
($60,000-$2,500).
Adjustment (c)
31 Depreciation Expense—Equipment..................... 4,000 Accumulated Depreciation—Equipment ..... 4,000 To record equipment depreciation.
Adjustment (d)
31 Depreciation Expense—Professional Library .... 2,000 Accumulated Depreciation— Professional Library ............................. 2,000 To record professional library depreciation.
Adjustment (e)
31 Unearned Training Fees ....................................... 9,200 Training Fees Earned .................................... 9,200 To record training fees earned that were
collected in advance.
Adjustment (f)
31 Accounts Receivable ............................................ 5,500 Tuition Fees Earned....................................... 5,500 To record tuition earned ($2,200 x 2 1/2 mo).
Adjustment (g)
31 Salaries Expense ................................................... 540 Salaries Payable............................................. 540 To accrue salaries expense (3 days x $180).
Adjustment (h)
31 Rent Expense ........................................................ 2,600 Prepaid Rent ................................................... 2,600 To record expiration of prepaid rent.
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Problem 3-3B (Continued) Part 3
ALCORN INSTITUTE Adjusted Trial Balance
December 31, 2011
Debit Credit
Cash ........................................................................................... $ 50,000
Accounts receivable ............................................................... 5,500
Teaching supplies ................................................................... 2,500
Prepaid insurance ................................................................... 11,600
Prepaid rent .............................................................................. 0
Professional library ................................................................. 10,000
Accumulated depreciation—Professional library ............ $ 3,500
Equipment ................................................................................ 30,000
Accumulated depreciation—Equipment ............................ 20,000
Accounts payable ................................................................... 12,200
Salaries payable ...................................................................... 540
Unearned training fees ........................................................... 18,400
M. Alcorn, Capital .................................................................... 68,500
M. Alcorn, Withdrawals .......................................................... 20,000
Tuition fees earned ................................................................. 110,500
Training fees earned ............................................................... 71,200
Depreciation expense—Professional library ..................... 2,000
Depreciation expense—Equipment .................................... 4,000
Salaries expense ..................................................................... 43,740
Insurance expense .................................................................. 6,400
Rent expense ........................................................................... 31,200
Teaching supplies expense .................................................. 57,500
Advertising expense ............................................................... 18,000
Utilities expense ...................................................................... 12,400 _______
Totals ......................................................................................... $304,840 $304,840
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Problem 3-3B (Continued) Part 4
ALCORN INSTITUTE Income Statement
For Year Ended December 31, 2011
Revenues
Tuition fees earned ................................................... $110,500
Training fees earned ................................................. 71,200
Total revenues ........................................................... $181,700
Expenses
Depreciation expense—Professional library .......... 2,000
Depreciation expense—Equipment ......................... 4,000
Salaries expense ....................................................... 43,740
Insurance expense .................................................... 6,400
Rent expense ............................................................. 31,200
Teaching supplies expense ...................................... 57,500
Advertising expense ................................................. 18,000
Utilities expense ........................................................ 12,400
Total expenses .......................................................... 175,240
Net income ................................................................... $ 6,460
ALCORN INSTITUTE Statement of Owner’s Equity
For Year Ended December 31, 2011 M. Alcorn, Capital, December 31, 2010 .............. $68,500
Plus: Net income .................................................. 6,460
74,960
Less: Owner withdrawals .................................... 20,000
M. Alcorn, Capital, December 31, 2011 .............. $54,960
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Problem 3-3B (Concluded)
ALCORN INSTITUTE Balance Sheet
December 31, 2011
Assets Cash .............................................................................. $50,000
Accounts receivable ................................................... 5,500
Teaching supplies ....................................................... 2,500
Prepaid insurance ....................................................... 11,600
Professional library ..................................................... $10,000
Accumulated depreciation—Professional library .......... (3,500) 6,500
Equipment .................................................................... 30,000
Accumulated depreciation—Equipment ................... (20,000) 10,000
Total assets .................................................................. $86,100
Liabilities
Accounts payable ........................................................ $12,200
Salaries payable .......................................................... 540
Unearned training fees ............................................... 18,400
Total liabilities ............................................................. 31,140
Equity
M. Alcorn, Capital ........................................................ 54,960
Total liabilities and equity .......................................... $86,100
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Problem 3-4B (45 minutes) — Part 1
Account
Unadjusted Trial Balance
Adjustments
Adjusted Trial Balance
Cash ................................................ $ 48,000 $ 48,000
Accounts receivable .................. 70,000 (a) 6,660 76,660
Office supplies ............................. 30,000 (b) 23,000 7,000
Prepaid insurance ....................... 13,200 (c) 4,600 8,600
Office equipment ......................... 150,000 150,000
Accumulated depreciation— Office equipment .............................
