Everyone Likes to Win
When Ted Castle was a hockey coach at the University of Vermont, his players were self-motivated by their desire to win. Hockey was a game you usually either won or lost. But at Rhino Foods, Inc., a bakery-foods company he founded in Burlington, Vermont, he discovered that manufacturing-line workers were not so self-motivated. Ted thought, what if he turned the food-making business into a game, with rules, strategies, and trophies?
In a game, knowing the score is all-important. Ted felt that only if the employees know the score—know exactly how the business is doing daily, weekly, monthly—could he turn food-making into a game. But Rhino is a closely held, family-owned business, and its financial statements and profits were confidential. Ted wondered, should he open Rhino's books to the employees?
A consultant put Ted's concerns in perspective when he said, “Imagine you're playing touch football. You play for an hour or two, and the whole time I'm sitting there with a book, keeping score. All of a sudden I blow the whistle, and I say, ‘OK, that's it. Everybody go home.’ I close my book and walk away. How would you feel?” Ted opened his books and revealed the financial statements to his employees.
The next step was to teach employees the rules and strategies of how to “win” at making food. The first lesson: “Your opponent at Rhino is expenses. You must cut and control expenses.” Ted and his staff distilled those lessons into daily scorecards—production reports and income statements—that keep Rhino's employees up-to-date on the game. At noon each day, Ted posts the previous day's results at the entrance to the production room. Everyone checks whether they made or lost money on what they produced the day before. And it's not just an academic exercise: There's a bonus check for each employee at the end of every four-week “game” that meets profitability guidelines.
Rhino has flourished since the first game. Employment has increased from 20 to 130 people, while both revenues and profits have grown dramatically.
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After studying this chapter, you should be able to:
[1] Prepare a worksheet.
[2] Explain the process of closing the books.
[3] Describe the content and purpose of a post-closing trial balance.
[4] State the required steps in the accounting cycle.
[5] Explain the approaches to preparing correcting entries.
[6] Identify the sections of a classified balance sheet.
Preview of Chapter 4
At Rhino Foods, Inc., financial statements help employees understand what is happening in the business. In Chapter 3, we prepared financial statements directly from the adjusted trial balance. However, with so many details involved in the end-of-period accounting procedures, it is easy to make errors. One way to minimize errors in the records and to simplify the end-of-period procedures is to use a worksheet.
In this chapter, we will explain the role of the worksheet in accounting. We also will study the remaining steps in the accounting cycle, especially the closing process, again using Pioneer Advertising Agency as an example. Then we will consider correcting entries and classified balance sheets. The content and organization of Chapter 4 are as follows.
Using a Worksheet
A worksheet is a multiple-column form used in the adjustment process and in preparing financial statements. As its name suggests, the worksheet is a working tool. It is not a permanent accounting record. It is neither a journal nor a part of the general ledger. The worksheet is merely a device used in preparing adjusting entries and the financial statements. Companies generally computerize work-sheets using an electronic spreadsheet program such as Excel.
Illustration 4-1 shows the basic form of a worksheet and the five steps for preparing it. Each step is performed in sequence. The use of a worksheet is optional. When a company chooses to use one, it prepares financial statements directly from the worksheet. It enters the adjustments in the worksheet columns and then journalizes and posts the adjustments after it has prepared the financial statements. Thus, worksheets make it possible to provide the financial statements to management and other interested parties at an earlier date.
Illustration 4-1
Form and procedure for a worksheet
Steps in Preparing a Worksheet
We will use the October 31 trial balance and adjustment data of Pioneer Advertising Agency from Chapter 3 to illustrate how to prepare a worksheet. We describe each step of the process and demonstrate these steps in Illustration 4-2 (page 164) and transparencies 4-3A, B, C, and D.
STEP 1. PREPARE A TRIAL BALANCE ON THE WORKSHEET
Enter all ledger accounts with balances in the account titles column. Enter debit and credit amounts from the ledger in the trial balance columns. Illustration 4-2 shows the worksheet trial balance for Pioneer Advertising Agency. This trial balance is the same one that appears in Illustration 2-31 (page 73) and Illustration 3-3 (page 103).
STEP 2. ENTER THE ADJUSTMENTS IN THE ADJUSTMENTS COLUMNS
Turn over the first transparency, Illustration 4-3A. When using a worksheet, enter all adjustments in the adjustments columns. In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals. A different letter identifies the debit and credit for each adjusting entry. The term used to describe this process is keying. Companies do not journalize the adjustments until after they complete the worksheet and prepare the financial statements.
The adjustments for Pioneer Advertising Agency are the same as the adjustments in Illustration 3-23 (page 117). They are keyed in the adjustments columns of the worksheet as follows.
(a) Pioneer debits an additional account, Supplies Expense, $1,500 for the cost of supplies used, and credits Supplies $1,500.
(b) Pioneer debits an additional account, Insurance Expense, $50 for the insurance that has expired, and credits Prepaid Insurance $50.
(c) The company needs two additional depreciation accounts. It debits Depreciation Expense $40 for the month's depreciation, and credits Accumulated Depreciation—Equipment $40.
(d) Pioneer debits Unearned Service Revenue $400 for services performed, and credits Service Revenue $400.
(e) Pioneer debits an additional account, Accounts Receivable, $200 for services performed but not billed, and credits Service Revenue $200.
(f) The company needs two additional accounts relating to interest. It debits Interest Expense $50 for accrued interest, and credits Interest Payable $50.
(g) Pioneer debits Salaries and Wages Expense $1,200 for accrued salaries, and credits an additional account, Salaries and Wages Payable, $1,200.
After Pioneer has entered all the adjustments, the adjustments columns are totaled to prove their equality.
STEP 3. ENTER ADJUSTED BALANCES IN THE ADJUSTED TRIAL BALANCE COLUMNS
Turn over the second transparency, Illustration 4-3B. Pioneer determines the adjusted balance of an account by combining the amounts entered in the first four columns of the worksheet for each account. For example, the Prepaid Insurance account in the trial balance columns has a $600 debit balance and a $50 credit in the adjustments columns. The result is a $550 debit balance recorded in the adjusted trial balance columns. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries. The balances in these columns are the same as those in the adjusted trial balance in Illustration 3-25 (page 119).
(Note: Text continues on page 165, following acetate overlays.)
Illustration 4-2
Preparing a trial balance
Illustration 4-3A
Entering the adjustments in the adjustments columns
Illustration 4-3B
Entering adjusted balances in the adjusted trial balance columns
Illustration 4-3C
Extending the adjusted trial balance amounts to appropriate financial statement columns
Illustration 4-3D
Computing net income or net loss and completing the worksheet
After Pioneer has entered all account balances in the adjusted trial balance columns, the columns are totaled to prove their equality. If the column totals do not agree, the financial statement columns will not balance and the financial statements will be incorrect.
Helpful Hint Every adjusted trial balance amount must be extended to one of the four statement columns.
STEP 4. EXTEND ADJUSTED TRIAL BALANCE AMOUNTS TO APPROPRIATE FINANCIAL STATEMENT COLUMNS
Turn over the third transparency, Illustration 4-3C. The fourth step is to extend adjusted trial balance amounts to the income statement and balance sheet columns of the worksheet. Pioneer enters balance sheet accounts in the appropriate balance sheet debit and credit columns. For instance, it enters Cash in the balance sheet debit column, and Notes Payable in the balance sheet credit column. Pioneer extends Accumulated Depreciation—Equipment to the balance sheet credit column. The reason is that accumulated depreciation is a contra asset account with a credit balance.
Because the worksheet does not have columns for the owner's equity statement, Pioneer extends the balance in owner's capital to the balance sheet credit column. In addition, it extends the balance in owner's drawings to the balance sheet debit column because it is an owner's equity account with a debit balance.
The company enters the expense and revenue accounts such as Salaries and Wages Expense and Service Revenue in the appropriate income statement columns. Illustration 4-3C shows all of these extensions.
STEP 5. TOTAL THE STATEMENT COLUMNS, COMPUTE THE NET INCOME (OR NET LOSS), AND COMPLETE THE WORKSHEET
Turn over the fourth transparency, Illustration 4-3D. The company now must total each of the financial statement columns. The net income or loss for the period is the difference between the totals of the two income statement columns. If total credits exceed total debits, the result is net income. In such a case, as shown in Illustration 4-3D, the company inserts the words “Net Income” in the account titles space. It then enters the amount in the income statement debit column and the balance sheet credit column. The debit amount balances the income statement columns; the credit amount balances the balance sheet columns. In addition, the credit in the balance sheet column indicates the increase in owner's equity resulting from net income.
What if total debits in the income statement columns exceed total credits? In that case, the company has a net loss. It enters the amount of the net loss in the income statement credit column and the balance sheet debit column.
After entering the net income or net loss, the company determines new column totals. The totals shown in the debit and credit income statement columns will match. So will the totals shown in the debit and credit balance sheet columns. If either the income statement columns or the balance sheet columns are not equal after the net income or net loss has been entered, there is an error in the worksheet. Illustration 4-3D shows the completed worksheet for Pioneer Advertising Agency.
Preparing Financial Statements from a Worksheet
After a company has completed a worksheet, it has at hand all the data required for preparation of financial statements. The income statement is prepared from the income statement columns. The balance sheet and owner's equity statement are prepared from the balance sheet columns. Illustration 4-4 (page 166) shows the financial statements prepared from Pioneer's worksheet. At this point, the company has not journalized or posted adjusting entries. Therefore, ledger balances for some accounts are not the same as the financial statement amounts.
Illustration 4-4
Financial statements from a worksheet
The amount shown for owner's capital on the worksheet is the account balance before considering drawings and net income (or loss). When the owner has made no additional investments of capital during the period, this worksheet amount for owner's capital is the balance at the beginning of the period.
