1

Exercise 3-7
On November 1, 2007, a company paid a $15,300 premium on a 36-month insurance policy Ior coverage
beginning on that date. ReIer to that policy and Iill in the blanks in the Iollowing table.
Balance Sheet Prepaid Insurance Asset Using Insurance Expense Using
Accrual Basis Cash Basis Accrual Basis Cash Basis
Dec.31,2007 $14,450 $0 2007 $ 850* $15,300
Dec.31,2008 9,350 0 2008 5,100 0
Dec.31,2009 4,250 0 2009 5,100 0
Dec.31,2010 0 0 2010 4,250 0
Total $15,300 $15,300
*15,300/36=$425/per month
"$ 3-1
In its Iirst year oI operations, Case Co. earned $60,000 in revenues and received $52,000 cash Irom these
customers. The company incurred expenses oI $37,500 but had not paid $6,000 oI them at year-end. The
company also prepaid $3,250 cash Ior expenses that would be incurred the next year. Calculate the Iirst year`s
net income under both the cash basis and the accrual basis oI accounting.








Exercise 3-6
The Iollowing three separate situations require adjusting journal entries to prepare Iinancial statements as oI
April 30. For each situation, present both the April 30 adjusting entry and the subsequent entry during May to
record the payment oI the accrued expenses.
a. On April 1, the company retained an attorney at a Ilat monthly Iee oI $4,500. This amount is payable on the
12th oI the Iollowing month.
b. A $760,000 note payable requires $5,700 oI interest to be paid at the 20th day oI each month. The interest
was last paid on April 20 and the next payment is due on May 20. As oI April 30, $1,900 oI interest expense
has accrued.
c. Total weekly salaries expense Ior all employees is $12,000. This amount is paid at the end oI the day on
Friday oI each Iive-day workweek. April 30 Ialls on Tuesday oI this year, which means that the employees
had worked two days since the last payday. The next payday is May 3.
AN$
a.
Apr. 30 Legal Fees Expense ........................................................... 4,500
Legal Fees Payable ................................................... 4,500
To record accrued legal fees.
May 12 Legal Fees Payable ..................................................... 4,500
Cash ................................................................... 4,500
To pay accrued legal fees.
Cash 52,000
Accounts Receivable 8,000
Revenues 60,000
Expenses 37,500
Accounts Payable 6,000
Cash 31,500
Prepaid Expenses 3,250
Cash 3,250
2

b.
Apr. 30 Interest Expense .......................................................... 1,900
Interest Payable .................................................. 1,900
To record accrued interest expense($5,700 x 10/30).
May 20 Interest Payable .......................................................... 1,900
Interest Expense .......................................................... 3,800
Cash ................................................................... 5,700
To record payment of accrued and current interest expense ($5,700 x 20/30).
c.
Apr. 30 Salaries Expense ......................................................... 4,800
Salaries Payable .................................................. 4,800
To record accrued salaries($12,000 x 2/5 week).
May 3 Salaries Payable .......................................................... 4,800
Salaries Expense ......................................................... 7,200
Cash ................................................................... 12,000
To record payment of accrued and current salaries ($12,000 x 3/5 week).

"$ 3-2
ClassiIy the Iollowing adjusting entries as involving prepaid expenses (PE), unearned revenues (UR), accrued
expenses (AE), or accrued revenues (AR).
AE a. To record wages expense incurred but not yet paid (nor recorded).
!E b. To record expiration oI prepaid insurance.
&# c. To record revenue earned that was previously received as cash in advance.
!E d. To record annual depreciation expense.
A# e. To record revenue earned but not yet billed (nor recorded).

Exercise 3-1
In the blank space beside each adjusting entry, enter the letter oI the explanation A through F that most
closely describes the entry.
A. To record accrued interest revenue. D. To record this period`s depreciation expense.
B. To record accrued interest expense. E. To record accrued salaries expense.
C. To record the earning oI previously unearned income. F. To record this period`s use oI a prepaid
expense.
B 1. Interest Expense 2,208
Interest Payable 2,208
F 2. Insurance Expense 3,180
Prepaid Insurance 3,180
C 3. Unearned ProIessional Fees 19,250
ProIessional Fees Earned 19,250
A 4. Interest Receivable 3,300
Interest Revenue 3,300
D 5. Depreciation Expense 38,217
Accumulated Depreciation 38,217
E 6. Salaries Expense 13,280
Salaries Payable 13,280
Exercise 3-3
For each oI the Iollowing separate cases, prepare adjusting entries required oI Iinancial statements Ior the year
ended (date oI) December 31, 2009. (Assume that prepaid expenses are initially recorded in asset accounts
and that Iees collected in advance oI work are initially recorded as liabilities.)
3

