Chapter 3

The Adjusting Process

Review Questions

1. Cash basis accounting records revenues only when cash is received and expenses only when cash is paid. Accrual basis accounting records revenues when earned
and expenses when incurred.

2. The concepts and principles applicable to accrual basis accounting are: the t
ime period concept, which assumes that a
business’s activities can be sliced into small time segments and that financial statements can be
prepared for specific periods, such as a month, quarter, or year; the concept of a fiscal year which
is an accounting year of any twelve consecutive months that may or may not coincide with the
calendar year; the revenue recognition principle which requires companies to record revenue
when it has been earned and determines the amount of revenue to record; and the matching
principle which guides accounting for expenses, ensures that all expenses are recorded when they
are incurred during the period, and matches those expenses against the revenues of the period
3. The time period concept requires companies to divide its activities into small time segments such as months, quarters, or years.

4. A fiscal year is an accounting year of any 12 consecutive months. A company might choose to use a fiscal year that is not a calendar year, if the low point in
business activity is other than December 31.

5.
Requires companies to record revenue when it has been earned and determines the amount of
revenue to record.
6. Under the matching principle, expenses are linked to the revenues they generate. Expenses are recorded in the same period as the revenues generated by the
expenses. e.

7. Adjusting entries are completed at the end of the accounting period to record revenues in the period in which they are earned and expenses in the period in which
they are incurred. Adjusting entries also update asset and liability accounts. Adjustments are needed to properly measure net income (loss) on the income statement and
assets and liabilities on the balance sheet.

8. The two basic categories of adjusting entries are prepaids and accruals.

Two examples of prepaids are prepaid expenses (such as Prepaid Rent and Office Supplies) and unearned revenues (such as Unearned Service Revenue).

Two examples of accruals are accrued expenses (such as Accrued Salaries Expense) and accrued revenues (such as Accrued Service Revenue).

9 An accrued expense is an expense that hasn’t been paid for yet. For example, salaries expense grows as the employee works, so the expense is said to accrue. Another
accrued expense is interest expense on a note payable.

10. The process of allocating the cost of a plant asset over its useful life is called depreciation.

11. The value of a depreciable asset at the end of its useful life is called the residual value.

Horngren’s Accounting 10/e Solutions Manual 3-1

 12. A depreciation method that allocates an equal amount of depreciation each year. (Cost − Residual value) / Useful life.

13. Accumulated depreciation is the sum of all depreciation expense recorded to date for a depreciable asset.

14. Book value is a depreciable asset’s cost minus accumulated depreciation. Book value represents the cost invested in the asset that the company has not yet
expensed.

15. Deferred revenue is a liability created when a company collects cash from customers in advance of doing work. For example, the collection of cash for services to
be provided by the company in the future.

16. An accrued expense is an expense that a company has incurred but not yet paid. For example, salaries expense is incurred by a company as employees work, even
though the company might not pay the employees until a later period.

17. An accrued revenue is a revenue that a company has earned but not yet collected in cash. For example, service revenue is earned by a company as it provides
services to a customer, even though the company might not collect cash from the customer until a later period.

18. The two rules to remember about adjusting entries are:

Adjusting entries never involve the Cash account.
1.
Adjusting entries either
2.
Increase a revenue account (credit revenue) or
a.
Increase an expense account (debit expense).
b.
19. An adjusted trial balance is prepared after adjustments have been journalized and posted. An adjusted trial balance is a list of all of the accounts with their adjusted
balances, and its purpose is to ensure that total debits equal total credits of all accounts. The adjusted trial balance is used to prepare the final financial statements.

20. If an accrued expense is not recorded at the end of the year, the financial statements will be inaccurate. On the balance sheet, liabilities will be understated and
equity will be overstated. On the income statement, expenses will be understated (thus net income will be overstated).

21. A worksheet is an internal document that helps summarize data for the preparation of the financial statements. As a summary device, it helps identify the accounts
that need adjustments. On a worksheet, accounts are listed, the unadjusted balances in the accounts are copied directly from the ledger (the unadjusted trial balance),
adjustments are entered, and the adjusted trial balance is completed (from which the financial statements can be prepared).

22A. If a payment of a prepaid expense was recorded under the alternative treatment, an expense account would be debited at the time of payment.

23A. If a payment of a prepaid expense was recorded under the alternative treatment, an asset account would be debited in the adjusting entry.

Short Exercises
S3-1

31 + 28 +31 + 16 days = 106 days / 7 = [Link] week

a. With a total of $1,500 for 15 weeks from Jan 1st until 16th April, with 13 weeks completed
at $100 per week, the Rent Expense incurred as at March 31st should be $1,300.

3-2 Horngren’s Accounting 10/e Solutions Manual

b. Nothing – no cash exchanged hands

Horngren’s Accounting 10/e Solutions Manual 3-3

 S3-2

a. $ 2,988 Fees using cash basis

b. $4,980 Fees using accrual basis

S3-3

a. Revenue is only recognized as earned so although the cash is collected for

those months, the revenue is recorded every month as $150 per
month. Cash is recorded as received at $450 for each of those 3 months
only.
b. Because the $450 has not been earned until the three months are completed
so they are owed to the customers until each quarter is over

S3-4
Cindy and Wendy decide to become roommates for the year. They split the prepaid
broadband annual charges of $1,200. Cindy decides to move out at the end of
August. Calculate how much Wendy should pay back to Cindy.

Solution:
1200/2 =600 PER PERSON/12 MONTHS = $50 PER PERSON PER MONTH.

End August leave, so left with 4 months = $50 x 4 = $200.

3-4 Horngren’s Accounting 10/e Solutions Manual

S3-5

April 1: Prepaid expense

10: Unearned revenue
15: Prepaid expense
18: Prepaid expense
30: Accrued revenue
30: Accrued expense
S3-6
Requirement 1

1 Dt Prepaid Rent 5,500

Ct Cash 5,500

2. Dt Rent Expense 1,100

Ct Prepaid Rent 1,100

3. Dt Rent Expense 1,100

Ct Prepaid Rent 1,100

4. Dt Rent Expense 1,100

Ct Rent Payable 1,100

S3-7
Requirement 1

Office Supplies
Nov. 1 800
1,000

Requirement 2

Horngren’s Accounting 10/e Solutions Manual 3-5

 Date Accounts and Explanation Debit Credit
Nov. 30 Supplies Expense 1,400*
Office Supplies 1,400*
To record office supplies used.

* Calculations:
$ 800 Office supplies beginning balance
1,000 Office supplies purchased during the month
1,800 Office supplies balance before adjustment
(400) Office supplies on hand
$1,400 Office supplies used

Requirement 3

Office Supplies Supplies Expense

Nov. 1 800 1,400 Nov. 30 Nov. 30 1,400
1,000 Bal. 1,400
Bal. 400

S3-8
Requirement 1

Straight-line depreciation per month = (Cost – Residual Value) / Useful Life

= ($54,000 – $0)  3 years

= $18,000 per year / 12 months

= $1,500

3-6 Horngren’s Accounting 10/e Solutions Manual

S3-8, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

May 31 Depreciation Expense—Computer Equipment 1,500
Accumulated Depreciation—Computer Equipment 1,500
To record depreciation on computer equipment.

Requirement 3

Accumulated Depreciation—
Computer Equipment Computer Equipment
May 1 54,000 1,500 May 31
Bal. 54,000 1,500 Bal.

Depreciation Expense—
Computer Equipment
May 31 1,500
Bal. 1,500

Requirement 4

Computer Equipment $54,000

Less: Accumulated Depreciation—Computer Equipment ( 1,500)
Book value of computer equipment $52,500

Horngren’s Accounting 10/e Solutions Manual 3-7

 S3-9
Requirement 1

Date Accounts and Explanation Debit Credit

Cash 170,00
0
Unearned Subscription Revenue 170,000
To record unearned subscription revenue.

Requirement 2

Date Accounts and Explanation Debit Credit

Unearned Subscription Revenue 12,000
Subscription Revenue 12.000
To record subscription revenue earned that
was collected in advance.

Requirement 3

Unearned Subscription Revenue Subscription Revenue

12,000 170,000 12,000
158,000 Bal. 12,000 Bal.

3-8 Horngren’s Accounting 10/e Solutions Manual

S3-10
Requirement 1

Date Accounts and Explanation Debit Credit

Dec. 31 Salaries Expense 8,000*
Salaries Payable 8,000*
To accrue salaries expense.

* Calculations:
$10,000 Payroll for a 5-day work week
 5 work days
$ 2,000 Salaries expense per work day

Thus,
$2,000 Salaries expense per work day
×4 work days
$8,000 Salaries expense for Monday through Thursday

Requirement 2

Salaries Payable Salaries Expense

8,000 Dec. 31 510,000
8,000 Bal. Dec 31. 8,000
Bal. 518,000

Horngren’s Accounting 10/e Solutions Manual 3-9

 S3-10, cont.
Requirement 3

Date Accounts and Explanation Debit Credit

Jan. 4 Salaries Expense 2,000*
Salaries Payable 8,000
Cash 10,000
To record payment of salaries.

* Calculations:
$10,000 Payroll for a 5-day work week
 5 work days
$ 2,000 Salaries expense for Friday of the previous work week

S3-11
Requirement 1

Date Accounts and Explanation Debit Credit

Dec. 31 Interest Expense 884
Interest Payable 884
To accrue interest expense.

Requirement 2

Interest Payable Interest Expense

884 Dec 31 Dec 31 884
884 Bal. Bal. 884

S3-12

Date Accounts and Explanation Debit Credit

June 30 Accounts Receivable 3,000
Service Revenue 3,000
To accrue service revenue.