Using a worksheet, companies can prepare financial statements before they journalize and post adjusting entries. However, the completed worksheet is not a substitute for formal financial statements. The format of the data in the financial statement columns of the worksheet is not the same as the format of the financial statements. A worksheet is essentially a working tool of the accountant; companies do not distribute it to management and other parties.
Preparing Adjusting Entries from a Worksheet
A worksheet is not a journal, and it cannot be used as a basis for posting to ledger accounts. To adjust the accounts, the company must journalize the adjustments and post them to the ledger. The adjusting entries are prepared from the adjustments columns of the worksheet. The reference letters in the adjustments columns and the explanations of the adjustments at the bottom of the worksheet help identify the adjusting entries. The journalizing and posting of adjusting entries follows the preparation of financial statements when a worksheet is used. The adjusting entries on October 31 for Pioneer Advertising Agency are the same as those shown in Illustration 3-23 (page 117).
Helpful Hint Note that writing the explanation to the adjustment at the bottom of the worksheet is not required.
DO IT!
Worksheet
Action Plan
Balance sheet: Extend assets to debit column. Extend liabilities to credit column. Extend contra assets to credit column. Extend drawings account to debit column.
Income statement: Extend expenses to debit column. Extend revenues to credit column.
Susan Elbe is preparing a worksheet. Explain to Susan how she should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.
| Cash | Owner's Drawings |
| Accumulated Depreciation—Equipment | Service Revenue |
| Accounts Payable | Salaries and Wages Expense |
Solution
Income statement debit column—Salaries and Wages Expense
Income statement credit column—Service Revenue
Balance sheet debit column—Cash; Owner's Drawings
Balance sheet credit column—Accumulated Depreciation—Equipment; Accounts Payable
Related exercise material: BE4-1, BE4-2, BE4-3, E4-1, E4-2, E4-5, E4-6, and DO IT! 4-1.
Closing the Books
At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts.
Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner's drawings account. The company closes all temporary accounts at the end of the period.
In contrast, permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner's capital account. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period. Illustration 4-5 identifies the accounts in each category.
Alternative Terminology Temporary accounts are sometimes called nominal accounts, and permanent accounts are sometimes called real accounts.
Illustration 4-5
Temporary versus permanent accounts
Preparing Closing Entries
At the end of the accounting period, the company transfers temporary account balances to the permanent owner's equity account, Owner's Capital, by means of closing entries.1
Closing entries formally recognize in the ledger the transfer of net income (or net loss) and owner's drawings to owner's capital. The owner's equity statement shows the results of these entries. Closing entries also produce a zero balance in each temporary account. The temporary accounts are then ready to accumulate data in the next accounting period separate from the data of prior periods. Permanent accounts are not closed.
Journalizing and posting closing entries is a required step in the accounting cycle. (See Illustration 4-12 on page 175.) The company performs this step after it has prepared financial statements. In contrast to the steps in the cycle that you have already studied, companies generally journalize and post closing entries only at the end of the annual accounting period. Thus, all temporary accounts will contain data for the entire year.
In preparing closing entries, companies could close each income statement account directly to owner's capital. However, to do so would result in excessive detail in the permanent Owner's Capital account. Instead, companies close the revenue and expense accounts to another temporary account, Income Summary, and they transfer the resulting net income or net loss from this account to owner's capital.
Companies record closing entries in the general journal. A center caption, Closing Entries, inserted in the journal between the last adjusting entry and the first closing entry, identifies these entries. Then the company posts the closing entries to the ledger accounts.
Companies generally prepare closing entries directly from the adjusted balances in the ledger. They could prepare separate closing entries for each nominal account, but the following four entries accomplish the desired result more efficiently:
1. Debit each revenue account for its balance, and credit Income Summary for total revenues.
2. Debit Income Summary for total expenses, and credit each expense account for its balance.
3. Debit Income Summary and credit Owner's Capital for the amount of net income.
4. Debit Owner's Capital for the balance in the Owner's Drawings account, and credit Owner's Drawings for the same amount.
Illustration 4-6 presents a diagram of the closing process. In it, the boxed numbers refer to the four entries required in the closing process.
Helpful Hint Owner's Drawings is closed directly to Owner's Capital and not to Income Summary. Owner's Drawings is not an expense.
Illustration 4-6
Diagram of closing process—proprietorship
If there were a net loss (because expenses exceeded revenues), entry 3 in Illustration 4-6 would be reversed: there would be a credit to Income Summary and a debit to Owner's Capital.
CLOSING ENTRIES ILLUSTRATED
In practice, companies generally prepare closing entries only at the end of the annual accounting period. However, to illustrate the journalizing and posting of closing entries, we will assume that Pioneer Advertising Agency closes its books monthly. Illustration 4-7 (page 170) shows the closing entries at October 31. (The numbers in parentheses before each entry correspond to the four entries diagrammed in Illustration 4-6.)
Illustration 4-7
Closing entries journalized
Note that the amounts for Income Summary in entries (1) and (2) are the totals of the income statement credit and debit columns, respectively, in the worksheet.
A couple of cautions in preparing closing entries: (1) Avoid unintentionally doubling the revenue and expense balances rather than zeroing them. (2) Do not close Owner's Drawings through the Income Summary account. Owner's Drawings is not an expense, and it is not a factor in determining net income.
Posting Closing Entries
Illustration 4-8 shows the posting of the closing entries and the underlining (ruling) of the accounts. Note that all temporary accounts have zero balances after posting the closing entries. In addition, notice that the balance in owner's capital (Owner's Capital) represents the total equity of the owner at the end of the accounting period. This balance is shown on the balance sheet and is the ending capital reported on the owner's equity statement, as shown in Illustration 4-4 on page 166. Pioneer uses the Income Summary account only in closing. It does not journalize and post entries to this account during the year.
As part of the closing process, Pioneer totals, balances, and double-underlines its temporary accounts—revenues, expenses, and Owner's Drawings, as shown in T-account form in Illustration 4-8. It does not close its permanent accounts—assets, liabilities, and Owner's Capital. Instead, Pioneer draws a single underline beneath the current-period entries for the permanent accounts. The account balance is then entered below the single underline and is carried forward to the next period. (For example, see Owner's Capital.)
Helpful Hint The balance in Income Summary before it is closed must equal the net income or net loss for the period.
Illustration 4-8
Posting of closing entries
ACCOUNTING ACROSS THE ORGANIZATION 
Cisco Performs the Virtual Close
Technology has dramatically shortened the closing process. Recent surveys have reported that the average company now takes only six to seven days to close, rather than 20 days. But a few companies do much better. Cisco Systems can perform a “virtual close”—closing within 24 hours on any day in the quarter. The same is true at Lockheed Martin Corp., which improved its closing time by 85% in just the last few years. Not very long ago, it took 14 to 16 days. Managers at these companies emphasize that this increased speed has not reduced the accuracy and completeness of the data.
This is not just showing off. Knowing exactly where you are financially all of the time allows the company to respond faster than competitors. It also means that the hundreds of people who used to spend 10 to 20 days a quarter tracking transactions can now be more usefully employed on things such as mining data for business intelligence to find new business opportunities.
Source: “Reporting Practices: Few Do It All,” Financial Executive (November 2003), p. 11.
Who else benefits from a shorter closing process? (See page 211.)
Closing Entries
Action Plan
Close Income Summary to Owner's Capital.
Close Owner's Drawings to Owner's Capital.
The worksheet for Hancock Company shows the following in the financial statement columns:
Owner's drawings $15,000
Owner's capital $42,000
Net income $18,000
Prepare the closing entries at December 31 that affect owner's capital.
Solution
Related exercise material: BE4-4, BE4-5, BE4-6, E4-4, E4-7, E4-8, E4-11, and DO IT! 4-2.
Preparing a Post-Closing Trial Balance
After Pioneer has journalized and posted all closing entries, it prepares another trial balance, called a post-closing trial balance, from the ledger. The post-closing trial balance lists permanent accounts and their balances after the journalizing and posting of closing entries. The purpose of the post-closing trial balance is to prove the equality of the permanent account balances carried forward into the next accounting period. Since all temporary accounts will have zero balances, the post-closing trial balance will contain only permanent—balance sheet—accounts.
Illustration 4-9 shows the post-closing trial balance for Pioneer Advertising Agency.
Illustration 4-9
Post-closing trial balance
Pioneer prepares the post-closing trial balance from the permanent accounts in the ledger. Illustration 4-10 shows the permanent accounts in Pioneer's general ledger.
Illustration 4-10
General ledger, permanent accounts
A post-closing trial balance provides evidence that the company has properly journalized and posted the closing entries. It also shows that the accounting equation is in balance at the end of the accounting period. However, like the trial balance, it does not prove that Pioneer has recorded all transactions or that the ledger is correct. For example, the post-closing trial balance still will balance even if a transaction is not journalized and posted or if a transaction is journalized and posted twice.
The remaining accounts in the general ledger are temporary accounts, shown in Illustration 4-11. After Pioneer correctly posts the closing entries, each temporary account has a zero balance. These accounts are double-underlined to finalize the closing process.
Illustration 4-11
General ledger, temporary accounts
Summary of the Accounting Cycle
Illustration 4-12 summarizes the steps in the accounting cycle. You can see that the cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance.
Illustration 4-12
Steps in the accounting cycle
Steps 1–3 may occur daily during the accounting period. Companies perform Steps 4–7 on a periodic basis, such as monthly, quarterly, or annually. Steps 8 and 9—closing entries and a post-closing trial balance—usually take place only at the end of a company's annual accounting period.