a. One-third oI the work related to $15,000 cash received in advance is perIormed this period.
b. Wages oI $7,500 are earned by workers but not paid as oI December 31, 2009.
c. Depreciation on the company`s equipment Ior 2009 is $17,251.
d. The OIIice Supplies account had a $240 debit balance on December 31, 2008. During 2009, $6,102 oI
oIIice supplies are purchased. A physical count oI supplies at December 31, 2009, shows $660 oI supplies
available.
e. The Prepaid Insurance account had a $4,000 balance on December 31, 2008. An analysis oI insurance
policies shows that $1,300 oI unexpired insurance beneIits remain at December 31, 2009.
I. The company has earned (but not recorded) $1,400 oI interest Irom investments in CDs Ior the year ended
December 31, 2009. The interest revenue will be received on January 10, 2010.
g. The company has a bank loan and has incurred (but not recorded) interest expense oI $2,000 Ior the year
ended December 31, 2009. The company must pay the interest on January 2, 2010.
, Une,rned Fee Revenue 5,000
Fee Revenue 5,000
To record earned portion of fee received in advance ($15,000 x 1/3).
b W,es Expense 7,500
W,es P,,ble 7,500
To record wages accrued but not yet paid.
c Depreci,tion ExpenseEquipment 17,251
Accumul,ted Depreci,tionEquipment 17,251
To record depreciation expense for the year.
d Office Supplies Expense 5,682
Office Supplies
*
5,682
To record office supplies used ($240 + $6,102 - $660).
e nsur,nce Expense 2,700
Prep,id nsur,nce
|
2,700
To record insurance coverage expired ($4,000 - $1,300).
f nterest Receiv,ble 1,400
nterest Revenue 1,400
To record interest earned but not yet received.
nterest Expense 2,000
nterest P,,ble 2,000
To record interest incurred but not yet paid.
Notes:
Prep,id nsur,nce
|
Office Supplies
*

Be B,l 4,000 Be B,l 240
Purch 6,102
? Used ? Used
End B,l 1,300 End B,l 660
Problem 3-3A
Wells Teaching Institute (WTI), a school owned by Tracey Wells, provides training to individuals who pay
tuition directly to the school. WTI also oIIers training to groups in oII-site locations. Its unadjusted trial
balance as oI December 31, 2009, Iollows. WTI initially records prepaid expenses and unearned revenues in
balance sheet accounts. Descriptions oI items a through h that require adjusting entries on December 31, 2009,
Iollow.
Additional InIormation Items
a. An analysis oI the school`s insurance policies shows that $3,000 oI coverage has expired.
4

b. An inventory count shows that teaching supplies costing $2,000 are available at year-end 2009.
c. Annual depreciation on the equipment is $10,000.
d. Annual depreciation on the proIessional library is $5,000.
e. On November 1, the school agreed to do a special six-month course (starting immediately) Ior a client. The
contract calls Ior a monthly Iee oI $2,500, and the client paid the Iirst Iive months` Iees in advance. When the
cash was received, the Unearned Training Fees account was credited. The Iee Ior the sixth month will be
recorded when it is collected in 2010.
I. On October 15, the school agreed to teach a Iour-month class (beginning immediately) Ior an individual Ior
$1,600 tuition per month payable at the end oI the class. The services are being provided as agreed, and no
payment has yet been received.
g. The school`s two employees are paid weekly. As oI the end oI the year, two days` salaries have accrued at
the rate oI $120 per day Ior each employee.
h. The balance in the Prepaid Rent account represents rent Ior December.

Required
1. Prepare T-accounts (representing the ledger) with balances Irom the unadjusted trial balance.
2. Prepare the necessary adjusting journal entries Ior items a through h and post them to the T-accounts.
Assume that adjusting entries are made only at year-end.
3. Update balances in the T-accounts Ior the adjusting entries and prepare an adjusted trial balance.
4. Prepare Wells Teaching Institute`s income statement and statement oI owner`s equity Ior the year 2009 and
prepare its balance sheet as oI December 31, 2009.