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S3-13

SCOTT TAX SERVICES

Adjusted Trial Balance
December 31, 2015
Account Title Balance
Debit Credit
Cash $ 18,150
Accounts Receivable 2,250
Office Supplies 200
Equipment 15,000
Accumulated Depreciation—Equipment $ 2,400
Land 20,000
Accounts Payable 3,100
Utilities Payable 350
Unearned Revenue 600
Scott, Capital 18,400
Scott, Withdrawals 22,000
Service Revenue 60,000
Salaries Expense 4,500
Depreciation Expense—Equipment 1,200
Supplies Expense 800
Utilities Expense 750
Total $ 84,850 $ 84,850

S3-14

Adjustment Balance Sheet Income Statement

Not Recorded Assets Liabilities Equity Revenue Expenses
a. Overstated Overstated Understated
b. Understated Understated Understated
c. Understated Overstated Understated
d. Overstated Overstated Understated
e. Overstated Understated Understated

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 S3-15

FAMOUS CUT HAIR STYLISTS

Worksheet
December 31, 2014
Unadjusted Adjusted
Account Names Trial Balance Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash $ 800 $ 800
Office Supplies 900 $ 600 a. 300
Equipment 19,100 19,100
Accumulated Depreciation—Equipment $ 1,000 1,000 b. $ 2,000
Accounts Payable 200 200
Interest Payable 600 c. 600
Note Payable 2,500 2,500
Fabio, Capital 7,400 7,400
Service Revenue 14,800 14,800
Rent Expense 4,500 4,500
Supplies Expense a. $ 600 600
Depreciation Expense—Equipment b. 1,000 1,000
Interest Expense 600 c. 600 1,200
Total $ 25,900 $ 25,900 $ 2,200 $ 2,200 $ 27,500 $ 27,500

3-12 Horngren’s Accounting 10/e Solutions Manual

S3A-16
Requirement 1

Date Accounts and Explanation Debit Credit

Dec. 1 Rent Expense 9,000
Cash 9,000
To record rent paid in advance.

Requirement 2

Date Accounts and Explanation Debit Credit

Dec. 31 Prepaid Rent 6,000 *
Rent Expense 6,000 *
To record prepaid rent.
* Calculations:
$9,000 Rent prepaid on December 1 for 3 months
 3 Months
$3,000 Rent expense per month

Thus,
$3,000
× 2 Months
$6,000 Rent still prepaid on December 31

Horngren’s Accounting 10/e Solutions Manual 3-13

 S3A-17
Requirement 1

Date Accounts and Explanation Debit Credit

Dec. 1 Cash 4,500
Service Revenue 4,500
To record cash collected for future services.

Requirement 2

Date Accounts and Explanation Debit Credit

Dec. 31 Service Revenue 3,750 *
Unearned Revenue 3,750 *
To record unearned revenue.

* Calculations:
$4,500 Collected in advance on December 1 for 6 months
 6 Months
$ 750 Revenue earned per month

Thus,
$ 750
× 5 Months
$3,750 Revenue still unearned on December 31

3-14 Horngren’s Accounting 10/e Solutions Manual

Exercises
E3-18

a. Considering the $1,000 paid by the freshman class, the revenue was earned on April
2. The revenue (April 2) did not occur on the same date as cash was received (March
3).
b. Considering the $4,100 paid by the sophomore class, the revenue was earned on
February 28. The revenue occurred on the same date as cash was received.

E3-19
Requirement 1

Amount of Revenue (Expense) for May

Cash Basis Amount of Accrual Basis Amount of
Date Revenue (Expense) Revenue (Expense)
May 1 ($1,500) ($0)
5 (400) (400)
9 2,600 2,600
14 (2,400) 0
23 0 3,000
31 0 (500) *
31 0 (1,400)
31 0 (40)

Requirement 2

Net income (loss) under cash basis is ($1,700).

Calculations:
Net Income (Loss) = Total Revenues–Total Expenses
= $2,600 – [$1,500 + $400 + $2,400]
= $2,600 – $4,300

= ($1,700)

Net income (loss) under accrual basis is $3,260.

Calculations:
Net Income (Loss) = Total Revenues – Total Expenses
= [$2,600 + $3,000] – [$400 + $500 + $1,400 + $40]

Horngren’s Accounting 10/e Solutions Manual 3-15

 = $5,600 – $2,340
= $3,260

Requirement 3

Accrual basis accounting gives the best picture of the true earnings of Sweet Catering, because rev-
enues are recorded when earned and expenses are recorded when incurred, as dictated by the
revenue recognition principle and the matching principle.

E3-20

Missing values shown in italics.

Situation

A B C D
Beginning Prepaid Rent (1 Jan 2016) $ 1,200 $ 900 $ 200 $ 700
Payments for Rent during the year 1,400 (b) 500 1,800 (f) 800
2,600 1,400 (c) 2,000 (e) 1,500
Subtract: Ending Prepaid Rent (31 dec 2016) 600 500 (d) 100 400
Rent Expense (a) $ 2,000 $ 900 $ 1,900 $ 1,100

1 jan 2016 Prepaid 1,200---------------------Paid 1,400-----------------------------31 dec 2016 Pre-

paid rent 600

This year rent 1200

This year rent 1400
Total this year 2,600
Less: Prepaid rent 600
For this year 2,000

3-16 Horngren’s Accounting 10/e Solutions Manual

E3-20, cont.

*Calculations:
a:
$2,000 = $2,600 – $600
b:
$500 = $1,400 – $900
c:
$2,000 = $200 + $1,800
d:
$100 = $2,000 – $1,900
e:
$1,500 = $400 + $1,100
f:
$800 = $1,500 – $700

E3-21

Date Accounts and Explanation Debit Credit

Jan. 31 Unearned Revenue 380*
(a) Service Revenue 380*
To record service revenue earned that
was collected in advance.

* Calculations:
$3800 Collected in advance on January 1 for 10 months
 10 Months
$ 3800 Revenue earned during January

1 Jan Dr. Cash

Cr. Unearned Service evenue

31 jan Dr. Unearned service revenue 200

Cr. Service Revenue 200

Question b

Horngren’s Accounting 10/e Solutions Manual 3-17

 Paid 1st Jan 15th Jan 31st Jan 1st Feb

E3-21, cont.

Date Accounts and Explanation Debit Credit

Jan. 31 Salaries Expense 1,600*
(b) Salaries Payable 1,600*
To accrue salaries expense.

Interest paid 1st day each month

1st Jan 31st jan 1st Feb 1st March

Date Accounts and Explanation Debit Credit

Jan. 31 Accounts Receivable 1,000
(c) Service Revenue 1,000
To accrue service revenue.

Date Accounts and Explanation Debit Credit

Jan. 31 … 100
(d) Interest Payable 100
To accrue interest expense.

E3-22

Date Accounts and Explanation Debit Credit

3-18 Horngren’s Accounting 10/e Solutions Manual

 a. Dec. 31 Unearned Revenue 1,375*
Rent Revenue 1,375*
To record rent revenue earned that was collected in
advance.

b. Dec. 31 Salaries Expense 6,800*

Salaries Payable 6,800*
To accrue salaries expense.

c. Dec. 31 Supplies Expense 1,800*

Office Supplies 1,800*
To record office supplies used.

E3-22, cont.

d. Dec. 31 Depreciation Expense—Equipment 300

Accumulated Depreciation—Equipment 300
To record depreciation on equipment.

e. Dec. 31 Insurance Expense 250*

Prepaid Insurance 250*
To record insurance expense.

* Calculations:

Situation a:
$3,300 Rent collected in advance on August 1 for 1 year
 12 Months
$ 275 Rent revenue earned per month

Thus,
$ 275 Rent revenue earned per month
× 5 Months
$1,375 Rent revenue earned during August through December

Situation b:
$1,700 Salaries expense per day
× 4 Days
$6,800 Salaries expense for Monday through Thursday

Horngren’s Accounting 10/e Solutions Manual 3-19

 Situation c:
$3,500 Office supplies prior to adjustment
(1,700) Office supplies on hand
$1,800 Supplies expense (cost of office supplies used)

E3-22, cont.

Situation e:
$600 Insurance prepaid on March 1 for 2 years
 24 Months
$ 25 Insurance expense per month

Thus,
$ 25 Insurance expense per month
× 10 Months
$250 Insurance expense for March through December

E3-23

Date Accounts and Explanation Debit Credit

a. Depreciation Expense—Equipment 2,400
Accumulated Depreciation—Equipment 2,400
To record depreciation on equipment.

b. Salaries Expense 3,200*

Salaries Payable 3,200*
To accrue salaries expense.

c. Supplies Expense 3,800*

Office Supplies 3,800*
To record office supplies used.

d. Insurance Expense 1,100*

Prepaid Insurance 1,100*
To record insurance expense.

3-20 Horngren’s Accounting 10/e Solutions Manual

 e. Unearned Revenue 3,200
Service Revenue 3,200
To record service revenue earned that was
collected in advance.

f. Interest Expense 150

Interest Payable 150
To accrue interest expense.

E3-23, cont.

g. Accounts Receivable 6,000

Service Revenue 6,000
To accrue service revenue.

* Calculations:

Situation b:
$5,600 Payroll for a 7-day work week
 7 work days
$ 800 Salaries expense per work day

Thus,
$ 800 Salaries expense per work day
× 4 work days
$3,200 Salaries expense for Monday through Thursday

Situation c:
$2,500 Beginning balance of office supplies
3,000 Office supplies purchased
(1,700) Office supplies on hand
$3,800 Supplies expense (cost of office supplies used)

Situation d:
$5,280 Insurance for two years
 24 Months
$ 220 Insurance expense per month

Thus,

Horngren’s Accounting 10/e Solutions Manual 3-21

 $ 220 Insurance expense per month
× 5 Months
$1,100 Insurance expense for August through December

E3-24
Requirement 1
Accounts Receivable Salaries Payable Service Revenue
Bal. 1,400 0 Bal. 4,200 Bal.

Office Supplies Unearned Revenue Salaries Expense

Bal. 1,100 600 Bal. Bal. 1,300

Prepaid Rent Supplies Expense

Bal. 2,400 Bal. 0

Equipment Rent Expense

Bal. 10,000 Bal. 0

Accumulated Depreciation— Depreciation Expense—

Equipment Equipment
0 Bal. Bal. 0

3-22 Horngren’s Accounting 10/e Solutions Manual

E3-24, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Mar. 31 Accounts Receivable 900
Service Revenue 900
To accrue service revenue.

b. Mar. 31 Unearned Revenue 200

Service Revenue 200
To record service revenue earned that was collected in
advance.

c. Mar. 31 Supplies Expense 500*

Office Supplies 500*
To record office supplies used.

d. Mar. 31 Salaries Expense 400

Salaries Payable 400
To accrue salaries expense.

e. Mar. 31 Rent Expense 800

Prepaid Rent 800
To record rent expense.

f. Mar. 31 Depreciation Expense—Equipment 150

Accumulated Depreciation—Equipment 150
To record depreciation on equipment.