There are also two optional steps in the accounting cycle. As you have seen, companies may use a worksheet in preparing adjusting entries and financial statements. In addition, they may use reversing entries, as explained below.
Reversing Entries—An Optional Step
Some accountants prefer to reverse certain adjusting entries by making a reversing entry at the beginning of the next accounting period. A reversing entry is the exact opposite of the adjusting entry made in the previous period. Use of reversing entries is an optional bookkeeping procedure; it is not a required step in the accounting cycle. Accordingly, we have chosen to cover this topic in an appendix at the end of the chapter.
Correcting Entries—An Avoidable Step
Unfortunately, errors may occur in the recording process. Companies should correct errors, as soon as they discover them, by journalizing and posting correcting entries. If the accounting records are free of errors, no correcting entries are needed.
You should recognize several differences between correcting entries and adjusting entries. First, adjusting entries are an integral part of the accounting cycle. Correcting entries, on the other hand, are unnecessary if the records are error-free. Second, companies journalize and post adjustments only at the end of an accounting period. In contrast, companies make correcting entries whenever they discover an error. Finally, adjusting entries always affect at least one balance sheet account and one income statement account. In contrast, correcting entries may involve any combination of accounts in need of correction. Correcting entries must be posted before closing entries.
To determine the correcting entry, it is useful to compare the incorrect entry with the correct entry. Doing so helps identify the accounts and amounts that should—and should not—be corrected. After comparison, the accountant makes an entry to correct the accounts. The following two cases for Mercato Co. illustrate this approach.
Ethics Note
When companies find errors in previously released income statements, they restate those numbers. Perhaps because of the increased scrutiny caused by Sarbanes-Oxley, in a recent year companies filed a record 1,195 restatements.
CASE 1
On May 10, Mercato Co. journalized and posted a $50 cash collection on account from a customer as a debit to Cash $50 and a credit to Service Revenue $50. The company discovered the error on May 20, when the customer paid the remaining balance in full.
Illustration 4-13
Comparison of entries
Comparison of the incorrect entry with the correct entry reveals that the debit to Cash $50 is correct. However, the $50 credit to Service Revenue should have been credited to Accounts Receivable. As a result, both Service Revenue and Accounts Receivable are overstated in the ledger. Mercato makes the following correcting entry.
Illustration 4-14
Correcting entry
CASE 2
On May 18, Mercato purchased on account equipment costing $450. The transaction was journalized and posted as a debit to Equipment $45 and a credit to Accounts Payable $45. The error was discovered on June 3, when Mercato received the monthly statement for May from the creditor.
Illustration 4-15
Comparison of entries
Comparison of the two entries shows that two accounts are incorrect. Equipment is understated $405, and Accounts Payable is understated $405. Mercato makes the following correcting entry.
Illustration 4-16
Correcting entry
Instead of preparing a correcting entry, it is possible to reverse the incorrect entry and then prepare the correct entry. This approach will result in more entries and postings than a correcting entry, but it will accomplish the desired result.
ACCOUNTING ACROSS THE ORGANIZATION
Yale Express Loses Some Transportation Bills
Yale Express, a short-haul trucking firm, turned over much of its cargo to local truckers to complete deliveries. Yale collected the entire delivery charge. When billed by the local trucker, Yale sent payment for the final phase to the local trucker. Yale used a cutoff period of 20 days into the next accounting period in making its adjusting entries for accrued liabilities. That is, it waited 20 days to receive the local truckers’ bills to determine the amount of the unpaid but incurred delivery charges as of the balance sheet date.
On the other hand, Republic Carloading, a nationwide, long-distance freight forwarder, frequently did not receive transportation bills from truckers to whom it passed on cargo until months after the year-end. In making its year-end adjusting entries, Republic waited for months in order to include all of these outstanding transportation bills.
When Yale Express merged with Republic Carloading, Yale's vice president employed the 20-day cutoff procedure for both firms. As a result, millions of dollars of Republic's accrued transportation bills went unrecorded. When the company detected the error and made correcting entries, these and other errors changed a reported profit of $1.14 million into a loss of $1.88 million!
What might Yale Express's vice president have done to produce more accurate financial statements without waiting months for Republic's outstanding transportation bills? (See page 211.)
The Classified Balance Sheet
The balance sheet presents a snapshot of a company's financial position at a point in time. To improve users’ understanding of a company's financial position, companies often use a classified balance sheet. A classified balance sheet groups together similar assets and similar liabilities, using a number of standard classifications and sections. This is useful because items within a group have similar economic characteristics. A classified balance sheet generally contains the standard classifications listed in Illustration 4-17.
Illustration 4-17
Standard balance sheet classifications
These groupings help financial statement readers determine such things as (1) whether the company has enough assets to pay its debts as they come due, and (2) the claims of short- and long-term creditors on the company's total assets. Many of these groupings can be seen in the balance sheet of Franklin Company shown in Illustration 4-18 below. In the sections that follow, we explain each of these groupings.
Illustration 4-18
Classified balance sheet
Helpful Hint Recall that the basic accounting equation is Assets = Liabilities + Owner's Equity.
Current Assets
Current assets are assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer. In Illustration 4-18, Franklin Company had current assets of $22,100. For most businesses the cutoff for classification as current assets is one year from the balance sheet date. For example, accounts receivable are current assets because the company will collect them and convert them to cash within one year. Supplies is a current asset because the company expects to use them up in operations within one year.
Some companies use a period longer than one year to classify assets and liabilities as current because they have an operating cycle longer than one year. The operating cycle of a company is the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. For most businesses this cycle takes less than a year, so they use a one-year cutoff. But, for some businesses, such as vineyards or airplane manufacturers, this period may be longer than a year. Except where noted, we will assume that companies use one year to determine whether an asset or liability is current or long-term.
Common types of current assets are (1) cash, (2) investments (such as short-term U.S. government securities), (3) receivables (notes receivable, accounts receivable, and interest receivable), (4) inventories, and (5) prepaid expenses (supplies and insurance). On the balance sheet, companies usually list these items in the order in which they expect to convert them into cash.
Illustration 4-19 presents the current assets of Southwest Airlines Co.
Illustration 4-19
Current assets section
As explained later in the chapter, a company's current assets are important in assessing its short-term debt-paying ability.
Long-Term Investments
Long-term investments are generally (1) investments in stocks and bonds of other companies that are normally held for many years, (2) long-term assets such as land or buildings that a company is not currently using in its operating activities, and (3) long-term notes receivable. In Illustration 4-18, Franklin Company reported total long-term investments of $7,200 on its balance sheet.
Yahoo! Inc. reported long-term investments in its balance sheet as shown in Illustration 4-20.
Alternative Terminology Long-term investments are often referred to simply as investments.
Illustration 4-20
Long-term investments section
Property, Plant, and Equipment
Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. This category includes land, buildings, machinery and equipment, delivery equipment, and furniture. In Illustration 4-18, Franklin Company reported property, plant, and equipment of $29,000.
Depreciation is the practice of allocating the cost of assets to a number of years. Companies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation. The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset's life. In Illustration 4-18, Franklin Company reported accumulated depreciation of $5,000.
Illustration 4-21 presents the property, plant, and equipment of Cooper Tire & Rubber Company.
Alternative Terminology Property, plant, and equipment is sometimes called fixed assets or plant assets.
International Note
Recently, China adopted International Financial Reporting Standards (IFRS). This was done in an effort to reduce fraud and increase investor confidence in financial reports. Under these standards, many items, such as property, plant, and equipment, may be reported at current fair values rather than historical cost.
Illustration 4-21
Property, plant, and equipment section
Helpful Hint Sometimes intangible assets are reported under a broader heading called “Other assets.”
Intangible Assets
Many companies have long-lived assets that do not have physical substance yet often are very valuable. We call these assets intangible assets. One significant intangible asset is goodwill. Others include patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specified period of time. In Illustration 4-18, Franklin Company reported intangible assets of $3,100.
Illustration 4-22 shows the intangible assets of media giant Time Warner, Inc.
Illustration 4-22
Intangible assets section
PEOPLE, PLANET, AND PROFIT INSIGHT 
Regaining Goodwill
After falling to unforeseen lows amidst scandals, recalls, and economic crises, the American public's positive perception of the reputation of corporate America is on the rise. Overall corporate reputation is experiencing rehabilitation as the American public gives high marks overall to corporate America, specific industries, and the largest number of individual companies in a dozen years. This is according to the findings of the 2011 Harris Interactive RQ Study, which measures the reputations of the 60 most visible companies in the United States.
The survey focuses on six reputational dimensions that influence reputation and consumer behavior. Four of these dimensions, along with the five corporations that ranked highest within each, are as follows.
• Social Responsibility: (1) Whole Foods Market, (2) Johnson & Johnson, (3) Google, (4) The Walt Disney Company, (5) Procter & Gamble Co.
• Emotional Appeal: (1) Johnson & Johnson, (2) Amazon.com, (3) UPS, (4) General Mills, (5) Kraft Foods
• Financial Performance: (1) Google, (2) Berkshire Hathaway, (3) Apple, (4) Intel, (5) The Walt Disney Company
• Products and Services: (1) Intel Corporation, (2) 3M Company, (3) Johnson & Johnson, (4) Google, (5) Procter & Gamble Co.
Source: www.harrisinteractive.com.
Name two industries today which are probably rated low on the reputational characteristics of “being trusted” and “having high ethical standards.” (See page 212.)
DO IT!
Assets Section of Classified Balance Sheet
Action Plan
Present current assets first. Current assets are cash and other resources that the company expects to convert to cash or use up within one year.
Present current assets in the order in which the company expects to convert them into cash.
Subtract accumulated depreciation—equipment from equipment to determine the book value of equipment.