5

!arts 1 and 2
,sh Equipment
Un,dj B,l 28,064 Un,dj B,l 75,800


Accounts Receiv,ble
Accumul,ted Depreci,tion
Equipment
Un,dj B,l 0 Un,dj B,l 15,000
(f) 4,000 (c) 10,000
Adj B,l 4,000 Adj B,l 25,000
Te,chin Supplies Accounts P,,ble
Un,dj B,l 11,000 B,l 39,500
(b) 9,000
Adj B,l 2,000

S,l,ries P,,ble
Prep,id nsur,nce Un,dj B,l 0
Un,dj B,l 16,000 () 480
(,) 3,000 Adj B,l 480
Adj B,l 13,000
Une,rned Tr,inin Fees
Prep,id Rent Un,dj B,l 12,500
Un,dj B,l 2,178 (h) 2,178 (e) 5,000
Adj B,l 0 Adj B,l 7,500

T Wells, ,pit,l
B,l 71,000
Profession,l Libr,r
B,l 33,000 T Wells, Withdr,,ls
B,l 44,000
Accumul,ted Depreci,tion
Profession,l Libr,r
Un,dj
B,l
10,000
(d) 5,000
Adj B,l 15,000

Tuition Fees E,rned Rent Expense
Un,dj B,l 111,000 Un,dj B,l 23,958
(f) 4,000 (h) 2,178
Adj
B,l
115,000 Adj B,l 26,136

Tr,inin Fees E,rned Te,chin Supplies Expense
Un,dj B,l 41,000 Un,dj B,l 0
(e) 5,000 (b) 9,000
Adj B,l 46,000 Adj B,l 9,000

Depreci,tion Expense
Profession,l Libr,r

Advertisin Expense
Un,dj B,l 0 B,l 8,000
(d) 5,000
Adj B,l 5,000

Depreci,tion Expense
Equipment

Utilities Expense
Un,dj B,l 0 B,l 6,000
(c) 10,000
Adj B,l 10,000
6


S,l,ries Expense nsur,nce Expense
Un,dj B,l 52,000 Un,dj B,l 0
() 480 (,) 3,000
Adj B,l 52,480 Adj B,l 3,000



!art 2
Adjustment (,)
Dec 31 nsur,nce Expense 3,000
Prep,id nsur,nce 3,000
To record the insurance expired.

Adjustment (b)
31 Te,chin Supplies Expense 9,000
Te,chin Supplies 9,000
To record supplies used ($11,000 - $2,000).

Adjustment (c)
31 Depreci,tion ExpenseEquipment 10,000
Accumul,ted Depreci,tionEquipment 10,000
To record equipment depreciation.

Adjustment (d)
31 Depreci,tion ExpenseProfess Libr,r 5,000
Accumul Depreci,tionProfess Libr,r 5,000
To record professional library depreciation.


Adjustment (e)
31 Une,rned Tr,inin Fees 5,000
Tr,inin Fees E,rned 5,000
To record 2 months' training fees earned that were collected in advance.

Adjustment (f)
31 Accounts Receiv,ble 4,000
Tuition Fees E,rned 4,000
To record tuition earned ($1,600 x 2 1/2 months).

Adjustment ()
31 S,l,ries Expense 480
S,l,ries P,,ble 480
To record accrued salaries(2 days x $120 x 2 employees).

Adjustment (h)
31 Rent Expense 2,178
Prep,id Rent 2,178
To record expiration of prepaid rent.