* Calculations:

$1,100 Office supplies prior to adjustment

(600) Office supplies on hand
$ 500 Supplies expense (cost of office supplies used)

Horngren’s Accounting 10/e Solutions Manual 3-23

 E3-24, cont.
Requirement 3

Accounts Receivable Salaries Payable Service Revenue

Bal. 0 Bal 4,200 Bal.
1,400
.
a. 900 400 d. 900 a.
Bal. 400 Bal 200 b.
2,300
.
5,300 Bal.

Office Supplies Unearned Revenue Salaries Expense

Bal. 500 c. b. 20 600 Bal Bal.
1,100 1,300
0 .
Bal. 400 Bal d.
600 400
.
Bal. 1,700

Prepaid Rent Supplies Expense

Bal. 2,400 800 e. Bal. 0
Bal. 1,600 c. 500
Bal. 500

Equipment Rent Expense

Bal. 10,000 Bal. 0
Bal. 10,000 e. 800
Bal. 800

Accumulated Depreciation— Depreciation Expense—

Equipment Equipment
0 Bal. Bal. 0
150 f. f. 150
150 Bal. Bal. 150

3-24 Horngren’s Accounting 10/e Solutions Manual

 E3-25
Requirement 1

Cash Accounts Payable Service Revenue

Bal. 700 2,800 Bal. 25,000 Bal.

Office Supplies Salaries Payable Salaries Expense

Bal. 3,000 Bal. 6,000

Prepaid Insurance Unearned Revenue Supplies Expense

Bal. 800 500 Bal.

Depreciation Expense—
Equipment Molly, Capital Equipment
Bal. 29,000 7,200 Bal.

Accumulated Depreciation
—Equipment Molly, Withdrawals Insurance Expense
7,000 Bal. Bal. 3,000

Horngren’s Accounting 10/e Solutions Manual 3-25

 E3-25, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Dec. 31 Supplies Expense 1,800
Office Supplies 1,800
To record office supplies used.

b. Dec. 31 Insurance Expense 620

Prepaid Insurance 620
To record insurance expense.

c. Dec. 31 Depreciation Expense—Equipment 460

Accumulated Depreciation—Equipment 460
To record depreciation on equipment.

d. Dec. 31 Salaries Expense 310

Salaries Payable 310
To accrue salaries expense.

e. Dec. 31 Unearned Revenue 360

Service Revenue 360
To record service revenue earned that was
collected in advance.

3-26 Horngren’s Accounting 10/e Solutions Manual

E3-25, cont.
Requirement 3

Cash Accounts Payable Service Revenue

Bal. 700 2,800 Bal. 25,000 Bal.
Bal. 700 2,800 Bal. 360 e.
25,360 Bal

Office Supplies Salaries Payable Salaries Expense

Bal. 3,000 1,800 a. 310 d. Bal. 6,000
Bal. 1,200 310 Bal. d. 310
Bal. 6,310

Prepaid Insurance Unearned Revenue Supplies Expense

Bal. 800 620 b. e. 360 500 Bal. a. 1,800
Bal. 180 140 Bal. Bal. 1,800

Depreciation Expense—
Equipment Molly, Capital Equipment
Bal. 29,000 7,200 Bal. c. 460
Bal. 29,000 7,200 Bal. Bal. 460

Accumulated Depreciation—
Equipment Molly, Withdrawals Insurance Expense
7,000 Bal. Bal. 3,00
b. 620
0
460 c. Bal. 3,00
Bal. 620
0
7,460 Bal.

Horngren’s Accounting 10/e Solutions Manual 3-27

 E3-26

FIRST CLASS MAIDS COMPANY

Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 700
Office Supplies 1,200
Prepaid Insurance 180
Equipment 29,000
Accumulated Depreciation—Equipment $ 7,460
Accounts Payable 2,800
Salaries Payable 310
Unearned Revenue 140
Molly, Capital 7,200
Molly, Withdrawals 3,000
Service Revenue 25,360
Salaries Expense 6,310
Supplies Expense 1,800
Depreciation Expense—Equipment 460
Insurance Expense 620
Total $ 43,270 $ 43,270

3-28 Horngren’s Accounting 10/e Solutions Manual

E3-27

Item Adjusting Specific Category Over / Specific Category Over /

Entry of Accounts on the Underst of Accounts on the Understat
Needed? Balance Sheet ated Income Statement ed
a. Yes Liability Over Revenue Under
Equity Under
b. Yes Liability Under Expense Under
Equity Over
c. Yes Asset Over Expense Under
Equity Over
d. Yes Asset Over Expense Under
Equity Over
e. Yes Asset Over Expense Under
Equity Over
f. Yes Liability Under Expense Under
Equity Over
g. Yes Asset Under Expense Over
Equity Under

Horngren’s Accounting 10/e Solutions Manual 3-29

 E3-28
Requirement 1

Date Accounts and Explanation Debit Credit

a. Jul. 31 Depreciation Expense 500
Accumulated Depreciation 500
To record depreciation.

b. Jul. 31 Rent Expense 600

Prepaid Rent 600
To record rent expense.

c. Jul. 31 Interest Expense 300

Interest Payable 300
To accrue interest expense.

d. Jul. 31 Salaries Expense 10,400*

Salaries Payable 10,400*
To accrue salaries expense.

e. Jul. 31 Unearned Revenue 1,300

Service Revenue 1,300
To record service revenue earned that was
collected in advance.

f. Jul. 31 Supplies Expense 250

Office Supplies 250
To record office supplies used.

* Calculations:
$13,000 Payroll for a 5-day work week
 5 work days
$ 2,600 Salaries expense per work day

Thus,
$ 2,600 Salaries expense per work day
× 4 work days
$10,400 Salaries expense for Monday through Thursday

3-30 Horngren’s Accounting 10/e Solutions Manual

E3-28, cont.
Requirement 2

If the adjustments in Requirement 1 were not made, net income would be overstated by
$10,750 overall.

Calculations:

If Not Made:
Net Income
Overstated
Adjustment (Understated)
a. $

b. 600
c. 300
d. 10,4

e. (1,3

f. 250
Overall $10,

Horngren’s Accounting 10/e Solutions Manual 3-31

 E3-29
Requirement 1

JOBS-4-U EMPLOYMENT SERVICES

Worksheet
April 30, 2014
Unadjusted Adjusted
Account Names Trial Balance Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash $ 900 $ 900
Accounts Receivable 4,100 a. $ 1,500 5,600
Office Supplies 1,000 $ 500 b. 500
Equipment 32,500 32,500
Accumulated Depreciation—Equipment $ 14,400 1,000 c. $ 15,400
Salaries Payable 1,200 d. 1,200
Yost, Capital 23,300 23,300
Yost, Withdrawals 4,800 4,800
Service Revenue 9,100 1,500 a. 10,600
Salaries Expense 2,500 d. 1,200 3,700
Rent Expense 1,000 1,000
Depreciation Expense—Equipment c. 1,000 1,000
Supplies Expense b. 500 500
Total $ 46,800 $ 46,800 $ 4,200 $ 4,200 $ 50,500 $ 50,500

3-32 Horngren’s Accounting 10/e Solutions Manual

E3-29, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Apr. 30 Accounts Receivable 1,500
Service Revenue 1,500
To accrue service revenue.

b. Apr. 30 Supplies Expense 500

Office Supplies 500
To record office supplies used.

c. Apr. 30 Depreciation Expense—Equipment 1,000

Accumulated Depreciation—Equipment 1,000
To record depreciation on equipment.

d. Apr. 30 Salaries Expense 1,200

Salaries Payable 1,200
To accrue salaries expense.

Horngren’s Accounting 10/e Solutions Manual 3-33

 E3-30
MILLER’S LANDSCAPING SERVICES
Worksheet
December 31, 2014
Unadjusted Adjusted
Account Names Trial Balance Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash $ 25,400 $ 25,400
Accounts Receivable 6,500 h. $ 2,000 8,500
Office Supplies 430 $ 170 b. 260
Prepaid Rent 2,500 1,250 a. 1,250
Equipment 65,000 65,000
Accumulated Depreciation—Equipment 1,000 c. $ 1,000
Trucks 90,000 90,000
Accumulated Depreciation—Trucks 1,500 d. 1,500
Accounts Payable $ 4,600 4,600
Utilities Payable 500 500
Salaries Payable 7,300 f. 7,300
Interest Payable 100 g. 100
Unearned Revenue 3,600 e. 2,400 1,200
Notes Payable 35,000 35,000
Miller, Capital 120,680 120,680
Miller, Withdrawals 15,000 15,000
Service Revenue 80,500 4,400 e., h. 84,900
Rent Expense 10,500 a. 1,250 11,750
Salaries Expense 24,150 f. 7,300 31,450
Supplies Expense b. 170 170
Utilities Expense 5,400 5,400
Depreciation Expense – Equipment c. 1,000 1,000
Depreciation Expense – Trucks d. 1,500 1,500
Interest Expense g. 100 100
Total $ 244,880 $ 244,880 $ 15,720 $ 15,720 $ 256,780 $ 256,780

3-34 Horngren’s Accounting 10/e Solutions Manual

E3A-31
Requirement 1

Date Accounts and Explanation Debit Credit

Supplies Expense 5,400*
Office Supplies 5,400*
To record office supplies used.

* Calculations:
$1,100 Beginning balance of office supplies
5,000 Office supplies purchased
(700) Office supplies on hand
$5,400 Supplies expense (cost of office supplies used)

Office Supplies Supplies Expense

Bal. 1,100 5,400 Adj. Adj. 5,400
5,000 Bal. 5,400
Bal. 700

Requirement 2

Date Accounts and Explanation Debit Credit

Supplies Expense 400
Office Supplies 400
To record additional supplies expense.

Office Supplies Supplies Expense

Bal. 1,100 400 Adj. 5,000
Bal. 700 Adj. 400
Bal. 5,400

Requirement 3

The ending balances in the Office Supplies account and the Supplies Expense account are the
same, regardless of which of the two approaches is used.

Horngren’s Accounting 10/e Solutions Manual 3-35

 E3A-32
Requirement 1

Date Accounts and Explanation Debit Credit

Unearned Revenue 6,500*
Service Revenue 6,500*
To record service revenue earned that
was collected in advance.