Baxter Hoffman recently received the following information related to Hoffman Company's December 31, 2014, balance sheet.
| Prepaid insurance | $ 2,300 |
| Cash | 800 |
| Equipment | 10,700 |
| Inventory | $3,400 |
| Accumulated depreciation—equipment | 2,700 |
| Accounts receivable | 1,100 |
Prepare the assets section of Hoffman Company's classified balance sheet.
Solution
Related exercise material: BE4-10 and DO IT! 4-3.
Current Liabilities
In the liabilities and owner's equity section of the balance sheet, the first grouping is current liabilities. Current liabilities are obligations that the company is to pay within the coming year or its operating cycle, whichever is longer. Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable. Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations. In Illustration 4-18, Franklin Company reported five different types of current liabilities, for a total of $16,050.
Illustration 4-23 shows the current liabilities section adapted from the balance sheet of Marcus Corporation.
Ethics Note
A company that has more current assets than current liabilities can increase the ratio of current assets to current liabilities by using cash to pay off some current liabilities. This gives the appearance of being more liquid. Do you think this move is ethical?
Illustration 4-23
Current liabilities section
Users of financial statements look closely at the relationship between current assets and current liabilities. This relationship is important in evaluating a company's liquidity—its ability to pay obligations expected to be due within the next year. When current assets exceed current liabilities, the likelihood for paying the liabilities is favorable. When the reverse is true, short-term creditors may not be paid, and the company may ultimately be forced into bankruptcy.
ACCOUNTING ACROSS THE ORGANIZATION
Can a Company Be Too Liquid?
There actually is a point where a company can be too liquid—that is, it can have too much working capital (current assets less current liabilities). While it is important to be liquid enough to be able to pay short-term bills as they come due, a company does not want to tie up its cash in extra inventory or receivables that are not earning the company money.
By one estimate from the REL Consultancy Group, the thousand largest U.S. companies have on their books cumulative excess working capital of $764 billion. Based on this figure, companies could have reduced debt by 36% or increased net income by 9%. Given that managers throughout a company are interested in improving profitability, it is clear that they should have an eye toward managing working capital. They need to aim for a “Goldilocks solution”—not too much, not too little, but just right.
Source: K. Richardson, “Companies Fall Behind in Cash Management,” Wall Street Journal (June 19, 2007).
What can various company managers do to ensure that working capital is managed efficiently to maximize net income? (See page 212.)
Long-Term Liabilities
Long-term liabilities are obligations that a company expects to pay after one year. Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities. Many companies report long-term debt maturing after one year as a single amount in the balance sheet and show the details of the debt in notes that accompany the financial statements. Others list the various types of long-term liabilities. In Illustration 4-18, Franklin Company reported long-term liabilities of $11,300.
Illustration 4-24 shows the long-term liabilities that The Procter & Gamble Company reported in its balance sheet.
Illustration 4-24
Long-term liabilities section
Owner's Equity
The content of the owner's equity section varies with the form of business organization. In a proprietorship, there is one capital account. In a partnership, there is a capital account for each partner. Corporations divide owners’ equity into two accounts—Common Stock (sometimes referred to as Capital Stock) and Retained Earnings. Corporations record stockholders’ investments in the company by debiting an asset account and crediting the Common Stock account. They record in the Retained Earnings account income retained for use in the business. Corporations combine the Common Stock and Retained Earnings accounts and report them on the balance sheet as stockholders’ equity. (We'll learn more about these corporation accounts in later chapters.) Nordstrom, Inc. recently reported its stockholders’ equity section as follows.
Alternative Terminology Common stock is sometimes called capital stock.
Illustration 4-25
Stockholders’ equity section
DO IT!
Balance Sheet Classifications
The following accounts were taken from the financial statements of Callahan Company.
| ________ Salaries and wages payable | ________ Stock investments (long-term) |
| ________ Service revenue | ________ Equipment |
| ________ Interest payable | ________ Accumulated depreciation—equipment |
| ________ Goodwill | |
| ________ Debt investments (short-term) | ________ Depreciation expense |
| ________ Mortgage payable (due in 3 years) | ________ Owner's capital |
| ________ Unearned service revenue |
Match each of the following to its proper balance sheet classification, shown below. If the item would not appear on a balance sheet, use “NA.”
| Current assets (CA) | Current liabilities (CL) |
| Long-term investments (LTI) | Long-term liabilities (LTL) |
| Property, plant, and equipment (PPE) | Owner's equity (OE) |
| Intangible assets (IA) |
Solution
Action Plan
Analyze whether each financial statement item is an asset, liability, or owner's equity.
Determine if asset and liability items are short-term or long-term.
| __CL__ | Salaries and wages payable |
| __NA__ | Service revenue |
| __CL__ | Interest payable |
| __IA__ | Goodwill |
| __CA__ | Debt investments (short-term) |
| __LTL__ | Mortgage payable (due in 3 years) |
| __LTI__ | Stock investments (long-term) |
| __PPE__ | Equipment |
| __PPE__ | Accumulated depreciation—equipment |
| __NA__ | Depreciation expense |
| __OE__ | Owner's capital |
| __CL__ | Unearned service revenue |
Related exercise material: BE4-11, E4-14, E4-15, E4-16, E4-17, and DO IT! 4-4.
At the end of its first month of operations, Watson Answering Service has the following unadjusted trial balance.
Action Plan
In completing the worksheet, be sure to (a) key the adjustments; (b) start at the top of the adjusted trial balance columns and extend adjusted balances to the correct statement columns; and (c) enter net income (or net loss) in the proper columns.
In preparing a classified balance sheet, know the contents of each of the sections.
In journalizing closing entries, remember that there are only four entries and that Owner's Drawings is closed to Owner's Capital.
1. Insurance expires at the rate of $200 per month.
2. $1,000 of supplies are on hand at August 31.
3. Monthly depreciation on the equipment is $900.
4. Interest of $500 on the notes payable has accrued during August.
Instructions
(a) Prepare a worksheet.
(b) Prepare a classified balance sheet assuming $35,000 of the notes payable are long-term.
(c) Journalize the closing entries.
Solution to Comprehensive DO IT!
SUMMARY OF LEARNING OBJECTIVES
1 Prepare a worksheet. The steps in preparing a worksheet are as follows. (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to appropriate financial statement columns. (e) Total the statement columns, compute net income (or net loss), and complete the worksheet.
2 Explain the process of closing the books. Closing the books occurs at the end of an accounting period. The process is to journalize and post closing entries and then underline and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Owner's Capital, and Owner's Drawings to Owner's Capital. Only temporary accounts are closed.
3 Describe the content and purpose of a post-closing trial balance. A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances.
4 State the required steps in the accounting cycle. The required steps in the accounting cycle are (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5) journalize and post adjusting entries, (6) prepare an adjusted trial balance, (7) prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance.
5 Explain the approaches to preparing correcting entries. One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry.
6 Identify the sections of a classified balance sheet. A classified balance sheet categorizes assets as current assets; long-term investments; property, plant, and equipment; and intangibles. Liabilities are classified as either current or long-term. There is also an owner's (owners’) equity section, which varies with the form of business organization.
GLOSSARY
Classified balance sheet A balance sheet that contains standard classifications or sections. (p. 177).
Closing entries Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent owner's equity account, Owner's Capital. (p. 168).
Correcting entries Entries to correct errors made in recording transactions. (p. 176).
Current assets Assets that a company expects to convert to cash or use up within one year. (p. 178).
Current liabilities Obligations that a company expects to pay within the coming year or its operating cycle, whichever is longer. (p. 182).
Income Summary A temporary account used in closing revenue and expense accounts. (p. 168).
Intangible assets Noncurrent assets that do not have physical substance. (p. 180).
Liquidity The ability of a company to pay obligations expected to be due within the next year. (p. 182).
Long-term investments Generally, (1) investments in stocks and bonds of other companies that companies normally hold for many years, and (2) long-term assets, such as land and buildings, not currently being used in operations. (p. 179).
Long-term liabilities Obligations that a company expects to pay after one year. (p. 183).
Operating cycle The average time that it takes to purchase inventory, sell it on account, and then collect cash from customers. (p. 179).
Permanent (real) accounts Accounts that relate to one or more future accounting periods. Consist of all balance sheet accounts. Balances are carried forward to next accounting period. (p. 168).
Post-closing trial balance A list of permanent accounts and their balances after a company has journalized and posted closing entries. (p. 172).
Property, plant, and equipment Assets with relatively long useful lives and currently being used in operations. (p. 180).
Reversing entry An entry, made at the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period. (p. 175).
Stockholders’ equity The ownership claim of shareholders on total assets. It is to a corporation what owner's equity is to a proprietorship. (p. 183).
Temporary (nominal) accounts Accounts that relate only to a given accounting period. Consist of all income statement accounts and owner's drawings account. All temporary accounts are closed at end of the accounting period. (p. 167).
Worksheet A multiple-column form that may be used in making adjusting entries and in preparing financial statements. (p. 162).
APPENDIX 4A Reversing Entries
After preparing the financial statements and closing the books, it is often helpful to reverse some of the adjusting entries before recording the regular transactions of the next period. Such entries are reversing entries. Companies make a reversing entry at the beginning of the next accounting period. Each reversing entry is the exact opposite of the adjusting entry made in the previous period. The recording of reversing entries is an optional step in the accounting cycle.
The purpose of reversing entries is to simplify the recording of a subsequent transaction related to an adjusting entry. For example, in Chapter 3 (page 115), the payment of salaries after an adjusting entry resulted in two debits: one to Salaries and Wages Payable and the other to Salaries and Wages Expense. With reversing entries, the company can debit the entire subsequent payment to Salaries and Wages Expense. The use of reversing entries does not change the amounts reported in the financial statements. What it does is simplify the recording of subsequent transactions.