$ 30,000 (d) 10,000 $ 40,000
Accounts payable ....................... 36,000 (e) 6,000 42,000
Interest payable............................ (f) 1,600 1,600
Salaries payable .......................... (g) 11,200 11,200
Unearned consulting fees ........ 30,000 (h) 12,200 17,800
Long-term notes payable ......... 80,000 80,000
D. Chen, Capital ........................... 70,200 70,200
D. Chen, Withdrawals ................ 10,000 10,000
Consulting fees earned ............ 264,000
(a) (h)
6,660 12,200
282,860
Depreciation expense— Office equipment ......................
(d)
10,000
10,000
Salaries expense ......................... 115,600 (g) 11,200 126,800
Interest expense .......................... 6,400 (f) 1,600 8,000
Insurance expense .................... (c) 4,600 4,600
Rent expense ............................... 24,000 24,000
Office supplies expense ........... (b) 23,000 23,000
Advertising expense .................. 43,000 _______ (e) 6 ,000 ______ 49,000 _______
Totals ............................................... $510,200 $510,200 $75,260 $75,260 $545,660 $545,660
Adjustment Descriptions:
(a) Earned but uncollected revenues.
(b) Cost of consumed office supplies.
(c) Cost of expired insurance coverage.
(d) Depreciation expense on office equipment.
(e) Incurred but unpaid advertising expense.
(f) Incurred but unpaid interest expense.
(g) Incurred but unpaid salaries expense.
(h) Earned revenues previously received in advance.
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Problem 3-4B
Part 2
DAXU CONSULTING COMPANY Income Statement
For Year Ended December 31, 2011 Revenues
Consulting fees earned ..................................... $282,860
Expenses
Depreciation expense—Office equipment ....... $ 10,000
Salaries expense ............................................... 126,800
Interest expense ................................................ 8,000
Insurance expense ............................................ 4,600
Rent expense ..................................................... 24,000
Office supplies expense ................................... 23,000
Advertising expense ......................................... 49,000
Total expenses ................................................... 245,400
Net income ............................................................ $ 37,460
DAXU CONSULTING COMPANY Statement of Owner’s Equity
For Year Ended December 31, 2011
D. Chen, Capital, December 31, 2010 ................. $ 70,200
Plus: Net income .................................................. 37,460
107,660
Less: Owner withdrawals .................................... 10,000
D. Chen, Capital, December 31, 2011 ................. $ 97,660
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Problem 3-4B (Concluded)
Part 2 (concluded)
DAXU CONSULTING COMPANY Balance Sheet
December 31, 2011
Assets
Cash ................................................................................ $ 48,000
Accounts receivable ..................................................... 76,660
Office supplies ............................................................... 7,000
Prepaid insurance ......................................................... 8,600
Office equipment ........................................................... $150,000
Accumulated depreciation—Office equipment .......... (40,000) 110,000
Total assets .................................................................... $250,260
Liabilities
Accounts payable .......................................................... $ 42,000
Interest payable ............................................................. 1,600
Salaries payable ............................................................ 11,200
Unearned consulting fees ............................................ 17,800
Long-term notes payable .............................................. 80,000
Total liabilities ............................................................... 152,600
Equity
D. Chen, Capital ............................................................. 97,660
Total liabilities and equity ............................................ $250,260
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Problem 3-5B (50 minutes)
Part 1
LIGHTNING COURIER Income Statement
For Year Ended December 31, 2011 Revenues
Delivery fees earned ..................................... $580,000
Interest earned ............................................... 24,000
Total revenues ............................................... $604,000
Expenses
Depreciation expense—Trucks .................... 24,000
Depreciation expense—Equipment ............. 46,000
Salaries expense ........................................... 64,000
Wages expense ............................................. 290,000
Interest expense ............................................ 25,000