* Calculations:
$2,700 Unearned Revenue at the beginning of the year
7,300 Cash collected for future services
(3,500) Unearned Revenue still unearned
$6,500 Service Revenue earned

Unearned Revenue Service Revenue

Adj. 6,500 2,700 Bal. 30,000
7,300 6,500 Adj.
3,500 Bal. 36,500 Bal.

Requirement 2

Date Accounts and Explanation Debit Credit

Service Revenue 800*
Unearned Revenue 800*
To record additional unearned revenue.

* Calculations:
$3,500 Unearned Revenue still unearned
(2,700) Unearned Revenue prior to adjustment
$ 800 Additional Unearned Revenue to be recorded

Unearned Revenue Service Revenue

2,700 Bal. 30,000
800 Adj. Adj. 800 7,300
3,500 Bal. 36,500 Bal.

3-36 Horngren’s Accounting 10/e Solutions Manual

 E3A-32, cont.
Requirement 3

The ending balances in the Unearned Revenue account and the Service Revenue account are
the same, regardless of which of the two approaches is used.
Problems (Group A)
P3-33A
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Salaries Expense 4,200*
Salaries Payable 4,200*
To accrue salaries expense.

b. Dec. 31 Insurance Expense 4,500*

Prepaid Insurance 4,500*
To record insurance expense.

c. Dec. 31 Supplies Expense 6,800*

Office Supplies 6,800*
To record office supplies used.

d. Dec. 31 Unearned Revenue 2,800*

Service Revenue 2,800*
To record service revenue earned that was collected in
advance.

e. Dec. 31 Accounts Receivable 3,500

Service Revenue 3,500
To accrue service revenue.

f. Dec. 31 Depreciation Expense—Equipment 3,700

Depreciation Expense—Trucks 1,300
Accumulated Depreciation—Equipment 3,700
Accumulated Depreciation—Trucks 1,300
To record depreciation on equipment and trucks.

g. Dec. 31 Interest Expense 300

Interest Payable 300
To accrue interest expense.

Horngren’s Accounting 10/e Solutions Manual 3-37

 P3-33A, cont.

* Calculations:

a:
$7,000 Payroll for a 5-day work week
 5 work days
$1,400 Salaries expense per work day

Thus,
$1,400 Salaries expense per work day
× 3 work days
$4,200 Salaries expense for Monday through Wednesday

b:
$9,000 Insurance prepaid on January 1 for two years
 2 Years
$4,500 Insurance expense for one year

c:
$4,000 Beginning balance of office supplies
5,200 Office supplies purchased
(2,400) Office supplies on hand
$6,800 Supplies expense (cost of office supplies used)

d:
$7,000 Collected in advance during December
× 40% Percentage earned during December
$2,800 Revenue earned during December

3-38 Horngren’s Accounting 10/e Solutions Manual

P3-33A, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Jan. 2 Salaries Expense 2,800*
Salaries Payable 4,200
Cash 7,000
To record payment of salaries.

d. Unearned Revenue 4,200*

Service Revenue 4,200*
To record service revenue earned that was collected in
advance.

g. Jan. 15 Interest Expense 150

Interest Payable 300
Cash 450
To record payment of interest.

* Calculations:
a:
$7,000 Payroll for a 5-day work week
 5 work days
$1,400 Salaries expense per work day

Thus,
$1,400 Salaries expense per work day
× 2 work days
$2,800 Salaries expense for Thursday and Friday of the current week

d:
$7,000 Collected in advance during December
(2,800) Revenue earned during December (see requirement 1)
$4,200 Revenue earned after December

g:
$450 Total interest paid on January 15
(300) Interest expense previously accrued on December 31
$150 Interest expense for January 1 through January 15

P3-34A

Horngren’s Accounting 10/e Solutions Manual 3-39

 Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Utilities Expense 230
Utilities Payable 230
To accrue utilities expense.

b. Dec. 31 Insurance Expense 1,600*

Prepaid Insurance 1,600*
To record insurance expense.

c. Dec. 31 Accounts Receivable 2,500

Service Revenue 2,500
To accrue service revenue.

d. Dec. 31 Depreciation Expense—Boat 11,000*

Accumulated Depreciation—Boat 11,000*
To record depreciation on boat.

e. Dec. 31 Unearned Revenue 8,000

Service Revenue 8,000
To record service revenue earned that was collected in
advance.

* Calculations:

b:
$4,800 Insurance prepaid on November 1 for 6 months
 6 months
$ 800 Insurance expense per month

Thus,
$ 800 Insurance expense per month
× 2 months
$1,600 Insurance expense for November and December

3-40 Horngren’s Accounting 10/e Solutions Manual

P3-34A, cont.
d:
Straight-line
= (Cost – Residual Value) / Useful Life in Years
depreciation per year

= ($60,000 – $5,000) / 5 years

= $55,000 / 5 years

= $11,000

Requirement 2

Specific Category Specific Category

Adjusting of Accounts on the Over / of Accounts on the Over /
Entry Balance Sheet Understated Income Statement Understated
a. Liability Understated Expense Understated
Equity Overstated
b. Asset Overstated Expense Understated
Equity Overstated
c. Asset Understated Revenue Understated
Equity Understated
d. Asset Overstated Expense Understated
Equity Overstated
e. Liability Overstated Revenue Understated
Equity Understated

Horngren’s Accounting 10/e Solutions Manual 3-41

 P3-35A
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Unearned Revenue 1,100
Service Revenue 1,100
To record service revenue earned that was collected in
advance.

b. Dec. 31 Rent Expense 1,200*

Prepaid Rent 1,200*
To record rent expense.

c. Dec. 31 Supplies Expense 600

Office Supplies 600
To record office supplies used.

d. Dec. 31 Depreciation Expense—Equipment 900

Accumulated Depreciation—Equipment 900
To record depreciation on equipment.

e. Dec. 31 Advertising Expense 900

Accounts Payable 900
To accrue advertising expense.

f. Dec. 31 Salaries Expense 900*

Salaries Payable 900*
To accrue salaries expense.

g. Dec. 31 Accounts Receivable 2,400*

Service Revenue 2,400*
To accrue service revenue.

3-42 Horngren’s Accounting 10/e Solutions Manual

P3-35A, cont.

* Calculations:

b:
$2,400 Rent prepaid on December 1 for two months
 2 months
$1,200 Rent Expense for December
f:
$1,500 Payroll for a 5-day work week
 5 work days
$ 300 Salaries Expense per work day

Thus,
$300 Salaries Expense per work day
× 3 work days
$900 Salaries Expense for Monday through Wednesday

g:
$3,200 Service Revenue to be earned October through January
 4 months
$ 800 Service Revenue earned per month

Thus,
$ 800 Service Revenue earned per month
× 3 months
$2,400 Service Revenue earned October through December

Horngren’s Accounting 10/e Solutions Manual 3-43

 P3-35A, cont.
Requirement 2

Cash Accounts Payable Service Revenue

Bal. 7,700 3,600 Bal. 15,400 Bal.
Bal. 7,700 900 e. 1,100 a.
4,500 Bal. 2,400 g.
18,900 Bal.

Accounts Receivable Salaries Payable Salaries Expense

Bal. 900 f. Bal. 3,50
19,200
0
g. 2,400 900 Bal. f. 900
Bal. 21,600 Bal. 4,400

Prepaid Rent Unearned Revenue Rent Expense

Bal. 2,400 1,200 b. a. 1,100 2,600 Bal. b. 1,200
Bal. 1,200 1,500 Bal. Bal. 1,200

Office Supplies Arlington, Capital Depreciation Expense—

Equipment
Bal. 1,300 600 c. 39,500 Bal. d. 900
Bal. 700 39,500 Bal. Bal. 900

Equipment Arlington, Withdrawals Advertising Expense

Bal. Bal 9,500
19,900 Bal. 1,900
.
Bal. Bal 9,500
19,900 e. 900
.
Bal. 2,800

Accumulated Depreciation
Supplies Expense
—Equipment
4,300 Bal. c. 600
900 d. Bal. 600
5,200 Bal.

3-44 Horngren’s Accounting 10/e Solutions Manual

P3-35A, cont.
Requirement 3

ARLINGTON AIR PURIFICATION SYSTEM

Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 7,700
Accounts Receivable 21,600
Prepaid Rent 1,200
Office Supplies 700
Equipment 19,900
Accumulated Depreciation—Equipment $ 5,200
Accounts Payable 4,500
Salaries Payable 900
Unearned Revenue 1,500
Arlington, Capital 39,500
Arlington, Withdrawals 9,500
Service Revenue 18,900
Salaries Expense 4,400
Rent Expense 1,200
Depreciation Expense—Equipment 900
Advertising Expense 2,800
Supplies Expense 600
Total $ 70,500 $ 70,500

Requirement 4

Arlington will use the adjusted trial balance to prepare its financial statements.
(Additionally, the purpose of any trial balance is to ensure that total debits equal total
credits.)

Horngren’s Accounting 10/e Solutions Manual 3-45

 P3-36A
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Insurance Expense 1,600*
Prepaid Insurance 1,600*
To record insurance expense.

b. Dec. 31 Supplies Expense 500*

Office Supplies 500*
To record office supplies used.

c. Dec. 31 Depreciation Expense—Building 1,600

Accumulated Depreciation—Building 1,600
To record depreciation on building.

d. Dec. 31 Salaries Expense 1,200*

Salaries Payable 1,200*
To accrue salaries expense.

e. Dec. 31 Unearned Revenue 1,000*

Service Revenue 1,000*
To record service revenue earned that was collected in
advance.

* Calculations:

a:
$2,300 Prepaid Insurance prior to adjustment
(700) Prepaid Insurance remaining
$1,600 Insurance Expense

b:
$1,100 Office Supplies prior to adjustment
(600) Office Supplies remaining
$ 500 Supplies Expense (cost of office supplies used)

3-46 Horngren’s Accounting 10/e Solutions Manual

P3-36A, cont.

d:
$2,000 Salaries for a five-day work week
 5 work days
$ 400 Salaries Expense per work day

Thus,

$ 400 Salaries Expense per work day

× 3 work days
$1,200 Salaries Expense for Monday through Wednesday

e:
$2,400 Unearned Revenue prior to adjustment
(1,400) Unearned Revenue still unearned
$1,000 Service Revenue earned

Requirement 2

CASH Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 12,100

ACCOUNTS RECEIVABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 14,300

PREPAID INSURANCE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,300
Dec. 31 a. 1,600 700

P3-36A, cont.