Reversing Entries Example
Companies most often use reversing entries to reverse two types of adjusting entries: accrued revenues and accrued expenses. To illustrate the optional use of reversing entries for accrued expenses, we will use the salaries expense transactions for Pioneer Advertising Agency as illustrated in Chapters 2, 3, and 4. The transaction and adjustment data are as follows.
1. October 26 (initial salary entry): Pioneer pays $4,000 of salaries and wages earned between October 15 and October 26.
2. October 31 (adjusting entry): Salaries and wages earned between October 29 and October 31 are $1,200. The company will pay these in the November 9 payroll.
3. November 9 (subsequent salary entry): Salaries and wages paid are $4,000. Of this amount, $1,200 applied to accrued salaries and wages payable and $2,800 was earned between November 1 and November 9.
Illustration 4A-1 shows the entries with and without reversing entries.
The first three entries are the same whether or not Pioneer uses reversing entries. The last two entries are different. The November 1 reversing entry eliminates the $1,200 balance in Salaries and Wages Payable created by the October 31 adjusting entry. The reversing entry also creates a $1,200 credit balance in the Salaries and Wages Expense account. As you know, it is unusual for an expense account to have a credit balance. The balance is correct in this instance, though, because it anticipates that the entire amount of the first salaries and wages payment in the new accounting period will be debited to Salaries and Wages Expense. This debit will eliminate the credit balance. The resulting debit balance in the expense account will equal the salaries and wages expense incurred in the new accounting period ($2,800 in this example).
If Pioneer makes reversing entries, it can debit all cash payments of expenses to the expense account. This means that on November 9 (and every payday) Pioneer can debit Salaries and Wages Expense for the amount paid, without regard to any accrued salaries and wages payable. Being able to make the same entry each time simplifies the recording process. The company can record subsequent transactions as if the related adjusting entry had never been made.
Illustration 4A-1
Comparative entries—not reversing vs. reversing
Illustration 4A-2 shows the posting of the entries with reversing entries.
Illustration 4A-2
Postings with reversing entries
A company can also use reversing entries for accrued revenue adjusting entries. For Pioneer Advertising Agency, the adjusting entry was Accounts Receivable (Dr.) $200 and Service Revenue (Cr.) $200. Thus, the reversing entry on November 1 is:
When Pioneer collects the accrued service revenue, it debits Cash and credits Service Revenue.
SUMMARY OF LEARNING OBJECTIVE FOR APPENDIX 4A
7 Prepare reversing entries. Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.
Self-Test, Brief Exercises, Exercises, Problem Set A, and many more components are available for practice in WileyPLUS.
*Note: All asterisked Questions, Exercises, and Problems relate to material in the appendix to the chapter.
SELF-TEST QUESTIONS
Answers are on page 212.
(LO 1)
1. Which of the following statements is incorrect concerning the worksheet?
(a) The worksheet is essentially a working tool of the accountant.
(b) The worksheet is distributed to management and other interested parties.
(c) The worksheet cannot be used as a basis for posting to ledger accounts.
(d) Financial statements can be prepared directly from the worksheet before journalizing and posting the adjusting entries.
(LO 1)
2. In a worksheet, net income is entered in the following columns:
(a) income statement (Dr) and balance sheet (Dr).
(b) income statement (Cr) and balance sheet (Dr).
(c) income statement (Dr) and balance sheet (Cr).
(d) income statement (Cr) and balance sheet (Cr).
(LO 1)
3. In the unadjusted trial balance of its worksheet for the year ended December 31, 2014, Knox Company reported Equipment of $120,000. The year-end adjusting entries require an adjustment of $15,000 for depreciation expense for the equipment. After adjustment, the following adjusted amount should be reported:
(a) a debit of $105,000 for Equipment in the balance sheet column.
(b) a credit of $15,000 for Depreciation Expense— Equipment in the income statement column.
(c) a debit of $120,000 for Equipment in the balance sheet column.
(d) a debit of $15,000 for Accumulated Depreciation— Equipment in the balance sheet column.
(LO 2)
4. An account that will have a zero balance after closing entries have been journalized and posted is:
(a) Service Revenue.
(b) Supplies.
(c) Prepaid Insurance.
(d) Accumulated Depreciation—Equipment.
(LO 2)
5. When a net loss has occurred, Income Summary is:
(a) debited and Owner's Capital is credited.
(b) credited and Owner's Capital is debited.
(c) debited and Owner's Drawings is credited.
(d) credited and Owner's Drawings is debited.
(LO 2)
6. The closing process involves separate entries to close (1) expenses, (2) drawings, (3) revenues, and (4) in -come summary. The correct sequencing of the entries is:
(a) (4), (3), (2), (1)
(b) (1), (2), (3), (4)
(c) (3), (1), (4), (2)
(d) (3), (2), (1), (4)
(LO 3)
7. Which types of accounts will appear in the post-closing trial balance?
(a) Permanent (real) accounts.
(b) Temporary (nominal) accounts.
(c) Accounts shown in the income statement columns of a worksheet.
(d) None of the above.
(LO 4)
8. All of the following are required steps in the accounting cycle except:
(a) journalizing and posting closing entries.
(b) preparing financial statements.
(c) journalizing the transactions.
(d) preparing a worksheet.
(LO 4)
9. The proper order of the following steps in the accounting cycle is:
(a) prepare unadjusted trial balance, journalize transactions, post to ledger accounts, journalize and post adjusting entries.
(b) journalize transactions, prepare unadjusted trial balance, post to ledger accounts, journalize and post adjusting entries.
(c) journalize transactions, post to ledger accounts, prepare unadjusted trial balance, journalize and post adjusting entries.
(d) prepare unadjusted trial balance, journalize and post adjusting entries, journalize transactions, post to ledger accounts.
(LO 5)
10. When Ramirez Company purchased supplies worth $500, it incorrectly recorded a credit to Supplies for $5,000 and a debit to Cash for $5,000. Before correcting this error:
(a) Cash is overstated and Supplies is overstated.
(b) Cash is understated and Supplies is understated.
(c) Cash is understated and Supplies is overstated.
(d) Cash is overstated and Supplies is understated.
(LO 5)
11. Cash of $100 received at the time the service was performed was journalized and posted as a debit to Cash $100 and a credit to Accounts Receivable $100. Assuming the incorrect entry is not reversed, the correcting entry is:
(a) debit Service Revenue $100 and credit Accounts Receivable $100.
(b) debit Accounts Receivable $100 and credit Service Revenue $100.
(c) debit Cash $100 and credit Service Revenue $100.
(d) debit Accounts Receivable $100 and credit Cash $100.
(LO 6)
12. The correct order of presentation in a classified balance sheet for the following current assets is:
(a) accounts receivable, cash, prepaid insurance, inventory.
(b) cash, inventory, accounts receivable, prepaid insurance.
(c) cash, accounts receivable, inventory, prepaid insurance.
(d) inventory, cash, accounts receivable, prepaid insurance.
(LO 6)
13. A company has purchased a tract of land. It expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. The land should be reported as:
(a) property, plant, and equipment.
(b) land expense.
(c) a long-term investment.
(d) an intangible asset.
(LO 6)
14. In a classified balance sheet, assets are usually classified using the following categories:
(a) current assets; long-term assets; property, plant, and equipment; and intangible assets.
(b) current assets; long-term investments; property, plant, and equipment; and tangible assets.
(c) current assets; long-term investments; tangible assets; and intangible assets.
(d) current assets; long-term investments; property, plant, and equipment; and intangible assets.
(LO 6)
15. Current assets are listed:
(a) by expected conversion to cash.
(b) by importance.
(c) by longevity.
(d) alphabetically.
(LO 7)
*16. On December 31, Kevin Hartman Company correctly made an adjusting entry to recognize $2,000 of accrued salaries payable. On January 8 of the next year, total salaries of $3,400 were paid. Assuming the correct reversing entry was made on January 1, the entry on January 8 will result in a credit to Cash $3,400 and the following debit(s):
(a) Salaries and Wages Payable $1,400 and Salaries and Wages Expense $2,000.
(b) Salaries and Wages Payable $2,000 and Salaries and Wages Expense $1,400.
(c) Salaries and Wages Expense $3,400.
(d) Salaries and Wages Payable $3,400.
Go to the book's companion website, www.wiley.com/college/weygandt, for additional Self-Test Questions.
QUESTIONS
1. “A worksheet is a permanent accounting record and its use is required in the accounting cycle.” Do you agree? Explain.
2. Explain the purpose of the worksheet.
3. What is the relationship, if any, between the amount shown in the adjusted trial balance column for an account and that account's ledger balance?
4. If a company's revenues are $125,000 and its expenses are $113,000, in which financial statement columns of the worksheet will the net income of $12,000 appear? When expenses exceed revenues, in which columns will the difference appear?
5. Why is it necessary to prepare formal financial statements if all of the data are in the statement columns of the worksheet?
6. Identify the account(s) debited and credited in each of the four closing entries, assuming the company has net income for the year.
7. Describe the nature of the Income Summary account and identify the types of summary data that may be posted to this account.
8. What are the content and purpose of a post-closing trial balance?
9. Which of the following accounts would not appear in the post-closing trial balance? Interest Payable; Equipment; Depreciation Expense; Owner's Drawings; Unearned Service Revenue; Accumulated Depreciation—Equipment; and Service Revenue.
10. Distinguish between a reversing entry and an adjusting entry. Are reversing entries required?
11. Indicate, in the sequence in which they are made, the three required steps in the accounting cycle that involve journalizing.
12. Identify, in the sequence in which they are prepared, the three trial balances that are often used to report financial information about a company.