7

!art 3
WELLS TEANG NSTTUTE
Adjusted Tri,l B,l,nce
December 31, 2009
Debit redit
,sh $ 28,064
Accounts receiv,ble 4,000
Te,chin supplies 2,000
Prep,id insur,nce 13,000
Prep,id rent 0
Profession,l libr,r 33,000
Accumul,ted depreci,tionProfession,l libr,r $ 15,000
Equipment 75,800
Accumul,ted depreci,tionEquipment 25,000
Accounts p,,ble 39,500
S,l,ries p,,ble 480
Une,rned tr,inin fees 7,500
T Wells, ,pit,l 71,000
T Wells, Withdr,,ls 44,000
Tuition fees e,rned 115,000
Tr,inin fees e,rned 46,000
Depreci,tion expenseProfession,l libr,r 5,000
Depreci,tion expenseEquipment 10,000
S,l,ries expense 52,480
nsur,nce expense 3,000
Rent expense 26,136
Te,chin supplies expense 9,000
Advertisin expense 8,000
Utilities expense 6,000 _______
Tot,ls $319,480 $319,480
!art 4
WELLS TEANG NSTTUTE
ncome St,tement
For Ye,r Ended December 31, 2009
Revenues
Tuition fees e,rned $115,000
Tr,inin fees e,rned 46,000
Tot,l revenues $161,000
Expenses
Depreci,tion expenseProfession,l libr,r 5,000
Depreci,tion expenseEquipment 10,000
S,l,ries expense 52,480
nsur,nce expense 3,000
Rent expense 26,136
Te,chin supplies expense 9,000
Advertisin expense 8,000
Utilities expense 6,000
Tot,l expenses 119,616
Net income $ 41,384


8

WELLS TEANG NSTTUTE
St,tement of Oner's Equit
For Ye,r Ended December 31, 2009
T Wells, ,pit,l, December 31, 2008 $ 71,000
Plus: Net income 41,384
112,384
Less: Withdr,,ls b oner 44,000
T Wells, ,pit,l, December 31, 2009 $ 68,384

WELLS TEANG NSTTUTE
B,l,nce Sheet
December 31, 2009
Assets
,sh $ 28,064
Accounts receiv,ble 4,000
Te,chin supplies 2,000
Prep,id insur,nce 13,000
Profession,l libr,r $33,000
Accumul,ted depreci,tionProfession,l libr,r (15,000) 18,000
Equipment 75,800
Accumul,ted depreci,tionEquipment (25,000) 50,800
Tot,l ,ssets $115,864

Li,bilities
Accounts p,,ble $ 39,500
S,l,ries p,,ble 480
Une,rned tr,inin fees 7,500
Tot,l li,bilities 47,480
Equit
T Wells, ,pit,l 68,384
Tot,l li,bilities ,nd equit $115,864

!robIem 3-2A
ormel Co. Iollows the practice oI recording prepaid expenses and unearned revenues in balance sheet
accounts. The company`s annual accounting period ends on December 31, 2009. The Iollowing inIormation
concerns the adjusting entries to be recorded as oI that date.
a. The OIIice Supplies account started the year with a $2,900 balance. During 2009, the company purchased
supplies Ior $11,977, which was added to the OIIice Supplies account. The inventory oI supplies available at
December 31, 2009, totaled $2,552.
b. An analysis oI the company`s insurance policies provided the Iollowing Iacts.
Policy Date oI Purchase Months oI Coverage Cost
A April 1, 2008 24 $11,640
B April 1, 2009 36 10,440
C August 1, 2009 12 9,240
The total premium Ior each policy was paid in Iull (Ior all months) at the purchase date, and the Prepaid
Insurance account was debited Ior the Iull cost. (Year-end adjusting entries Ior Prepaid Insurance were
properly recorded in all prior years.)
c. The company has 15 employees, who earn a total oI $1,830 in salaries each working day. They are paid
each Monday Ior their work in the Iive-day workweek ending on the previous Friday. Assume that December
31, 2009, is a Tuesday, and all 15 employees worked the Iirst two days oI that week. Because New Year`s
Day is a paid holiday, they will be paid salaries Ior Iive Iull days on Monday, January 6, 2010.
d. The company purchased a building on January 1, 2009. It cost $800,000 and is expected to have a $45,000
salvage value at the end oI its predicted 40-year liIe. Annual depreciation is $18,875.
9

e. Since the company is not large enough to occupy the entire building it owns, it rented space to a tenant at
$3,000 per month, starting on November 1, 2009. The rent was paid on time on November 1, and the amount
received was credited to the Rent Earned account. owever, the tenant has not paidthe December rent. The
company has worked out an agreement with the tenant, who has promised to pay both December and January
rent in Iull on January 15. The tenant has agreed not to Iall behind again.
I. On November 1, the company rented space to another tenant Ior $2,718 per month. The tenant paid Iive
months` rent in advance on that date. The payment was recorded with a credit to the Unearned Rent account.
Required
1. Use the inIormation to prepare adjusting entries as oI December 31, 2009.
2. Prepare journal entries to record the Iirst subsequent cash transaction in 2010 Ior parts c and e.
!art 1
Adjustment (,)
Dec 31 Office Supplies Expense 12,325
Office Supplies 12,325
To record cost of supplies used($2,900 + $11,977 - $2,552).
Adjustment (b)
31 nsur,nce Expense 12,280
Prep,id nsur,nce 12,280
To record annual insurance coverage cost.