Horngren’s Accounting 10/e Solutions Manual 3-47

 OFFICE SUPPLIES Account No.
Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 1,100
Dec. 31 b. 500 600

BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 411,000

ACCUMULATED DEPRECIATION—BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 312,500
Dec. 31 c. 1,600 314,100

ACCOUNTS PAYABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 1,950

SALARIES PAYABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 d. 1,200 1,200

UNEARNED REVENUE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,400
Dec. 31 e. 1,000 1,400

P3-36A, cont.

CALVASINA, CAPITAL Account No.

3-48 Horngren’s Accounting 10/e Solutions Manual

 Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 114,740

CALVASINA, WITHDRAWALS Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,860

SERVICE REVENUE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 15,600
Dec. 31 e. 1,000 16,600

SALARIES EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,700
Dec. 31 d. 1,200 3,900

INSURANCE EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 a. 1,600 1,600

DEPRECIATION EXPENSE—BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 c. 1,600 1,600

Horngren’s Accounting 10/e Solutions Manual 3-49

 P3-36A, cont.

ADVERTISING EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 830

SUPPLIES EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 b. 500 500

Requirement 3

LEXINGTON INN COMPANY

Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 12,100
Accounts Receivable 14,300
Prepaid Insurance 700
Office Supplies 600
Building 411,000
Accumulated Depreciation—Building $ 314,100
Accounts Payable 1,950
Salaries Payable 1,200
Unearned Revenue 1,400
Calvasina, Capital 114,740
Calvasina, Withdrawals 2,860
Service Revenue 16,600
Salaries Expense 3,900
Insurance Expense 1,600
Depreciation Expense—Building 1,600
Advertising Expense 830
Supplies Expense 500
Total $ 449,990 $ 449,990

3-50 Horngren’s Accounting 10/e Solutions Manual

P3-36A, cont.
Requirement 4

No. Even if total debits equals total credits on the adjusted trial balance, this does not mean
that the adjusting entries have been recorded correctly. For example, an adjusting entry
could have been recorded for the incorrect amount (even though the debit and the credit
amount is the same, the amount is incorrect). Or an adjusting entry could have been omitted
entirely.

Horngren’s Accounting 10/e Solutions Manual 3-51

 P3-37A
Requirement 1

GALANT THEATER PRODUCTION COMPANY

Worksheet
December 31, 2014
Unadjusted Adjusted
Account Trial Balance Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash $ 3,900 $ 3,900
Accounts Receivable 6,100 a. $ 800 6,900
Office Supplies 1,700 $ 1,400 b. 300
Prepaid Insurance 2,700 600 c. 2,100
Equipment 25,000 25,000
Accumulated Depreciation—Equipment $ 8,800 4,400 d. $ 13,200
Accounts Payable 4,000 4,000
Salaries Payable 300 e. 300
Galant, Capital 20,300 20,300
Galant, Withdrawals 30,500 30,500
Service Revenue 71,000 800 a. 71,800
Depreciation Expense—Equipment d. 4,400 4,400
Supplies Expense b. 1,400 1,400
Utilities Expense 4,700 4,700
Salaries Expense 29,500 e. 300 29,800
Insurance Expense c. 600 600
Total $ 104,100 $ 104,100 $ 7,500 $ 7,500 $ 109,600 $ 109,600

3-52 Horngren’s Accounting 10/e Solutions Manual

P3-37A, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Dec. 31 Accounts Receivable 800
Service Revenue 800
To accrue service revenue.

b. Dec. 31 Supplies Expense 1,400

Office Supplies 1,400
To record office supplies used.

c. Dec. 31 Insurance Expense 600

Prepaid Insurance 600
To record insurance expense.

d. Dec. 31 Depreciation Expense—Equipment 4,400

Accumulated Depreciation—Equipment 4,400
To record depreciation on equipment.

e. Dec. 31 Salaries Expense 300

Salaries Payable 300
To accrue salaries expense.

Horngren’s Accounting 10/e Solutions Manual 3-53

 P3A-38A
Requirement 1

Date Accounts and Explanation Debit Credit

Nov. 1 Prepaid Rent 6,000
Cash 6,000
To record rent paid in advance.

Nov. 1 Prepaid Insurance 6,000

Cash 6,000
To record insurance paid in advance.

Dec. 1 Cash 5,200

Unearned Revenue 5,200
To record cash collected for future services.

Dec. 1 Cash 4,500

Unearned Revenue 4,500
To record cash collected for future services.

3-54 Horngren’s Accounting 10/e Solutions Manual

P3A–38A, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

Dec. 31 Rent Expense 4,000*
Prepaid Rent 4,000*
To record rent expense.

Dec. 31 Insurance Expense 3,000*

Prepaid Insurance 3,000*
To record insurance expense.

Dec. 31 Unearned Revenue 1,300

Service Revenue 1,300
To record service revenue earned that was collected in
advance.

Dec. 31 Unearned Revenue 1,500

Service Revenue 1,500
To record service revenue earned that was collected in
advance.

* Calculations:

Adjusting Journal Entry One:

$6,000 Rent prepaid on November 1 for 3 months
 3 months
$2,000 Rent expense per month

Thus,
$2,000 Rent expense per month
× 2 months
$4,000 Rent expense for November and December

Horngren’s Accounting 10/e Solutions Manual 3-55

 P3A–38A, cont.

Adjusting Journal Entry Two:

$6,000 Insurance prepaid on November 1 for 4 months
 4 Months
$1,500 Insurance expense per month

Thus,
$1,500 Insurance expense per month
× 2 Months
$3,000 Insurance expense for November and December

Requirement 3

Prepaid Rent Rent Expense

Nov. 1 6,000 4,000 Dec. 31 Dec. 31 4,000
Bal. 2,000 Bal. 4,000

Prepaid Insurance Insurance Expense

Nov. 1 6,000 3,000 Dec. 31 Dec. 31 3,000
Bal. 3,000 Bal. 3,000

Unearned Revenue Service Revenue

Dec. 31 1,300 5,200 Dec. 1 1,300 Dec. 31
Dec. 31 1,500 4,500 Dec. 1 1,500 Dec. 31
6,900 Bal. 2,800 Bal.

3-56 Horngren’s Accounting 10/e Solutions Manual

P3A-38A, cont.
Requirement 4

Date Accounts and Explanation Debit Credit

Nov. 1 Rent Expense 6,000
Cash 6,000
To record rent paid in advance.

Nov. 1 Insurance Expense 6,000

Cash 6,000
To record insurance paid in advance.

Dec. 1 Cash 5,200

Service Revenue 5,200
To record cash collected for future services.

Dec. 1 Cash 4,500

Service Revenue 4,500
To record cash collected for future services.

Dec. 31 Prepaid Rent 2,000*

Rent Expense 2,000*
To record prepaid rent.

Dec. 31 Prepaid Insurance 3,000*

Insurance Expense 3,000*
To record prepaid insurance.

Dec. 31 Service Revenue 3,900*

Unearned Revenue 3,900*
To record unearned revenue.

Dec. 31 Service Revenue 3,000*

Unearned Revenue 3,000*
To record unearned revenue.

Horngren’s Accounting 10/e Solutions Manual 3-57

 P3A–38A, cont.

* Calculations:

Adjusting Journal Entry One:

$6,000 Rent prepaid on November 1 for 3 months
 3 Months
$2,000 Rent expense per month

Thus,
$2,000 Rent still prepaid on December 31

Adjusting Journal Entry Two:

$6,000 Insurance prepaid on November 1for 4 months

 4 Months
$1,500 Insurance expense per month

Thus,
$1,500 Insurance expense per month
× 2 Months
$3,000 Insurance still prepaid on December 31

Adjusting Journal Entry Three:

$ 5,200 Collected in advance on December 1 for 4 months

(1,300) Revenue earned during December
$ 3,900 Revenue still unearned on December 31

Adjusting Journal Entry Four:

$ 4,500 Collected in advance on December 1 for 3 months

(1,500) Revenue earned during December
$ 3,000 Revenue still unearned on December 31

3-58 Horngren’s Accounting 10/e Solutions Manual

P3A–38A, cont.

Prepaid Rent Rent Expense

Dec. 31 2,000 Nov. 1 6,000 2,000 Dec. 31
Bal. 2,000 Bal. 4,000

Prepaid Insurance Insurance Expense

Dec. 31 3,000 Nov. 1 6,000 3,000 Dec. 31
Bal. 3,000 Bal. 3,000

Unearned Revenue Service Revenue

3,900 Dec. 31 Dec. 31 3,900 5,200 Dec. 1
3,000 Dec. 31 Dec. 31 3,000 4,500 Dec. 1
6,900 Bal. 2,800 Bal.

Requirement 5

The ending balances in the accounts are the same, regardless of which of the two approaches
is used.

Horngren’s Accounting 10/e Solutions Manual 3-59

 Problems (Group B)
P3-39B
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Salaries Expense 3,900*
Salaries Payable 3,900*
To accrue salaries expense.

b. Dec. 31 Insurance Expense 2,750*

Prepaid Insurance 2,750*
To record insurance expense.

c. Dec. 31 Supplies Expense 6,900*

Office Supplies 6,900*
To record office supplies used.

d. Dec. 31 Unearned Revenue 6,300*

Service Revenue 6,300*
To record service revenue earned that was collected in
advance.

e. Dec. 31 Accounts Receivable 4,000

Service Revenue 4,000
To accrue service revenue.

f. Dec. 31 Depreciation Expense—Equipment 3,600

Depreciation Expense—Trucks 1,400
Accumulated Depreciation—Equipment 3,600
Accumulated Depreciation—Trucks 1,400
To record depreciation on equipment and trucks.

g. Dec. 31 Interest Expense 200

Interest Payable 200
To accrue interest expense.

3-60 Horngren’s Accounting 10/e Solutions Manual

P3-39B, cont.