13. How do correcting entries differ from adjusting entries?
14. What standard classifications are used in preparing a classified balance sheet?
15. What is meant by the term “operating cycle?”
16. Define current assets. What basis is used for arranging individual items within the current assets section?
17. Distinguish between long-term investments and property, plant, and equipment.
18. (a) What is the term used to describe the owner's equity section of a corporation? (b) Identify the two owners’ equity accounts in a corporation and indicate the purpose of each.
19. Using Apple's annual report, determine its current liabilities at September 25, 2010, and September 24, 2011. Were current liabilities higher or lower than current assets in these two years?
*20. Cigale Company prepares reversing entries. If the adjusting entry for interest payable is reversed, what type of an account balance, if any, will there be in Interest Payable and Interest Expense after the reversing entry is posted?
*21. At December 31, accrued salaries payable totaled $3,500. On January 10, total salaries of $8,000 are paid. (a) Assume that reversing entries are made at January 1. Give the January 10 entry, and indicate the Salaries and Wages Expense account balance after the entry is posted. (b) Repeat part (a) assuming reversing entries are not made.
BRIEF EXERCISES
List the steps in preparing a worksheet.
(LO 1)
BE4-1 The steps in using a worksheet are presented in random order below. List the steps in the proper order by placing numbers 1–5 in the blank spaces.
(a) _____ Prepare a trial balance on the worksheet.
(b) _____ Enter adjusted balances.
(c) _____ Extend adjusted balances to appropriate statement columns.
(d) _____ Total the statement columns, compute net income (loss), and complete the worksheet.
(e) _____ Enter adjustment data.
Prepare partial worksheet.
(LO 1)
BE4-2 The ledger of Clayton Company includes the following unadjusted balances: Pre-paid Insurance $3,000, Service Revenue $58,000, and Salaries and Wages Expense $25,000. Adjusting entries are required for (a) expired insurance $1,800; (b) services performed $1,100, but unbilled and uncollected; and (c) accrued salaries payable $800. Enter the unadjusted balances and adjustments into a worksheet and complete the worksheet for all accounts. (Note: You will need to add the following accounts: Accounts Receivable, Salaries and Wages Payable, and Insurance Expense.)
Identify worksheet columns for selected accounts.
(LO 1)
BE4-3 The following selected accounts appear in the adjusted trial balance columns of the worksheet for Goulet Company: Accumulated Depreciation; Depreciation Expense; Owner's Capital; Owner's Drawings; Service Revenue; Supplies; and Accounts Payable. Indicate the financial statement column (income statement Dr., balance sheet Cr., etc.) to which each balance should be extended.
Prepare closing entries from ledger balances.
(LO 2)
BE4-4 The ledger of Rios Company contains the following balances: Owner's Capital $30,000; Owner's Drawings $2,000; Service Revenue $50,000; Salaries and Wages Expense $27,000; and Supplies Expense $7,000. Prepare the closing entries at December 31.
Post closing entries; underline and balance T-accounts.
(LO 2)
BE4-5 Using the data in BE4-4, enter the balances in T-accounts, post the closing entries, and underline and balance the accounts.
Journalize and post closing entries using the three-column form of account.
(LO 2)
BE4-6 The income statement for Weeping Willow Golf Club for the month ending July 31 shows Service Revenue $16,400, Salaries and Wages Expense $8,200, Maintenance and Repairs Expense $2,500, and Net Income $5,700. Prepare the entries to close the revenue and expense accounts. Post the entries to the revenue and expense accounts, and complete the closing process for these accounts using the three-column form of account.
Identify post-closing trial balance accounts.
(LO 3)
BE4-7 Using the data in BE4-3, identify the accounts that would be included in a post-closing trial balance.
List the required steps in the accounting cycle in sequence.
(LO 4)
BE4-8 The steps in the accounting cycle are listed in random order below. List the steps in proper sequence, assuming no worksheet is prepared, by placing numbers 1–9 in the blank spaces.
(a) ________ Prepare a trial balance.
(b) ________ Journalize the transactions.
(c) ________ Journalize and post closing entries.
(d) ________ Prepare financial statements.
(e) ________ Journalize and post adjusting entries.
(f) ________ Post to ledger accounts.
(g) ________ Prepare a post-closing trial balance.
(h) ________ Prepare an adjusted trial balance.
(i) ________ Analyze business transactions.
Prepare correcting entries.
(LO 5)
BE4-9 At Creighton Company, the following errors were discovered after the transactions had been journalized and posted. Prepare the correcting entries.
1. A collection on account from a customer for $870 was recorded as a debit to Cash $870 and a credit to Service Revenue $870.
2. The purchase of store supplies on account for $1,570 was recorded as a debit to Supplies $1,750 and a credit to Accounts Payable $1,750.
Prepare the current assets section of a balance sheet.
(LO 6)
BE4-10 The balance sheet debit column of the worksheet for Hamidi Company includes the following accounts: Accounts Receivable $12,500; Prepaid Insurance $3,600; Cash $4,100; Supplies $5,200; and Debt Investments (short-term) $6,700. Prepare the current assets section of the balance sheet, listing the accounts in proper sequence.
Classify accounts on balance sheet.
(LO 6)
BE4-11 The following are the major balance sheet classifications:
| Current assets (CA) | Current liabilities (CL) |
| Long-term investments (LTI) | Long-term liabilities (LTL) |
| Property, plant, and equipment (PPE) | Owner's equity (OE) |
| Intangible assets (IA) |
Match each of the following accounts to its proper balance sheet classification.
| ________ Accounts payable | ________ Income taxes payable |
| ________ Accounts receivable | ________ Debt investments (long-term) |
| ________ Accumulated depreciation—buildings | ________ Land |
| ________ Buildings | ________ Inventory |
| ________ Cash | ________ Patents |
| ________ Copyrights | ________ Supplies |
Prepare reversing entries.
(LO 7)
*BE4-12 At October 31, Burgess Company made an accrued expense adjusting entry of $2,100 for salaries. Prepare the reversing entry on November 1, and indicate the balances in Salaries and Wages Payable and Salaries and Wages Expense after posting the reversing entry.
DO IT! Review
Prepare a worksheet.
(LO 1)
DO IT! 4-1 Bradley Decker is preparing a worksheet. Explain to Bradley how he should extend the following adjusted trial balance accounts to the financial statement columns of the worksheet.
| Service Revenue | Accounts Receivable |
| Notes Payable | Accumulated Depreciation |
| Owner's Capital | Utilities Expense |
Prepare closing entries.
(LO 2)
DO IT! 4-2 The worksheet for Tsai Company shows the following in the financial statement columns.
| Owner's drawings | $22,000 |
| Owner's capital | 70,000 |
| Net income | 41,000 |
Prepare the closing entries at December 31 that affect owner's capital.
Prepare assets section of the balance sheet.
(LO 6)
DO IT! 4-3 Ryan Newton recently received the following information related to Ryan Company's December 31, 2014, balance sheet.
| Inventory | $ 2,900 |
| Cash | 4,300 |
| Equipment | 21,700 |
| Stock investments (long-term) | 6,500 |
| Debt investments (short-term) | $1,200 |
| Accumulated depreciation | 5,700 |
| Accounts receivable | 4,300 |
Prepare the assets section of Ryan Company's classified balance sheet.
Match accounts to balance sheet classifications.
(LO 6)
DO IT! 4-4 The following accounts were taken from the financial statements of Lee Company.
| ________ Interest revenue | ________ Owner's capital |
| ________ Utilities payable | ________ Accumulated depreciation—equipment |
| ________ Accounts payable | ________ Equipment |
| ________ Supplies | ________ Salaries and wages expense |
| ________ Bonds payable | ________ Debt investments (long-term) |
| ________ Goodwill | ________ Unearned rent revenue |
Match each of the accounts to its proper balance sheet classification, as shown below. If the item would not appear on a balance sheet, use “NA.”
| Current assets (CA) | Current liabilities (CL) |
| Long-term investments (LTI) | Long-term liabilities (LTL) |
| Property, plant, and equipment (PPE) | Owner's equity (OE) |
| Intangible assets (IA) |
EXERCISES
Complete the worksheet.
(LO 1)
E4-1 The trial balance columns of the worksheet for Nanduri Company at June 30, 2014, are as follows.
Other data:
1. A physical count reveals $500 of supplies on hand.
2. $100 of the unearned revenue is still unearned at month-end.
3. Accrued salaries are $210.
Instructions
Enter the trial balance on a worksheet and complete the worksheet.
Complete the worksheet.
(LO 1)
E4-2 The adjusted trial balance columns of the worksheet for DeSousa Company are as follows.
Instructions
Complete the worksheet.
Prepare financial statements from worksheet.
(LO 1, 6)
E4-3 Worksheet data for DeSousa Company are presented in E4-2. The owner did not make any additional investments in the business in April.
Instructions
Prepare an income statement, an owner's equity statement, and a classified balance sheet.
Journalize and post closing entries and prepare a post-closing trial balance.
(LO 2, 3)
E4-4 Worksheet data for DeSousa Company are presented in E4-2.
Instructions
(a) Journalize the closing entries at April 30.
(b) Post the closing entries to Income Summary and Owner's Capital. Use T-accounts.
(c) Prepare a post-closing trial balance at April 30.
Prepare adjusting entries from a worksheet, and extend balances to worksheet columns.
(LO 1)
E4-5 The adjustments columns of the worksheet for Misra Company are shown below.
Instructions
(a) Prepare the adjusting entries.
(b) Assuming the adjusted trial balance amount for each account is normal, indicate the financial statement column to which each balance should be extended.
Derive adjusting entries from worksheet data.
(LO 1)
E4-6 Selected worksheet data for Elsayed Company are presented below.