Office supplies expense ............................... 33,000
Advertising expense ..................................... 26,400
Repairs expense—Trucks ............................ 34,600
Total expenses .............................................. 543,000
Net income ....................................................... $ 61,000
LIGHTNING COURIER Statement of Owner's Equity
For Year Ended December 31, 2011
J. Hallam, Capital, December 31, 2010 .......... $115,000
Plus : Net income ........................................... 61,000
176,000
Less: Withdrawals by owner ......................... 40,000
J. Hallam, Capital, December 31, 2011 .......... $136,000
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Problem 3-5B (Concluded) Part 1 (concluded)
LIGHTNING COURIER Balance Sheet
December 31, 2011
Assets
Cash ...................................................................... $ 48,000
Accounts receivable ............................................ 110,000
Interest receivable ................................................ 6,000
Notes receivable (due in 90 days)......................... 200,000
Office supplies ..................................................... 12,000
Trucks ................................................................... $124,000
Accumulated depreciation—Trucks ................... (48,000) 76,000
Equipment ............................................................. 260,000
Accumulated depreciation—Equipment ............ (190,000) 70,000
Land ....................................................................... 90,000
Total assets .......................................................... $612,000
Liabilities
Accounts payable ................................................ $124,000
Interest payable .................................................... 22,000
Salaries payable ................................................... 30,000
Unearned delivery fees ........................................ 110,000
Long-term notes payable .................................... 190,000
Total liabilities ...................................................... 476,000
Equity
J. Hallam, Capital ................................................. 136,000
Total liabilities and equity ................................... $612,000
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Part 2 Profit margin = $61,000 / $604,000 = 10.1% Problem 3-6BA (40 minutes) Part 1 Method that records prepaid expenses and unearned revenues in balance sheet accounts:
Apr. 1 Prepaid Consulting Fees ..................................... 3,450 Cash ............................................................... 3,450 Paid for future consulting services.
1 Prepaid Insurance ................................................ 2,700 Cash ............................................................... 2,700 Paid insurance for one year.
30 Cash ....................................................................... 7,500 Unearned Service Fees ................................ 7,500 Received fees in advance.
May 1 Prepaid Advertising ............................................. 3,450 Cash ............................................................... 3,450 Paid for future advertising.
23 Cash ..................................................................... 9,450 Unearned Service Fees ............................... 9,450 Received fees in advance.
31 Consulting Fees Expense .................................... 1,500 Prepaid Consulting Fees .............................. 1,500 To adjust prepaid consulting fees.
31 Insurance Expense ............................................... 450 Prepaid Insurance ......................................... 450 To adjust prepaid insurance.
31 Unearned Service Fees ....................................... 3,900 Service Fees Earned ..................................... 3,900 To adjust unearned service fees.
31 Advertising Expense ............................................ 2,400 Prepaid Advertising ...................................... 2,400 To adjust prepaid advertising.
31 Unearned Service Fees ........................................ 4,500
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................................................Service Fees Earned
................................................4,500
To adjust unearned service fees. Problem 3-6B
A (Continued)
Part 2 Method that records prepaid expenses and unearned revenues in income statement accounts:
Apr. 1 Consulting Fees Expense ................................. 3,450 Cash ............................................................. 3,450 Paid for future consulting services.
1 Insurance Expense ............................................. 2,700 Cash ............................................................. 2,700 Paid insurance for one year.