* Calculations:

a:
$6,500 Payroll for a 5-day work week
 5 work days
$1,300 Salaries expense per work day

Thus,
$1,300 Salaries expense per work day
× 3 work days
$3,900 Salaries expense for Monday through Wednesday

b:
$5,500 Insurance prepaid on January 1 for two years
 2 years
$2,750 Insurance expense for one year

c:
$4,200 Beginning balance of office supplies
5,100 Office supplies purchased
(2,400) Office supplies on hand
$6,900 Supplies expense (cost of office supplies used)

d:
$9,000 Collected in advance during December
× 70% Percentage earned during December
$6,300 Revenue earned during December

Horngren’s Accounting 10/e Solutions Manual 3-61

 P3-39B, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Jan. 2 Salaries Expense 2,600*
Salaries Payable 3,900
Cash 6,500
To record payment of salaries.

d. Unearned Revenue 2,700*

Service Revenue 2,700*
To record service revenue earned that was collected in
advance.

g. Jan. 15 Interest Expense 300

Interest Payable 200
Cash 500
To record payment of interest.

* Calculations:
a:
$6,500 Payroll for a 5-day work week
 5 work days
$1,300 Salaries expense per work day

Thus,
$1,300 Salaries expense per work day
× 2 work days
$2,600 Salaries expense for Thursday and Friday of the current week

d:
$9,000 Collected in advance during December
(6,300) Revenue earned during December (see requirement 1)
$2,700 Revenue earned after December

g:
$500 Total interest paid on January 15
(200) Interest expense previously accrued on December 31
$300 Interest expense for January 1 through January 15

3-62 Horngren’s Accounting 10/e Solutions Manual

P3-40B
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Utilities Expense 400
Utilities Payable 400
To accrue utilities expense.

b. Dec. 31 Insurance Expense 600*

Prepaid Insurance 600*
To record insurance expense.

c. Dec. 31 Accounts Receivable 2,300

Service Revenue 2,300
To accrue service revenue.

d. Dec. 31 Depreciation Expense—Boat 9,000*

Accumulated Depreciation—Boat 9,000*
To record depreciation on boat.

e. Dec. 31 Unearned Revenue 6,000

Service Revenue 6,000
To record service revenue earned that was collected in
advance.

* Calculations:

b:
$1,800 Insurance prepaid on November 1 for 6 months
 6 months
$ 300 Insurance expense per month

Thus,
$300 Insurance expense per month
× 2 months
$600 Insurance expense for November and December

Horngren’s Accounting 10/e Solutions Manual 3-63

 P3-40B, cont.
d:
Straight-line
= (Cost – Residual Value) / Useful Life in Years
depreciation per year

= ($50,000 – $5,000) / 5 years

= $45,000 / 5 years

= $9,000

Requirement 2

Specific Category Specific Category

Adjusting of Accounts on the Over / of Accounts on the Over /
Entry Balance Sheet Understated Income Statement Understated
a. Liability Understated Expense Understated
Equity Overstated
b. Asset Overstated Expense Understated
Equity Overstated
c. Asset Understated Revenue Understated
Equity Understated
d. Asset Overstated Expense Understated
Equity Overstated
e. Liability Overstated Revenue Understated
Equity Understated

3-64 Horngren’s Accounting 10/e Solutions Manual

P3-41B
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Unearned Revenue 1,800
Service Revenue 1,800
To record service revenue earned that was collected in
advance.

b. Dec. 31 Rent Expense 1,100*

Prepaid Rent 1,100*
To record rent expense.

c. Dec. 31 Supplies Expense 400

Office Supplies 400
To record office supplies used.

d. Dec. 31 Depreciation Expense—Equipment 700

Accumulated Depreciation—Equipment 700
To record depreciation on equipment.

e. Dec. 31 Advertising Expense 400

Accounts Payable 400
To accrue advertising expense.

f. Dec. 31 Salaries Expense 1,200*

Salaries Payable 1,200*
To accrue salaries expense.

g. Dec. 31 Accounts Receivable 1,530*

Service Revenue 1,530*
To accrue service revenue.

* Calculations:

b:
$2,200 Rent prepaid on December 1 for two months
 2 months
$1,100 Rent expense for December

Horngren’s Accounting 10/e Solutions Manual 3-65

 P3-41B, cont.

f:
$2,000 Payroll for a 5-day work week
 5 work days
$ 400 Salaries expense per work day

Thus,
$ 400 Salaries expense per work day
× 3 work days
$1,200 Salaries expense for Monday through Wednesday

g:
$2,040 Service revenue to be earned October through January
 4 months
$ 510 Service revenue earned per month

Thus,
$ 510 Service revenue earned per month
× 3 months
$1,530 Service revenue earned October through December

3-66 Horngren’s Accounting 10/e Solutions Manual

P3-41B, cont.
Requirement 2

Cash Accounts Payable Service Revenue

Bal. 7,200 3,400 Bal. 15,900 Bal.
Bal. 7,200 400 e. 1,800 a.
3,800 Bal. 1,530 g.
19,230 Bal.

Accounts Receivable Salaries Payable Salaries Expense

Bal. 19,400 1,200 f. Bal. 3,300
g. 1,530 1,200 Bal. f. 1,200
Bal. 20,930 Bal. 4,500

Prepaid Rent Unearned Revenue Rent Expense

Bal. 2,200 1,100 b. a. 1,800 2,600 Bal. b. 1,100
Bal. 1,100 800 Bal. Bal. 1,100

Depreciation Expense—
Office Supplies Canton, Capital Equipment
Bal. 1,600 400 c. 39,000 Bal. d. 700
Bal. 1,200 39,000 Bal. Bal. 700

Equipment Canton, Withdrawals Advertising Expense

Bal. 20,000 Bal. 9,600 Bal. 1,300
Bal. 20,000 Bal. 9,600 e. 400
Bal. 1,700

Accumulated Depreciation—
Equipment Supplies Expense
3,700 Bal. c. 400
700 d. Bal. 400
4,400 Bal.

Horngren’s Accounting 10/e Solutions Manual 3-67

 P3-41B, cont.
Requirement 3

CANTON AIR PURIFICATION SYSTEM

Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 7,200
Accounts Receivable 20,930
Prepaid Rent 1,100
Office Supplies 1,200
Equipment 20,000
Accumulated Depreciation—Equipment $ 4,400
Accounts Payable 3,800
Salaries Payable 1,200
Unearned Revenue 800
Canton, Capital 39,000
Canton, Withdrawals 9,600
Service Revenue 19,230
Salaries Expense 4,500
Rent Expense 1,100
Depreciation Expense—Equipment 700
Advertising Expense 1,700
Supplies Expense 400
Total $ 68,430 $ 68,430

Requirement 4

Canton will use the adjusted trial balance to prepare its financial statements. (Additionally,
the purpose of any trial balance is to ensure that total debits equal total credits.)

3-68 Horngren’s Accounting 10/e Solutions Manual

P3-42B
Requirement 1

Date Accounts and Explanation Debit Credit

a. Dec. 31 Insurance Expense 1,900*
Prepaid Insurance 1,900*
To record insurance expense.

b. Dec. 31 Supplies Expense 500*

Office Supplies 500*
To record office supplies used.

c. Dec. 31 Depreciation Expense—Building 1,000

Accumulated Depreciation—Building 1,000
To record depreciation on building.

d. Dec. 31 Salaries Expense 900*

Salaries Payable 900*
To accrue salaries expense.

e. Dec. 31 Unearned Revenue 800*

Service Revenue 800*
To record service revenue earned that was collected in
advance.

* Calculations:

a:
$2,800 Prepaid Insurance prior to adjustment
(900) Prepaid Insurance remaining
$1,900 Insurance Expense

b:
$1,400 Office supplies prior to adjustment
(900) Office supplies remaining
$ 500 Supplies Expense (cost of office supplies used)

Horngren’s Accounting 10/e Solutions Manual 3-69

 P3-42B, cont.

d:
$1,500 Salaries for a five-day work week
 5 Work days
$ 300 Salaries Expense per work day

Thus,

$300 Salaries Expense per work day

× 3 work days
$900 Salaries Expense for Monday through Wednesday

e:
$3,000 Unearned Revenue prior to adjustment
(2,200) Unearned Revenue still unearned
$ 800 Service Revenue earned

Requirement 2

CASH Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 12,000

ACCOUNTS RECEIVABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 14,400

PREPAID INSURANCE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,800
Dec. 31 a. 1,900 900

P3-42B, cont.

3-70 Horngren’s Accounting 10/e Solutions Manual

OFFICE SUPPLIES Account No.
Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 1,400
Dec. 31 b. 500 900

BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 435,000

ACCUMULATED DEPRECIATION—BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 310,500
Dec. 31 c. 1,000 311,500

ACCOUNTS PAYABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 1,930

SALARIES PAYABLE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 d. 900 900

UNEARNED REVENUE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 3,000
Dec. 31 e. 800 2,200

P3-42B, cont.

CONCORD, CAPITAL Account No.

Horngren’s Accounting 10/e Solutions Manual 3-71

 Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 141,060

CONCORD, WITHDRAWALS Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,940

SERVICE REVENUE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 15,700
Dec. 31 e. 800 16,500

SALARIES EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 2,800
Dec. 31 d. 900 3,700

INSURANCE EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 a. 1,900 1,900

DEPRECIATION EXPENSE—BUILDING Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 c. 1,000 1,000

3-72 Horngren’s Accounting 10/e Solutions Manual

P3-42B, cont.

ADVERTISING EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 Balance 850

SUPPLIES EXPENSE Account No.

Balance
Date Item Post Ref. Debit Credit Debit Credit
2014
Dec. 31 b. 500 500

Requirement 3

CONCORD BED AND BREAKFAST COMPANY

Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 12,000
Accounts Receivable 14,400
Prepaid Insurance 900
Office Supplies 900
Building 435,000
Accumulated Depreciation—Building $ 311,500
Accounts Payable 1,930
Salaries Payable 900
Unearned Revenue 2,200
Concord, Capital 141,060
Concord, Withdrawals 2,940
Service Revenue 16,500
Salaries Expense 3,700
Insurance Expense 1,900
Depreciation Expense—Building 1,000
Advertising Expense 850
Supplies Expense 500
Total $ 474,090 $ 474,090

Horngren’s Accounting 10/e Solutions Manual 3-73

 P3-42B, cont.