Instructions
(a) Fill in the missing amounts.
(b) Prepare the adjusting entries that were made.
Prepare closing entries, and prepare a post-closing trial balance.
(LO 2, 3)
E4-7 Kay Magill Company had the following adjusted trial balance.
Instructions
(a) Prepare closing entries at June 30, 2014.
(b) Prepare a post-closing trial balance.
Journalize and post closing entries, and prepare a post-closing trial balance.
(LO 2, 3)
E4-8 Plevin Company ended its fiscal year on July 31, 2014. The company's adjusted trial balance as of the end of its fiscal year is shown below.
Instructions
(a) Prepare the closing entries using page J15.
(b) Post to Owner's Capital and No. 350 Income Summary accounts. (Use the three-column form.)
(c) Prepare a post-closing trial balance at July 31.
Prepare financial statements.
(LO 6)
E4-9 The adjusted trial balance for Plevin Company is presented in E4-8.
Instructions
(a) Prepare an income statement and an owner's equity statement for the year. Plevin did not make any capital investments during the year.
(b) Prepare a classified balance sheet at July 31.
Answer questions related to the accounting cycle.
(LO 4)
E4-10 Janis Engle has prepared the following list of statements about the accounting cycle.
1. “Journalize the transactions” is the first step in the accounting cycle.
2. Reversing entries are a required step in the accounting cycle.
3. Correcting entries do not have to be part of the accounting cycle.
4. If a worksheet is prepared, some steps of the accounting cycle are incorporated into the worksheet.
5. The accounting cycle begins with the analysis of business transactions and ends with the preparation of a post-closing trial balance.
6. All steps of the accounting cycle occur daily during the accounting period.
7. The step of “post to the ledger accounts” occurs before the step of “journalize the transactions.”
8. Closing entries must be prepared before financial statements can be prepared.
Instructions
Identify each statement as true or false. If false, indicate how to correct the statement.
Prepare closing entries.
(LO 2)
E4-11 Selected accounts for Heather's Salon are presented below. All June 30 postings are from closing entries.
Instructions
(a) Prepare the closing entries that were made.
(b) Post the closing entries to Income Summary.
Prepare correcting entries.
(LO 5)
E4-12 Andrew Clark Company discovered the following errors made in January 2014.
1. A payment of Salaries and Wages Expense of $700 was debited to Equipment and credited to Cash, both for $700.
2. A collection of $1,000 from a client on account was debited to Cash $100 and credited to Service Revenue $100.
3. The purchase of equipment on account for $760 was debited to Equipment $670 and credited to Accounts Payable $670.
Instructions
(a) Correct the errors by reversing the incorrect entry and preparing the correct entry.
(b) Correct the errors without reversing the incorrect entry.
Prepare correcting entries.
(LO 5)
E4-13 Keenan Company has an inexperienced accountant. During the first 2 weeks on the job, the accountant made the following errors in journalizing transactions. All entries were posted as made.
1. A payment on account of $840 to a creditor was debited to Accounts Payable $480 and credited to Cash $480.
2. The purchase of supplies on account for $560 was debited to Equipment $56 and credited to Accounts Payable $56.
3. A $500 withdrawal of cash for P. Keenan's personal use was debited to Salaries and Wages Expense $500 and credited to Cash $500.
Instructions
Prepare the correcting entries.
Prepare a classified balance sheet.
(LO 6)
E4-14 The adjusted trial balance for Martell Bowling Alley at December 31, 2014, contains the accounts shown on page 198.
Instructions
(a) Prepare a classified balance sheet; assume that $22,000 of the note payable will be paid in 2015.
(b) 
Comment on the liquidity of the company.
Classify accounts on balance sheet.
(LO 6)
E4-15 The following are the major balance sheet classifications.
| Current assets (CA) | Current liabilities (CL) |
| Long-term investments (LTI) | Long-term liabilities (LTL) |
| Property, plant, and equipment (PPE) | Owner's equity (OE) |
| Intangible assets (IA) |
Instructions
Classify each of the following accounts taken from Raman Company's balance sheet.
| ________ Accounts payable | ________ Accumulated depreciation—equipment |
| ________ Accounts receivable | ________ Buildings |
| ________ Cash | ________ Land (in use) |
| ________ Owner's capital | ________ Notes payable (due in 2 years) |
| ________ Patents | ________ Supplies |
| ________ Salaries and wages payable | ________ Equipment |
| ________ Inventory | ________ Prepaid expenses |
| ________ Stock investments (to be sold in 7 months) |
Prepare a classified balance sheet.
(LO 6)
E4-16 The following items were taken from the financial statements of D. Gygi Company. (All amounts are in thousands.)
Instructions
Prepare a classified balance sheet in good form as of December 31, 2014.
Prepare financial statements.
(LO 6)
E4-17 These financial statement items are for Norsted Company at year-end, July 31, 2014.
Instructions
(a) Prepare an income statement and an owner's equity statement for the year. The owner did not make any new investments during the year.
(b) Prepare a classified balance sheet at July 31.
Use reversing entries.
(LO 7)
*E4-18 Reblin Company pays salaries of $12,000 every Monday for the preceding 5-day week (Monday through Friday). Assume December 31 falls on a Tuesday, so Reblin's employees have worked 2 days without being paid.
Instructions
(a) Assume the company does not use reversing entries. Prepare the December 31 adjusting entry and the entry on Monday, January 6, when Reblin pays the payroll.
(b) Assume the company does use reversing entries. Prepare the December 31 adjusting entry, the January 1 reversing entry, and the entry on Monday, January 6, when Reblin pays the payroll.
Prepare closing and reversing entries.
(LO 2, 4, 7)
*E4-19 On December 31, the adjusted trial balance of Cisneros Employment Agency shows the following selected data.
Analysis shows that adjusting entries were made to (1) accrue $5,000 of service revenue and (2) accrue $2,000 interest expense.
Instructions
(a) Prepare the closing entries for the temporary accounts shown above at December 31.
(b) Prepare the reversing entries on January 1.
(c) Post the entries in (a) and (b). Underline and balance the accounts. (Use T-accounts.)
(d) Prepare the entries to record (1) the collection of the accrued revenue on January 10 and (2) the payment of all interest due ($3,000) on January 15.
(e) Post the entries in (d) to the temporary accounts.
EXERCISES: SET B AND CHALLENGE EXERCISES
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.
PROBLEMS: SET A
Prepare a worksheet, financial statements, and adjusting and closing entries.
(LO 1, 2, 3, 6)
P4-1A The trial balance columns of the worksheet for Lampert Roofing at March 31, 2014, are as follows.
1. A physical count reveals only $550 of roofing supplies on hand.
2. Depreciation for March is $250.
3. Unearned revenue amounted to $210 at March 31.
4. Accrued salaries are $700.
Instructions
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Prepare an income statement and owner's equity statement for the month of March and a classified balance sheet at March 31. C. Lampert made an additional investment in the business of $10,000 in March.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
(a) Adjusted trial balance $24,450
(b) Net income $2,540 Total assets $17,750
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-2A The adjusted trial balance columns of the worksheet for Alshwer Company, owned by M. Alshwer, are as follows.
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, owner's equity statement, and a classified balance sheet. (Note: $5,000 of the notes payable become due in 2015.) M. Alshwer did not make any additional investments in the business during the year.
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is No. 350.
(e) Prepare a post-closing trial balance.
(a) Net income $10,900
(b) Current assets $19,600 Current liabilities $14,100
(e) Post-closing trial balance $46,600
Prepare financial statements, closing entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-3A The completed financial statement columns of the worksheet for Fleming Company are shown on the next page.
Instructions
(a) Prepare an income statement, an owner's equity statement, and a classified balance sheet.
(b) Prepare the closing entries. J. Fleming did not make any additional investments during the year.
(c) Post the closing entries and underline and balance the accounts. (Use T-accounts.) Income Summary is account No. 350.
(d) Prepare a post-closing trial balance.
(a) Ending capital $30,600 Total current assets $22,500
(d) Post-closing trial balance $46,500
Complete worksheet; prepare classified balance sheet, entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-4A Jarmuz Management Services began business on January 1, 2014, with a capital investment of $120,000. The company manages condominiums for owners (Service Revenue) and rents space in its own office building (Rent Revenue). The trial balance and adjusted trial balance columns of the worksheet at the end of the first year are as follows.
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $30,000 of the mortgage note payable is due for payment next year.)
(c) Journalize the adjusting entries.
(d) Journalize the closing entries.
(e) Prepare a post-closing trial balance.
(a) Net income $24,900
(b) Total current assets $44,500
(e) Post-closing trial balance $297,500
Complete all steps in accounting cycle.
(LO 1, 2, 3, 4, 6)
P4-5A Heidi Jara opened Jara's Cleaning Service on July 1, 2014. During July, the following transactions were completed.
| July | 1 | Jara invested $20,000 cash in the business. |
| 1 | Purchased used truck for $9,000, paying $4,000 cash and the balance on account. | |
| 3 | Purchased cleaning supplies for $2,100 on account. | |
| 5 | Paid $1,800 cash on a 1-year insurance policy effective July 1. | |
| 12 | Billed customers $4,500 for cleaning services. | |
| 18 | Paid $1,500 cash on amount owed on truck and $1,400 on amount owed on cleaning supplies. | |
| 20 | Paid $2,500 cash for employee salaries. | |
| 21 | Collected $3,400 cash from customers billed on July 12. | |
| 25 | Billed customers $6,000 for cleaning services. | |
| 31 | Paid $350 for the monthly gasoline bill for the truck. | |
| 31 | Withdraw $5,600 cash for personal use. |
The chart of accounts for Jara's Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 301 Owner's Capital, No. 306 Owner's Drawings, No. 350 Income Summary, No. 400 Service Revenue, No. 631 Supplies Expense, No. 633 Gasoline Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal and the three-column form of account.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Unbilled and uncollected revenue for services performed at July 31 were $2,700.