30 Cash ..................................................................... 7,500 Service Fees Earned ................................... 7,500 Received fees in advance.
May 1 Advertising Expense .......................................... 3,450 Cash ............................................................. 3,450 Paid for future advertising.
23 Cash ..................................................................... 9,450 Service Fees Earned ................................... 9,450 Received fees in advance.
31 Prepaid Consulting Fees ................................... 1,950 Consulting Fees Expense .......................... 1,950 To adjust for prepaid consulting fees.
31 Prepaid Insurance ............................................. 2,250 Insurance Expense ..................................... 2,250 To adjust for prepaid insurance.
31 Service Fees Earned .......................................... 3,600 Unearned Service Fees ............................. 3,600 To adjust for unearned service fees.
31 Prepaid Advertising ........................................... 1,050 Advertising Expense .................................. 1,050 To adjust for prepaid advertising.
31 Service Fees Earned .......................................... 4,950 Unearned Service Fees ............................. 4,950 To adjust for unearned service fees.
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Problem 3-6BA (Concluded)
Part 3 There are no differences between the two methods in terms of the amounts that appear on the financial statements. In both cases, the financial statements reflect the following:
Prepaid consulting fees as of May 31 ......................................... $ 1,950
Consulting fees expense for two months .................................. 1,500
Insurance expense for two months ............................................ 450
Prepaid insurance as of May 31 .................................................. 2,250
Unearned service fees as of May 31 ($3,600 + $4,950) ............. 8,550
Service fees earned for two months ($3,900 + $4,500) ............. 8,400
Prepaid advertising as of May 31 ................................................ 1,050
Advertising expense for two months.......................................... 2,400
When prepaid expenses and unearned revenues are recorded in balance sheet accounts, the related adjusting entries are designed to generate the correct asset, expense, liability, and revenue account balances. When prepaid expenses and unearned revenues are recorded in income statement accounts, the related adjusting entries are designed to accomplish exactly the same result.
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SERIAL PROBLEM – SP 3
Serial Problem, Business Solutions (180 minutes) — Part 1
<Note: The general ledger is displayed at the end of Part 6>
Journal entries
Dec. 2 Advertising Expense .................................. 655 1,025 Cash .....................................................101 1,025 Paid share of mall advertising costs.
3 Repairs Expense–Computer ..................... 684 500 Cash .....................................................101 500 Repaired the computer.
4 Cash ............................................................. 101 3,950 Accounts Receivable ..........................106 3,950 Collected accounts receivable.
10 Wages Expense .......................................... 623 750 Cash .....................................................101 750 Paid employee for part-time work.
14 Cash ............................................................. 101 1,500 Unearned Computer Services Revenue ...236 1,500
Received advance on work to be performed.
15 Computer Supplies .................................... 126 1,100 Accounts Payable ...............................201 1,100 Purchased supplies on credit. 16 No entry recorded in the journal.
20 Cash ............................................................. 101 5,625 Computer Services Revenue .............403 5,625 Collected cash revenue from customer.
28 Cash ............................................................. 101 3,000 Accounts Receivable ..........................106 3,000 Collected accounts receivable.
29 Mileage Expense ........................................ 676 192 Cash .....................................................101 192 Reimbursed Rey for mileage.
31 S. Rey, Withdrawals ................................... 302 1,500 Cash .....................................................101 1,500 Paid cash for owner withdrawal.
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Serial Problem, SP 3 (Continued)
Part 2
Adjusting entries
Dec. 31 Computer Supplies Expense .........................652 3,065 Computer Supplies .................................126 3,065 Adjustment for supplies used (supplies
balance less cost of supplies available).
31 Insurance Expense .........................................637 555 Prepaid Insurance ...................................128 555 Adjustment for expired insurance (1/4
of $2,220 original prepaid amount).
31 Wages Expense ..............................................623 500 Wages Payable ........................................210 500 Adjustment for accrued wages.