Polic

ost per Month
Months Active in
2009

2009 ost
A $485 ($11,640/24 mo) 12 $ 5,820
B 290 ($10,440/36 mo) 9 2,610
770 ($ 9,240 /12 mo) 5 3,850
Tot,l $12,280
Adjustment (c)
31 S,l,ries Expense 3,660
S,l,ries P,,ble 3,660
To record accrued but unpaid wages (2 days x $1,830).
Adjustment (d)
Dec 31 Depreci,tion ExpenseBuildin 18,875
Accumul,ted Depreci,tionBuildin 18,875
To record annual depreciation expense[($800,000 -$45,000) / 40 years = $18,875]
Adjustment (e)
31 Rent Receiv,ble 3,000
Rent E,rned 3,000
To record earned but unpaid Dec. rent.
Adjustment (f)
31 Une,rned Rent 5,436
Rent E,rned 5,436
To record the amount of rent earned for November and December (2 x $2,718).
!art 2
,sh P,ment for (c)
J,n 6 S,l,ries P,,ble 3,660
S,l,ries Expense* 5,490
,sh 9,150
To record payment of accrued and current salaries. *(3 days x $1,830)
,sh P,ment for (e)
15 ,sh 6,000
Rent Receiv,ble 3,000
Rent E,rned 3,000
To record past due rent for two months.
10

"$ 3-9
The Iollowing inIormation is taken Irom Booker Company`s unadjusted and adjusted trial balances.
unadjusted adjusted
Debit Credit Debit Credit
Prepaid Insurance $4,100 $3,700
Insurance $ 0 $800
Given this inIormation, which oI the Iollowing is likely included among its adjusting entries?
a. A $400 debit to Insurance Expense and an $800 debit to Interest Expense.
b. A $400 debit to Insurance Expense and an $800 debit to Interest Payable.
c. A $400 credit to Prepaid Insurance and an $800 debit to Interest Payable.

B 1. A company Iorgot to record accrued and unpaid employee wages oI $350,000 at period-end. This
oversight would
a. Understate net income by $350,000. b. Overstate net income by $350,000.
c. ave no eIIect on net income. d. Overstate assets by $350,000.
e. Understate assets by $350,000.

C 2. Prior to recording adjusting entries, the Supplies account has a $450 debit balance. A physical count oI
supplies shows $125 oI unused supplies still available. The required adjusting entry is:
a. Debit Supplies $125; Credit Supplies Expense $125.
b. Debit Supplies $325; Credit Supplies Expense $325.
c. Debit Supplies Expense $325; Credit Supplies $325.
d. Debit Supplies Expense $325; Credit Supplies $125.
e. Debit Supplies Expense $125; Credit Supplies $125.

B 3. On May 1, 2009, a two-year insurance policy was purchased Ior $24,000 with coverage to begin
immediately. What is the amount oI insurance expense that appears on the company`s income statement Ior
the year ended December 31, 2009?
a. $4,000 b. $8,000 c. $12,000 d. $20,000 e. $24,000

a 4. On November 1, 2009, Stockton Co. receives $3,600 cash Irom ans Co. Ior consulting services to be
provided evenly over the period November 1, 2009, to April 30, 2010at which time Stockton credited
$3,600 to Unearned Consulting Fees. The adjusting entry on December 31, 2009 (Stockton`s yearend) would
include a
a. Debit to Unearned Consulting Fees Ior $1,200. b. Debit to Unearned Consulting Fees Ior $2,400.
c. Credit to Consulting Fees Earned Ior $2,400. d. Debit to Consulting Fees Earned Ior $1,200.
e. Credit to Cash Ior $3,600.

E 5. II a company had $15,000 in net income Ior the year, and its sales were $300,000 Ior the same year,
what is its proIit margin?
a. 20 b. 2,000 c. $285,000 d. $315,000 e. 5