Requirement 4

No. Even if total debits equals total credits on the adjusted trial balance, this does not mean
that the adjusting entries have been recorded correctly. For example, an adjusting entry
could have been recorded for the incorrect amount (even though the debit and the credit
amount is the same, the amount is incorrect). Or an adjusting entry could have been omitted
entirely.

3-74 Horngren’s Accounting 10/e Solutions Manual

P3-43B
Requirement 1

SHOWTIME THEATER PRODUCTION COMPANY

Worksheet
December 31, 2014
Unadjusted Adjusted
Account Trial Balance Adjustments Trial Balance
Debit Credit Debit Credit Debit Credit
Cash $ 3,500 $ 3,500
Accounts Receivable 6,000 a. $ 900 6,900
Office Supplies 1,300 $ 800 b. 500
Prepaid Insurance 2,100 800 c. 1,300
Equipment 23,000 23,000
Accumulated Depreciation—Equipment $ 8,100 3,500 d. $ 11,600
Accounts Payable 5,000 5,000
Salaries Payable 500 e. 500
Webber, Capital 21,100 21,100
Webber, Withdrawals 28,500 28,500
Service Revenue 59,600 900 a. 60,500
Depreciation Expense—Equipment d. 3,500 3,500
Supplies Expense b. 800 800
Utilities Expense 5,400 5,400
Salaries Expense 24,000 e. 500 24,500
Insurance Expense c. 800 800
Total $ 93,800 $ 93,800 $ 6,500 $ 6,500 $ 98,700 $ 98,700

Horngren’s Accounting 10/e Solutions Manual 3-75

 P3-43B, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

a. Dec. 31 Accounts Receivable 900
Service Revenue 900
To accrue service revenue.

b. Dec. 31 Supplies Expense 800

Office Supplies 800
To record office supplies used.

c. Dec. 31 Insurance Expense 800

Prepaid Insurance 800
To record insurance expense.

d. Dec. 31 Depreciation Expense—Equipment 3,500

Accumulated Depreciation—Equipment 3,500
To record depreciation on equipment.

e. Dec. 31 Salaries Expense 500

Salaries Payable 500
To accrue salaries expense.

3-76 Horngren’s Accounting 10/e Solutions Manual

P3A-44B
Requirement 1

Date Accounts and Explanation Debit Credit

Nov. 1 Prepaid Rent 4,500
Cash 4,500
To record rent paid in advance.

Nov. 1 Prepaid Insurance 3,200

Cash 3,200
To record insurance paid in advance.

Dec. 1 Cash 4,800

Unearned Revenue 4,800
To record cash collected for future services.

Dec. 1 Cash 5,400

Unearned Revenue 5,400
To record cash collected for future services.

Horngren’s Accounting 10/e Solutions Manual 3-77

 P3A-44B, cont.
Requirement 2

Date Accounts and Explanation Debit Credit

Dec. 31 Rent Expense 3,000*
Prepaid Rent 3,000*
To record rent expense.

Dec. 31 Insurance Expense 1,600*

Prepaid Insurance 1,600*
To record insurance expense.

Dec. 31 Unearned Revenue 1,200

Service Revenue 1,200
To record service revenue earned that was collected in
advance.

Dec. 31 Unearned Revenue 1,800

Service Revenue 1,800
To record service revenue earned that was collected in
advance.

* Calculations:
Adjusting Journal Entry One:
$4,500 Rent prepaid on November 1 for 3 months
 3 Months
$1,500 Rent expense per month

Thus,
$1,500 Rent expense per month
× 2 Months
$3,000 Rent expense for November and December

Adjusting Journal Entry Two:

$3,200 Insurance prepaid on November 1 for 4 months
 4 Months
$ 800 Insurance expense per month

Thus,
$ 800 Insurance expense per month
× 2 Months
$1,600 Insurance expense for November and December
P3A-44B, cont.

3-78 Horngren’s Accounting 10/e Solutions Manual

Requirement 3

Prepaid Rent Rent Expense

Nov. 1 4,500 3,000 Dec. 31 Dec. 31 3,000
Bal. 1,500 Bal. 3,000

Prepaid Insurance Insurance Expense

Nov. 1 3,200 1,600 Dec. 31 Dec. 31 1,600
Bal. 1,600 Bal. 1,600

Unearned Revenue Service Revenue

Dec. 31 1,200 4,800 Dec. 1 1,200 Dec. 31
Dec. 31 1,800 5,400 Dec. 1 1,800 Dec. 31
7,200 Bal. 3,000 Bal.

Requirement 4

Date Accounts and Explanation Debit Credit

Nov. 1 Rent Expense 4,500
Cash 4,500
To record rent paid in advance.

Nov. 1 Insurance Expense 3,200

Cash 3,200
To record insurance paid in advance.

Dec. 1 Cash 4,800

Service Revenue 4,800
To record cash collected for future services.

Dec. 1 Cash 5,400

Service Revenue 5,400
To record cash collected for future services.

Horngren’s Accounting 10/e Solutions Manual 3-79

 P3A-44B, cont.

Date Accounts and Explanation Debit Credit

Dec. 31 Prepaid Rent 1,500*
Rent Expense 1,500*
To record prepaid rent.

Dec. 31 Prepaid Insurance 1,600*

Insurance Expense 1,600*
To record prepaid insurance.

Dec. 31 Service Revenue 3,600*

Unearned Revenue 3,600*
To record unearned revenue.

Dec. 31 Service Revenue 3,600*

Unearned Revenue 3,600*
To record unearned revenue.

* Calculations:

Adjusting Journal Entry One:

$4,500 Rent prepaid on November 1 for 3 months
 3 Months
$1,500 Rent expense per month

Thus,
$1,500 Rent still prepaid on December 31

Adjusting Journal Entry Two:

$3,200 Insurance prepaid on November 1 for 4 months

 4 Months
$ 800 Insurance expense per month

Thus,
$ 800 Insurance expense per month
× 2 months
$1,600 Insurance still prepaid on December 31

3-80 Horngren’s Accounting 10/e Solutions Manual

P3-44B, cont.

Adjusting Journal Entry Three:

$4,800 Collected in advance on December 1 for 4 months

(1,200) Revenue earned during December
$3,600 Revenue still unearned on December 31

Adjusting Journal Entry Four:

$5,400 Collected in advance on December 1 for 3 months

(1,800) Revenue earned during December
$3,600 Revenue still unearned on December 31

Prepaid Rent Rent Expense

Dec. 31 1,500 Nov. 1 4,500 1,500 Dec. 31
Bal. 1,500 Bal. 3,000

Prepaid Insurance Insurance Expense

Dec. 31 1,600 Nov. 1 3,200 1,600 Dec. 31
Bal. 1,600 Bal. 1,600

Unearned Revenue Service Revenue

3,600 Dec. 31 Dec. 31 3,600 4,800 Dec. 1
3,600 Dec. 31 Dec. 31 3,600 5,400 Dec. 1
7,200 Bal. 3,000 Bal.

Requirement 5

The ending balances in the accounts are the same, regardless of which of the two approaches
is used.

Horngren’s Accounting 10/e Solutions Manual 3-81

 Continuing Problem
P3-45
Requirement 1

Date Accounts and Explanation Debit Credit

Dec. 31 Accounts Receivable 550
Service Revenue 550
To accrue service revenue.

Dec. 31 Unearned Revenue 700

Service Revenue 700
To record service revenue earned that was collected in
advance.

Dec. 31 Supplies Expense 700*

Office Supplies 700*
To record supplies used.

Dec. 31 Depreciation Expense— Equipment 30

Depreciation Expense—Furniture 70
Accumulated Depreciation—Equipment 30
Accumulated Depreciation—Furniture 70
To record depreciation on equipment and furniture.

Dec. 31 Salaries Expense 685

Salaries Payable 685
To accrue salaries expense.

* Calculations:

$900 Office Supplies prior to adjustment

(200) Office Supplies remaining
$700 Supplies Expense (cost of supplies used)

3-82 Horngren’s Accounting 10/e Solutions Manual

P3-45, cont.
Requirement 1

Horngren’s Accounting 10/e Solutions Manual 3-83

 Cash Accounts Payable P3-
Dec. 2 18,000 550 Dec. 2 Dec. 26 400 4,200 Dec. 4 45,
Dec. 18 1,100 1,800 Dec. 3 900 Dec. 5
Dec. 21 1,400 250 Dec. 12 4,700 Balance
Dec. 28 300 400 Dec. 26
1,400 Dec. 30
Balance 16,400

Accounts Receivable Unearned Revenue

Dec. 9 1,500 300 Dec. 28 Adj. 700 1,400 Dec. 21
Adj. 550 700 Balance
Balance 1,750

Office Supplies Salaries Payable

Dec. 5 900 700 Adj. 685 Adj.
Balance 200 685 Balance

Equipment Davis, Capital

Dec. 3 1,800 18,000 Dec. 2
Balance 1,800 18,000 Balance

Accumulated Depreciation—Equipment Davis, Withdrawals

30 Adj. Dec. 30 1,400
30 Balance Balance 1,400

Furniture Service Revenue

Dec. 4 4,200 1,500 Dec. 9
Balance 4,200 1,100 Dec. 18
550 Adj.
700 Adj.
3,850 Balance

Accumulated Depreciation—Furniture Rent Expense

70 Adj. Dec. 2 550
70 Balance Balance 550

Utilities Expense
Dec. 12 250
Balance 250

cont.

3-84 Horngren’s Accounting 10/e Solutions Manual

 Supplies Expense
Adj. 700
Balance 700

Salaries Expense
Adj. 685
Balance 685

Depreciation Expense—Equipment
Adj. 30
Balance 30

Depreciation Expense—Furniture
Adj. 70
Balance 70

Horngren’s Accounting 10/e Solutions Manual 3-85

 P3-45, cont.
Requirement 2

DAVIS CONSULTING
Adjusted Trial Balance
December 31, 2014
Account Title Balance
Debit Credit
Cash $ 16,400
Accounts Receivable 1,750
Office Supplies 200
Equipment 1,800
Accumulated Depreciation—Equipment $ 30
Furniture 4,200
Accumulated Depreciation—Furniture 70
Accounts Payable 4,700
Unearned Revenue 700
Salaries Payable 685
Davis, Capital 18,000
Davis, Withdrawals 1,400
Service Revenue 3,850
Rent Expense 550
Utilities Expense 250
Supplies Expense 700
Salaries Expense 685
Depreciation Expense—Equipment 30
Depreciation Expense—Furniture 70
Total $ 28,035 $ 28,035

3-86 Horngren’s Accounting 10/e Solutions Manual

Practice Set
P3-46
Requirement 1

Date Accounts and Explanation Debit Credit

Nov. 30 Supplies Expense 220*
Cleaning Supplies 220*
To record supplies used.