31 Depreciation Expense–Computer Equip .......613 1,250 Accumulated Depreciation— Computer Equipment ...........................168 1,250 Adjustment for computer equipment depreciation:
Cost ......................................................... $20,000 Predicted life ........................................... 4 years Annual depreciation (cost/life) ............... $5,000 Expense for three months ...................... $1,250
31 Depreciation Expense—Office Equip ............612 400 Accumulated Depreciation— Office Equipment ..................................164 400 Adjustment for office equipment depreciation:
Cost ......................................................... $8,000 Predicted life ........................................... 5 years Annual depreciation (cost/life) ............... $1,600 Expense for three months ...................... $400
31 Rent Expense ..................................................640 2,475 Prepaid Rent ............................................131 2,475 Adjustment for expired rent (3/4 of
$3,300 original prepaid amount).
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Serial Problem, SP 3 (Continued)
Part 3
BUSINESS SOLUTIONS Adjusted Trial Balance
December 31, 2011 Debit Credit
Cash ........................................................................... $ 48,372
Accounts receivable ................................................. 5,668
Computer supplies ................................................... 580
Prepaid insurance ..................................................... 1,665
Prepaid rent ............................................................... 825
Office equipment ...................................................... 8,000
Accumulated depreciation—Office equipment ....... $ 400
Computer equipment ................................................ 20,000
Accumulated depreciation—Computer equipment 1,250
Accounts payable ..................................................... 1,100
Wages payable .......................................................... 500
Unearned computer services revenue ................... 1,500
S. Rey, Capital ............................................................ 73,000
S. Rey, Withdrawals ................................................... 7,100
Computer services revenue ..................................... 31,284
Depreciation expense—Office equipment .............. 400
Depreciation expense—Computer equipment ........ 1,250
Wages expense ......................................................... 3,875
Insurance expense ................................................... 555
Rent expense ............................................................ 2,475
Computer supplies expense .................................... 3,065
Advertising expense .................................................. 2,753
Mileage expense ....................................................... 896
Miscellaneous expenses .......................................... 250
Repairs expense—Computer ................................... 1,305 _______
Totals .......................................................................... $109,034 $109,034
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Serial Problem, SP 3 (Continued)
Part 4
BUSINESS SOLUTIONS Income Statement
For Three Months Ended December 31, 2011 Revenue Computer services revenue ....................................... $31,284
Expenses
Depreciation expense—Office equipment ............... $ 400
Depreciation expense—Computer equipment ......... 1,250
Wages expense ........................................................... 3,875
Insurance expense ..................................................... 555
Rent expense .............................................................. 2,475
Computer supplies expense ...................................... 3,065
Advertising expense ................................................... 2,753
Mileage expense ......................................................... 896
Miscellaneous expenses ............................................ 250
Repairs expense—Computer ..................................... 1,305
Total expenses ............................................................ 16,824
Net income .................................................................... $14,460
Part 5
BUSINESS SOLUTIONS Statement of Owner’s Equity
For Three Months Ended December 31, 2011 S. Rey, Capital, October 1, 2011 .................................. $73,000
