Chapter 4: Preparing Financial Statements

1. Chapter 4:Preparing Financial Statements

2. Raider Company borrowed $10,000 on October 1, 2008. The note included a 5 percent annual interest rate, payable each September 30, starting Sept. 30, 2009. How much interest must Raider accrue at Dec. 31, 2008 before financial statements are prepared? Calc: Principal x rate x time P x R x T AJE: 1. Accrual of Expenses - Example 1 10,000 x .05 x 3/12 of a year = $125 Interest Expense 125 Interest Payable 125

3. Raider Company leases out part of its office building to Tu Company for $2,000 per month. At the end of the year, Tu owes Raider for December’s rent. Prepare the AJE for Raider Company: 2. Accrual of Revenues - Example 2 Rent Receivable 2,000 Rent Revenue 2,000

4. Raider Company purchased a 1-year insurance policy on April 1, 2008 at a cost of $2,400 General JEat time of purchase: Prepaid Insurance 2,400 Cash 2,400 Calculation for AJE at December 31 to recognize the portion that has been used up: 3.Prepaid Expenses - Example 3 2,400 /12 = 200 per month x 9 months= $1,800 AJE: Insurance Expense 1,800 Prepaid Insurance 1,800

5. Raider Company purchased equipment in 2006 at a cost of $30,000. The equipment has a useful life of 10 years and no salvage value. Calculation for AJE at December 31, 2008 for the current year’s depreciation. 3.Prepaid Expenses - Example 4 30,000/10 = 3,000 per year AJE: Depreciation Expense 3,000 Accumulated Depr. 3,000

6. Raider Company received $6,000 on November 30, 2008 for subscriptions to be delivered over the next 12 months, starting in December of 2008. General JE at time cash received: Cash 6,000 Unearned Revenues 6,000 AJEat end of the period (for portion earned): 4.Unearned Revenues - Example 5 6,000 / 12 = 500 per month, so 1 month earned. Unearned Revenues 500 Subscription Revenues 500

7. The trial balance of Mega Company, Inc. at the end of its annual accounting period is as follows: Mega Company Trial Balance December 31, 2008 Cash $ 3,000 Prepaid Insurance 1,600 Supplies 2,100 Equipment 20,000 Accumulated depreciation $ 2,000 Common Stock 10,000 Retained Earnings 7,000 Dividends 1,000 Revenue 33,000 Salaries Expense 18,300 Rent Expense 6,000 ______ Totals $52,000$52,000 Class Problem – Prepare Adjusting Entries

8. 1. Unexpired insurance at December 31 was $1,000. Adjusting Entries (So expired insurance is $600) AJE: Insurance Expense 600 Prepaid Insurance 600

9. 2. Unused supplies, per inventory, $800 at December 31. Adjusting Entries So used supplies = 2,100 - 800 = 1,300 Supplies Expense 1,300 Supplies 1,300

10. 3. Estimated Depreciation for 2008 is $1,000 Adjusting Entries Depreciation Expense 1,000 Accumulated Depr. 1,000

11. 4. Earned but unpaid salaries at December 31, $700. Adjusting Entries Salaries Expense 700 Salaries Payable 700

12. Mega Company, Adjusted Trial Balance, 12/31/08 Cash $ 3,000 Prepaid Insurance 1,000 Supplies 800 Equipment 20,000 Accumulated depreciation $ 3,000 Salaries Payable 700 Common Stock 10,000 Retained Earnings 7,000 Dividends 1,000 Revenue 33,000 Salaries Expense 19,000 Rent Expense 6,000 Insurance Expense 600 Supplies Expense 1,300 Depreciation Expense 1,000 ______ Totals $53,700$53,700 Class Problem – Adjusted Trial Balance

13. Refer to Mega Company Adjusted Trial Balance. Close revenues and expense to retained earnings: Revenue 33,000 Salaries Expense 19,000 Rent Expense 6,000 Insurance Expense 600 Supplies Expense 1,300 Depreciation Expense 1,000 Closing Journal Entries (CJEs) - Example Retained Earnings 5,100

14. Refer to Mega Company. Now close the balance in the Dividends account to Retained Earnings. Closing Journal Entries (CJEs) - Example Retained Earnings 1,000 Dividends 1,000

15. Closing Journal entries Now post the effects of retained earnings to the RE general ledger account. Retained Earnings 7,000 Beginning Dividends 1,000 5,100 Net Income 11,100 Ending 15

16. Mega Company, 12/31/08, Postclosing Trial Balance Cash $ 3,000 Prepaid Insurance 1,000 Supplies 800 Equipment 20,000 Accumulated depreciation $ 3,000 Salaries Payable 700 Common Stock 10,000 Retained Earnings ______ 11,100 Totals $24,800$24,800 Class Problem – Postclosing Trial Balance

17. Exercise 4-32 7/1 Cash 50,000 Notes Payable 50,000 7/31 Calc: 50,000 x .12 x 1/12 = $500 AJE Int. Expense 500 Int. Payable 500 8/31 Owe? 50,000 + 50,000 x .12 x 2/12 = $51,000 Notes Pay. 50,000 Int. Payable 500 Int. Expense 500 Cash 51,000

18. Problem 4-3 a. Calc: (15,000 - 250)/5 = 2,950 per yr. Depreciation Exp. 2,950 Accum. Depr. 2,950 b. Calc.: Begin. 3,600 + Purch 17,600 - Unused (1,850) =Used 19,350 Supplies Expense 19,350 Office Supplies 19,350

19. Problem 4-3 c. Earned? 24,000/6 = 4,000 per mo. x 5 mos. = $20,000 Customer Deposits 20,000 Fees Earned 20,000 d. Calc: 2,700 per mo. x 2 mos = 5,400 used Rent Expense 5,400 Prepaid Rent 5,400

20. Problem 4-3 e. Calc: 200,000 x .09 x 2/12 = $3,000 (use months unless otherwise instructed) Interest Expense 3,000 Interest Payable 3,000 f. If paid on Thursday (Dec. 30), and Friday is Dec. 31, then owe for 1 day: Salaries Expense 500 Salaries Payable 500

21. Problem 4-3 Part 2: effect on I/S if not recorded? Depr. Exp. not recorded +2,950 Supplies Exp. not recorded +19,350 Revenues not recorded -20,000 Rent Exp. not recorded +5,400 Interest Exp. not recorded +3,000 Salaries Exp. not recorded + 500 Net effect: Net Inc. Over by 11,200

22. Exercise 4-23 Close revenues & expenses to Ret. Earn.: Ad. Fee Earned 58,500 Int. Revenue 2,700 Wage & Sal. Exp. 14,300 Util. Exp. 12,500 Ins. Exp. 7,300 Depr. Exp. 16,250 Int. Exp. 2,600 Inc. Tax Exp. 3,300 Retained Earnings (plug) 4,950 Now close Dividends to Retained Earn.: Retained Earnings 2,000 Dividends 2,000

23. Exercise 4-18 Ignore AJE? Effect on Net Income? O =Overstate U=Understate NE=no effect 1. no depr. exp.? O 2. no revenues? U 3. no ins. exp? O 4. no int. exp? O 5. no commission exp.? O 6. no rent revenue? U