Nov. 30 Depreciation Expense 170

Accumulated Depreciation 170
To record depreciation on depreciable assets.

Nov. 30 Rent Expense 500*

Prepaid Rent 500*
To record rent expense.

Nov. 30 Insurance Expense 200*

Prepaid Insurance 200*
To record insurance expense.

Nov. 30 Unearned Revenue 150*

Service Revenue 150*
To record service revenue earned that was collected in
advance.

Nov. 30 Interest Expense 100*

Interest Payable 100*
To accrue interest expense.

* Calculations:

Adjusting Journal Entry One:

$270 Cleaning Supplies prior to adjustment
(50) Cleaning Supplies remaining
$220 Supplies Expense (cost of supplies used)

Horngren’s Accounting 10/e Solutions Manual 3-87

 P3-46, cont.

Adjusting Journal Entry Three:

$2,000 Rent prepaid on November 2 for 4 months
 4 Months
$ 500 Rent expense for November

Adjusting Journal Entry Four:

$2,400 Insurance prepaid on November 3 for 12 months
 12 Months
$ 200 Insurance expense for November

Adjusting Journal Entry Five:

$3,600 Collected in advance on November 16 for one year
 12 Months
$ 300 Service revenue earned per month

Thus,
$300 Service revenue earned per month
2
$150 Service revenue earned November 16 through November 30

Adjusting Journal Entry Six:

$40,000 borrowed on Nov. 20, 9% interest rate per year

Thus,

$40,000 × 0.09 × (10 days / 360 days)

= $100 interest expense for Nov. 20 through Nov. 30

3-88 Horngren’s Accounting 10/e Solutions Manual

P3-46, cont.
Requirement 2

SHINE KING CLEANING

Adjusted Trial Balance
November 30, 2015
Account Title Balance
Debit Credit
Cash $ 73,100
Accounts Receivable 2,000
Cleaning Supplies 50
Prepaid Rent 1,500
Prepaid Insurance 2,200
Equipment 2,200
Truck 8,000
Accumulated Depreciation $ 170
Accounts Payable 945
Unearned Revenue 3,450
Interest Payable 100
Notes Payable 40,000
Hudson, Capital 43,000
Hudson, Withdrawals 600
Service Revenue 3,950
Salaries Expense 500
Advertising Expense 100
Utilities Expense 175
Supplies Expense 220
Depreciation Expense 170
Rent Expense 500
Insurance Expense 200
Interest Expense 100
Total $ 91,615 $ 91,615

Horngren’s Accounting 10/e Solutions Manual 3-89

 Critical Thinking

Decision Case 3-1

Requirement 1

Service Revenue [$12,300 + $3,800 accrual adj.] $ 16,100

Expenses:
Salaries Expense [$3,400 + $5,000 new manager] $ 8,400
Utilities Expense 900
Other Expenses [accrual adj.] 1,100
Total Expenses 10,400
Expected Monthly Net Income $ 5,700
Multiplier × 20
Possible price $ 114,000

Requirement 2

[Link] ADVERTISING
Statement of Owner's Equity
Month Ended January 31, 2015

Nicholas, Capital, January 1, 2015 $ 110,400

Net income for the month 10,700*
Owner withdrawal (9,000)
Nicholas, Capital, January 31, 2015 [Owner’s Equity] $ 112,100

* Calculations:

Net Income (Loss) = Total Revenues – Total Expenses

= [$12,300 + $3,800 adj] – [$3,400 + $900 + $1,100 adj]
= $16,100 – $5,400
= $10,700

3-90 Horngren’s Accounting 10/e Solutions Manual

 Decision Case 3-1, cont.
Requirement 3

Students’ responses will vary. Illustrative answers follow.

Offer Nicholas an amount below the $112,100 (requirement 2) he is willing to take, for example
$100,000. If Nicholas is eager to sell the business, he might accept. If not, pay the $112,100,
which is still below the $114,000 possible price (requirement 1). An offer can always be
raised, so start below $112,100.

Decision Case 3-2

Swift Classified Ads

Income Statement
Year Ended December 31

Revenues:
Service Revenue [$59,500 + $1,600 adj + $900 adj] $ 62,000
Expenses:
Salaries Expense [$17,000 + $1,200 adj] $ 18,200
Depreciation Expense [adj] 5,000
Rent Expense [adj] 2,400
Utilities Expense 800
Supplies Expense [adj] 1,700
Total Expenses 28,100
Net Income $ 33,900

Advise Stasney to continue operating Swift Classified Ads. The company earned a profit during its
first year, while many companies lose money early on.

Horngren’s Accounting 10/e Solutions Manual 3-91

 Ethical Issue 3-1
Requirement 1

Net income is overstated by $3,300.

Calculations:

Items
Improperly recorded a sale $2,000
Failed to accrue salaries expense 900
Failed to record insurance expense 400
Total overstatement of net income $3,300

Requirement 2

Students’ responses will vary. Illustrative answers follow.

Steinbach is taking this action to improve the company’s income in order to borrow on favorable
terms and increase the likelihood of loan approval. His action is unethical because he is deliber-
ately overstating reported income.

Steinbach would be helped by his unethical actions.

The bank would be harmed by Steinbach’s unethical actions. Lending money under false pre-
tenses may lead the bank to charge a lower interest rate (generating less interest revenue) than
otherwise, and may increase the bank’s exposure to risk of default.

Requirement 3

Students’ responses will vary. Illustrative answers follow.

The accountant should refuse to follow Steinbach’s instructions. Accountants are bound by stan-
dards of ethical conduct; following Steinbach’s instructions would result in an overstatement of
reported income (a misrepresentation of the facts), and would violate the standards of ethics.

3-92 Horngren’s Accounting 10/e Solutions Manual

Fraud Case 3-1

Requirement 1

Revenue could be accrued based on the percentage of completion. For a high-tech product, an
engineer should be qualified to estimate the percentage of completion. The estimate might be
based on the percentage of total costs incurred, the percentage of engineering steps completed, or
some other reasonable criteria. The amount of revenue to accrue is equal to the percentage com -
plete times the total estimated revenue.

Requirement 2

In 2016, XM would make an entry to debit a Loss and credit the Accounts Receivable account
that had been recorded in 2015. Additionally, any costs that had been capitalized in an asset ac-
count would be written off (removed from the asset account).

Financial Statement Case 3-1

Requirement 1

Starbucks Corporation might record adjusting entries for the following assets: Accounts receiv-
ables, Prepaid expenses and other current assets, Short-term investments, Long-term investments
and Property, plant and equipment. In addition, although not discussed in this chapter, the in-
structor might wish to discuss that Intangible assets might also involve adjusting entries.

Requirement 2

Starbucks Corporation might record adjusting entries for the following liabilities:, Accrued com-
pensation and related costs, Deferred revenue, Other accrued liabilities, Accrued occupancy
costs, Accrued taxes, and Long-term debt.

Requirement 3

Starbucks carries property, plant and equipment at cost less accumulated depreciation. Deprecia-
tion is provided on the straight-line method over estimated useful lives. The range of estimated
useful lives is from 2 to 7 years for equipment and 30 to 40 years for buildings.

Horngren’s Accounting 10/e Solutions Manual 3-93

 Team Project 3-1

Students’ responses will vary. Illustrative answers follow.

Requirement 1

The business will use the accrual basis of accounting because it provides more complete infor-
mation than the cash basis. Under accrual basis accounting, adjusting entries are completed at the
end of the accounting period to record revenues in the period in which they are earned (revenue
recognition principle) and expenses in the period in which they are incurred to generate revenue .
Adjusting entries also update asset and liability accounts. Adjustments are needed to properly
measure net income (loss) on the income statement and assets and liabilities on the balance sheet.
An accrual basis income statement gives a better measure of the business’s net income or net
loss, and an accrual basis balance sheet gives a more complete indication of the business’s finan -
cial position.

Requirement 2

Monthly financial statements will be prepared in order to measure net income (loss), cash flows,
and financial position on a timely basis. The business will use the financial statements as fol -
lows:

 Income Statement to measure operating performance in terms of net profits and net losses
 Balance Sheet to measure financial position in terms of assets, liabilities, and owner’s
equity.
 Statement of Cash Flows to report cash coming in (positive amounts) and cash going out
(negative amounts), and to report the net increase or decrease in cash during the period as
well as the ending cash balance.

Requirement 3

The business will earn service revenue by arranging a package of several dates for clients. The
business will record revenue when it is earned, as per the revenue recognition principle. Cash
collected in advance of providing services will be recorded in a liability account (Unearned Rev-
enue) until services are provided (revenue is earned) at which time revenue will be recorded and
the liability will be reduced. Additionally, revenue will be accrued (along with a related asset,
other than cash) when earned before being collected in cash.

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Team Project 3-1, cont.

Requirement 4

Examples of expenses the business will incur include: salaries expense, advertising expense, de-
preciation expense, supplies expense, interest expense, and insurance expense.

The business will record expenses in the same period as the revenues generated by the expenses
following the matching principle. . Cash paid in advance will be recorded in an asset account
(e.g. a prepaid expense account) until used up, at which time an expense will be recorded and the
asset will be reduced (or accumulated depreciation, a contra-asset account, will be increased in
the case of depreciable assets). Additionally, expenses will be recorded (along with a related lia-
bility) when incurred before paying cash.
Communication Activity 3-1

Under accrual basis accounting, adjusting entries are completed at the end of the accounting
period to record revenues in the period in which they are earned (revenue recognition principle)
and expenses in the same period as the revenues generated by the expenses (matching principle).
Adjusting entries also update asset and liability accounts. Adjustments are needed to properly
measure net income (loss) on the income statement and assets and liabilities on the balance sheet.

Horngren’s Accounting 10/e Solutions Manual 3-95