Plus: Net income .......................................................... 14,460
87,460
Less: Withdrawals ........................................................ 7,100
S. Rey, Capital, December 31, 2011 ............................ $80,360
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Serial Problem, SP 3 (Continued)
Part 6
BUSINESS SOLUTIONS Balance Sheet
December 31, 2011 Assets Cash ................................................................................ $ 48,372
Accounts receivable ..................................................... 5,668
Computer supplies ........................................................ 580
Prepaid insurance ......................................................... 1,665
Prepaid rent ................................................................... 825
Office equipment ........................................................... $ 8,000 Accumulated depreciation–Office equipment ............. (400) 7,600
Computer equipment ..................................................... 20,000 Accumulated depreciation–Computer equipment ...... (1,250) 18,750
Total assets ..................................................................... $ 83,460 Liabilities Accounts payable ........................................................... $ 1,100
Wages payable ............................................................... 500
Unearned computer services revenue ......................... 1,500
Total liabilities ................................................................ 3,100 Equity S. Rey, Capital ................................................................ 80,360
Total liabilities and equity ............................................. $ 83,460
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Serial Problem, SP 3 (Continued) [Note: Ledger includes all entries from prior three months. The Working Papers shorten
the solution by showing account balances as of November 30.] General Ledger
Cash Acct. No. 101
Date Explanation PR Debit Credit Balance
Oct. 1 45,000 45,000 2 3,300 41,700 5 2,220 39,480 8 1,420 38,060 15 4,800 42,860 17 805 42,055 20 1,728 40,327 22 1,400 41,727 31 875 40,852 31 3,600 37,252 Nov. 1 320 36,932 2 4,633 41,565 5 1,125 40,440 18 2,208 42,648 22 250 42,398 28 384 42,014 30 1,750 40,264 30 2,000 38,264 Dec. 2 1,025 37,239 3 500 36,739 4 3,950 40,689 10 750 39,939 14 1,500 41,439 20 5,625 47,064 28 3,000 50,064 29 192 49,872 31 1,500 48,372
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Serial Problem, SP 3 (Continued)
Accounts Receivable Acct. No. 106
Date Explanation PR Debit Credit Balance
Oct. 6 4,800 4,800 12 1,400 6,200 15 4,800 1,400 22 1,400 0 28 5,208 5,208 Nov. 8 5,668 10,876 18 2,208 8,668 24 3,950 12,618 Dec. 4 3,950 8,668 28 3,000 5,668
Computer Supplies
Acct. No. 126
Date Explanation PR Debit Credit Balance
Oct. 3 1,420 1,420 Nov. 5 1,125 2,545 Dec. 15 1,100 3,645 31 3,065 580
Prepaid Insurance Acct. No. 128
Date Explanation PR Debit Credit Balance
Oct. 5 2,220 2,220 Dec. 31 555 1,665
Prepaid Rent Acct. No. 131
Date Explanation PR Debit Credit Balance
Oct. 2 3,300 3,300 Dec. 31 2,475 825
Office Equipment Acct. No. 163
Date Explanation PR Debit Credit Balance
Oct. 1 8,000 8,000 Accumulated Depreciation—Office Equipment Acct. No. 164
Date Explanation PR Debit Credit Balance
Dec. 31 400 400
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Serial Problem, SP 3 (Continued)
Computer Equipment Acct. No. 167
Date Explanation PR Debit Credit Balance
Oct. 1 20,000 20,000
Accumulated Depreciation—Computer Equipment Acct. No. 168
Date Explanation PR Debit Credit Balance
Dec. 31 1,250 1,250
Accounts Payable Acct. No. 201
Date Explanation PR Debit Credit Balance
Oct. 3 1,420 1,420 8 1,420 0 Dec. 15 1,100 1,100
Wages Payable Acct. No. 210
Date Explanation PR Debit Credit Balance
Dec. 31 500 500 Unearned Computer Services Revenue Acct. No. 236
Date Explanation PR Debit Credit Balance
Dec. 14 1,500 1,500
S. Rey, Capital Acct. No. 301
Date Explanation PR Debit Credit Balance
Oct. 1 73,000 73,000
S. Rey, Withdrawals Acct. No. 302
Date Explanation PR Debit Credit Balance
Oct. 31 3,600 3,600 Nov. 30 2,000 5,600 Dec. 31 1,500 7,100
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Serial Problem, SP 3 (Continued)
Computer Services Revenue Acct. No. 403
Date Explanation PR Debit Credit Balance
Oct. 6 4,800 4,800 12 1,400 6,200 28 5,208 11,408 Nov. 2 4,633 16,041 8 5,668 21,709 24 3,950 25,659 Dec. 20 5,625 31,284
Depreciation Expense—Office Equipment Acct. No. 612
Date Explanation PR Debit Credit Balance
Dec. 31 400 400 Depreciation Expense—Computer Equipment Acct. No. 613
Date Explanation PR Debit Credit Balance
Dec. 31 1,250 1,250
Wages Expense Acct. No. 623
Date Explanation PR Debit Credit Balance
Oct. 31 875 875 Nov. 30 1,750 2,625 Dec. 10 750 3,375 31 500 3,875
Insurance Expense Acct. No. 637
Date Explanation PR Debit Credit Balance
Dec. 31 555 555
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Serial Problem, SP 3 (Concluded)
Rent Expense Acct. No. 640
Date Explanation PR Debit Credit Balance
Dec. 31 2,475 2,475
Computer Supplies Expense Acct. No. 652
Date Explanation PR Debit Credit Balance
Dec. 31 3,065 3,065
Advertising Expense Acct. No. 655
Date Explanation PR Debit Credit Balance
Oct. 20 1,728 1,728 Dec. 2 1,025 2,753
Mileage Expense Acct. No. 676
Date Explanation PR Debit Credit Balance
Nov. 1 320 320 28 384 704 Dec. 29 192 896
Miscellaneous Expense Acct. No. 677
Date Explanation PR Debit Credit Balance
Nov. 22 250 250
Repairs Expense—Computer Acct. No. 684
Date Explanation PR Debit Credit Balance
Oct. 17 805 805 Dec. 3 500 1,305
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Reporting in Action — BTN 3-1 1. The revenue recognition principle requires that revenue be recorded
when realized or realizable and earned, not before and not after. Most companies earn revenue when they provide services and products to customers.
2. Research In Motion provides information on revenue recognition in its footnote 1 titled ―Research In Motion Limited and Summary of Significant Accounting Policies.‖ They report that ―Revenue from the sales of Blackberry devices is recognized when title is transferred to the customer and all significant contractual obligations that affect the customer’s final acceptance have been fulfilled. For hardware products for which software is deemed not to be incidental, the Company recognizes revenue in accordance with industry specific software revenue recognition guidance.‖ Research In Motion also explains how it estimates accruals for price protection commitments, incentive programs, warranties and royalties related to sales of Blackberry devices.
3. For fiscal year-end February 28, 2009, the profit margin is ($ millions): $1,893 / $11,065 = 0.171 = 17.1% For fiscal year-end February 27, 2010, the profit margin is ($ millions): $2,457 / $14,953 = 0.164 = 16.4%
4. Solution depends on the financial statements accessed.
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Comparative Analysis — BTN 3-2 1. Research In Motion Current year, profit margin = $2,457 / $14,953 = 16.4% Prior year, profit margin = $1,893 / $11,065 = 17.1% Apple Current year, profit margin = $8,235 / $42,905 = 19.2% Prior year, profit margin = $6,119 / $37,491 = 16.3% 2. Apple is more successful on the basis of profit margin in the current
year relative to Research In Motion, but Research In Motion is more successful based on the prior year profit margin. Research In Motion’s profit margin declined in the current year while Apple’s increased. In the current year, Research In Motion earned an average of 16.4 cents on each dollar while Apple earned 19.2 cents on each dollar.
Ethics Challenge — BTN 3-3 1. GAAP requires that annual deprecation be accumulated in a contra-
asset account, called Accumulated Depreciation. While property, plant, and equipment is often shown at its net value on the balance sheet (as with Research In Motion’s balance sheet in Appendix A) the cost of property, plant, and equipment along with its related accumulated depreciation are reported in the footnotes. Thus, Bergez is correct with her journal entry recommendation.
2. One strength of Welch’s method would be the ease of preparing the
balance sheet. The property, plant, and equipment balance in the adjusted trial balance would be directly transferable to the balance sheet when the preparer desired to show the amount at net. Welch’s approach carries weaknesses in that financial statement users would not be able to ascertain the original cost of the equipment or be able to know how much of the original cost had been allocated to depreciation to date.
3. While both approaches would lead to the same total assets on the
balance sheet, GAAP requires Bergez’s approach. As a professional, Bergez is required to uphold the standards of her profession and, thus, the decision is an ethical one for her.
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Communicating in Practice — BTN 3-4 This communication activity has no set solution. A class discussion of the ratios can be conducted with emphasis on (1) return and profitability by industries and (2) a contrast of debt financing between industries.
Taking It to the Net — BTN 3-5 1. The Gap’s main brands (stores) are The Gap, Old Navy, and Banana
Republic. It also has Piperlime and Athleta brands. 2. The Gap’s fiscal year-end is January 30, 2010. It appears that The Gap’s
fiscal year-end is consistently set as of the Saturday closest to January 31 – meaning it falls in the last week of January or first week of February.
3. Net sales for the year ended January 30, 2010, are $14,197 million. 4. Net income for the year ended January 30, 2010, is $1,102 million. 5. Profit margin = $1,102 million / $14,197 million = 7.76% 6. The company probably chose a fiscal year-end as the end of January or
early February to have it be consistent with their natural year. For many retailers, the highest amount of sales is in November and December (with some residual in January including sales returns).
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Teamwork in Action — BTN 3-6
Note that there is no specific solution to this activity. Still, the presentation of each expert team should reflect the following summary points:
Before Adjusting Balance Sheet Income Statement Type Account Account Adjusting Entry
Prepaid expense Asset overstated Expense understated Dr. Expense Cr. Asset* Unearned revenues Liability overstated Revenue understated Dr. Liability Cr. Revenue
Accrued Expenses Liability understated Expense understated Dr. Expense
Cr. Liability Accrued Revenues Asset understated Revenue understated Dr. Asset Cr. Revenue
* For depreciation, one would Credit the Accumulated Depreciation contra account.
Some implementation notes: This activity allows all students to be actively involved in the learning process. Encourage students to take the opportunity to ask questions in the small group environment the learning team provides. Encourage the better students to serve as experts on unearned revenues. The instructor’s observation of and reactions to expert teams’ development of presentation material as well as the delivery to learning teams will have a significant impact on the effectiveness of this activity.
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Entrepreneurial Decision — BTN 3-7 1. a. To record the collection of cash from sale of the gift certificate in
advance of delivery of merchandise to the customer:
Cash ..................................................................... 300 Unearned revenue....................................... 300 b. To record the delivery of merchandise to the customer when he/she
uses the gift certificate:
Unearned revenue .............................................. 300 Revenue earned .......................................... 300 2. Carrying less inventory would allows Cheezburger Network to save the
costs of carrying that added inventory; such as warehousing costs, insurance, theft/damage, and other potential losses. Saving these costs can increase income. By increasing income (via lower costs), profit margin should increase.
3. If it carries additional inventory, Cheezburger Network can potentially
sell more merchandise and increase its profits. This might further fuel increased sales as additional customers might be attracted to its products. On the other hand, carrying inventory has risks. The most important risk for a company like Cheezburger Network is that of inventory obsolescence. Consumer tastes and trends are constantly changing, and by carrying less inventory, the business can be more flexible in quickly responding with products consistent with those changing consumer trends.
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Hitting the Road — BTN 3-8 There is no formal solution to this field activity. The instructor may wish to tally students’ findings to see what companies were selected, who responded, what was the response time, etc. The instructor can also periodically ask students to bring in examples from their selected companies at certain times, and then compare and contrast them with the examples in the book.
Global Decision — BTN 3-9 1. Nokia’s Note 1 (Accounting Principles - Revenue Recognition) reports
that ―Sales from the majority of the Group are recognized when the significant risks and rewards of ownership have transferred to the buyer, continuing managerial involvement usually associated with ownership and effective control have ceased, the amount of revenue can be measured reliably, it is probable that economic benefits associated with the transaction will flow to the Group and the costs incurred or to be incurred in respect of the transaction can be measured reliably.‖ Subsequent text and paragraphs provide more details for revenue recognition for specific sub-categories of revenues.
2. Profit margin = 260 EUR / 40,984 EUR = 0.6% (EUR in millions)