(2) Depreciation on equipment for the month was $500.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $600 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $1,000.
(d) Prepare the income statement and owner's equity statement for July and a classified balance sheet at July 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Prepare a post-closing trial balance at July 31.
(b) Trial balance $34,700
(c) Adjusted trial balance $38,900
(d) Net income $7,200 Total assets $26,800
(g) Post-closing trial balance $27,300
Analyze errors and prepare correcting entries and trial balance.
(LO 5)
P4-6A Dao Vang, CPA, was retained by Universal Cable to prepare financial statements for April 2014. Vang accumulated all the ledger balances per Universal's records and found the following.
Dao Vang reviewed the records and found the following errors.
1. Cash received from a customer on account was recorded as $950 instead of $590.
2. A payment of $75 for advertising expense was entered as a debit to Miscellaneous Expense $75 and a credit to Cash $75.
3. The first salary payment this month was for $1,900, which included $700 of salaries payable on March 31. The payment was recorded as a debit to Salaries and Wages Expense $1,900 and a credit to Cash $1,900. (No reversing entries were made on April 1.)
4. The purchase on account of a printer costing $310 was recorded as a debit to Supplies and a credit to Accounts Payable for $310.
5. A cash payment of repair expense on equipment for $96 was recorded as a debit to Equipment $69 and a credit to Cash $69.
Instructions
(a) Prepare an analysis of each error showing (1) the incorrect entry, (2) the correct entry, and (3) the correcting entry. Items 4 and 5 occurred on April 30, 2014.
(b) Prepare a correct trial balance.
(b) Trial balance $22,690
PROBLEMS: SET B
Prepare worksheet, financial statements, and adjusting and closing entries.
(LO 1, 2, 3, 6)
P4-1B Michael Pevnick began operations as a private investigator on January 1, 2014. The trial balance columns of the worksheet for Michael Pevnick, P.I., at March 31 are as follows.
1. Supplies on hand total $480.
2. Depreciation is $800 per quarter.
3. Interest accrued on 6-month note payable, issued January 1, $300.
4. Insurance expires at the rate of $200 per month.
5. Services performed but unbilled at March 31 total $1,030.
Instructions
(a) Enter the trial balance on a worksheet and complete the worksheet.
(b) Prepare an income statement and owner's equity statement for the quarter and a classified balance sheet at March 31. M. Pevnick did not make any additional investments in the business during the quarter ended March 31, 2014.
(c) Journalize the adjusting entries from the adjustments columns of the worksheet.
(d) Journalize the closing entries from the financial statement columns of the worksheet.
(a) Adjusted trial balance $58,100
(b) Net income $7,480 Total assets $49,530
Complete worksheet; prepare financial statements, closing entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-2B The adjusted trial balance columns of the worksheet for Greenwood Company are as follows.
Instructions
(a) Complete the worksheet by extending the balances to the financial statement columns.
(b) Prepare an income statement, owner's equity statement, and a classified balance sheet. (Note: $5,000 of the notes payable become due in 2015.) T. Greenwood did not make any additional investments in the business during 2014.
(c) Prepare the closing entries. Use J14 for the journal page.
(d) Post the closing entries. Use the three-column form of account. Income Summary is account No. 350.
(e) Prepare a post-closing trial balance.
(a) Net income $22,100
(b) Current assets $41,700 Current liabilities $16,600
(e) Post-closing trial balance $87,700
Prepare financial statements, closing entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-3B The completed financial statement columns of the worksheet for Niho Company are shown below.
Instructions
(a) Prepare an income statement, owner's equity statement, and a classified balance sheet. S. Niho made an additional investment in the business of $4,000 during 2014.
(b) Prepare the closing entries.
(c) Post the closing entries and underline and balance the accounts. (Use T-accounts.) Income Summary is account No. 350.
(d) Prepare a post-closing trial balance.
(a) Net loss $1,600 Ending capital $25,200 Total assets $39,900
(d) Post-closing trial balance $48,500
Complete worksheet; prepare classified balance sheet, entries, and post-closing trial balance.
(LO 1, 2, 3, 6)
P4-4B Avalon Amusement Park has a fiscal year ending on September 30. Selected data from the September 30 worksheet are presented below.
(a) Net income $44,000
(b) Total current assets $54,500
(e) Post-closing trial balance $254,500
Instructions
(a) Prepare a complete worksheet.
(b) Prepare a classified balance sheet. (Note: $15,000 of the mortgage note payable is due for payment in the next fiscal year.)
(c) Journalize the adjusting entries using the worksheet as a basis.
(d) Journalize the closing entries using the worksheet as a basis.
(e) Prepare a post-closing trial balance.
Complete all steps in accounting cycle.
(LO 1, 2, 3, 4, 6)
P4-5B Gillian Shaw opened Shaw's Carpet Cleaners on March 1. During March, the following transactions were completed.
| Mar. | 1 | Invested $10,000 cash in the business. |
| 1 | Purchased used truck for $6,000, paying $3,000 cash and the balance on account. | |
| 3 | Purchased cleaning supplies for $1,200 on account. | |
| 5 | Paid $1,200 cash on a 1-year insurance policy effective March 1. | |
| 14 | Billed customers $4,800 for cleaning services. | |
| 18 | Paid $1,500 cash on amount owed on truck and $500 on amount owed on cleaning supplies. | |
| 20 | Paid $1,800 cash for employee salaries. | |
| 21 | Collected $1,400 cash from customers billed on March 14. | |
| 28 | Billed customers $2,500 for cleaning services. | |
| 31 | Paid $200 for the monthly gasoline bill for the truck. | |
| 31 | Withdrew $700 cash for personal use. |
The chart of accounts for Shaw's Carpet Cleaners contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 301 Owner's Capital, No. 306 Owner's Drawings, No. 350 Income Summary, No. 400 Service Revenue, No. 631 Supplies Expense, No. 633 Gasoline Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
(b) Trial balance $19,500
(c) Adjusted trial balance $20,850
Instructions
(a) Journalize and post the March transactions. Use page J1 for the journal and the three-column form of account.
(b) Prepare a trial balance at March 31 on a worksheet.
(c) Enter the following adjustments on the worksheet and complete the worksheet.
(1) Unbilled revenue for services performed at March 31 was $500.
(2) Depreciation on equipment for the month was $300.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $250 of cleaning supplies on hand at March 31.
(5) Accrued but unpaid employee salaries were $550.
(d) Prepare the income statement and owner's equity statement for March and a classified balance sheet at March 31.
(e) Journalize and post adjusting entries. Use page J2 for the journal.
(f) Journalize and post closing entries and complete the closing process. Use page J3 for the journal.
(g) Prepare a post-closing trial balance at March 31.
(d) Net income $3,900 Total assets $15,950
(g) Post-closing trial balance $16,250
PROBLEMS: SET C
Visit the book's companion website, at www.wiley.com/college/weygandt, and choose the Student Companion site to access Problem Set C.
COMPREHENSIVE PROBLEM: Chapters 2 TO 4
CP4 Kristin Malone opened Kristin's Maids Cleaning Service on July 1, 2014. During July, the company completed the following transactions.
| July | 1 | Invested $14,000 cash in the business. |
| 1 | Purchased a used truck for $10,000, paying $3,000 cash and the balance on account. | |
| 3 | Purchased cleaning supplies for $800 on account. | |
| 5 | Paid $1,800 on a 1-year insurance policy, effective July 1. | |
| 12 | Billed customers $3,800 for cleaning services. | |
| 18 | Paid $1,000 of amount owed on truck, and $400 of amount owed on cleaning supplies. 20 Paid $1,600 for employee salaries. | |
| 21 | Collected $1,400 from customers billed on July 12. | |
| 25 | Billed customers $1,500 for cleaning services. | |
| 31 | Paid gasoline for the month on the truck, $400. | |
| 31 | Withdrew $600 cash for personal use. |
The chart of accounts for Kristin's Maids Cleaning Service contains the following accounts: No. 101 Cash, No. 112 Accounts Receivable, No. 126 Supplies, No. 130 Prepaid Insurance, No. 157 Equipment, No. 158 Accumulated Depreciation—Equipment, No. 201 Accounts Payable, No. 212 Salaries and Wages Payable, No. 301 Owner's Capital, No. 306 Owner's Drawings, No. 350 Income Summary, No. 400 Service Revenue, No. 631 Supplies Expense, No. 633 Gasoline Expense, No. 711 Depreciation Expense, No. 722 Insurance Expense, and No. 726 Salaries and Wages Expense.
Instructions
(a) Journalize and post the July transactions. Use page J1 for the journal.
(b) Prepare a trial balance at July 31 on a worksheet.
(c) Enter the following adjustments on the worksheet, and complete the worksheet.
(1) Unbilled fees for services performed at July 31 were $1,300.
(2) Depreciation on equipment for the month was $200.
(3) One-twelfth of the insurance expired.
(4) An inventory count shows $100 of cleaning supplies on hand at July 31.
(5) Accrued but unpaid employee salaries were $500.
(d) Prepare the income statement and owner's equity statement for July, and a classified balance sheet at July 31, 2014.
(e) Journalize and post the adjusting entries. Use page J2 for the journal.
(f) Journalize and post the closing entries, and complete the closing process. Use page J3 for the journal.
(g) Prepare a post-closing trial balance at July 31.
(b) Trial balance totals $25,700
(d) Net income $3,050 Total assets $23,350
(g) Trial balance totals $23,550
CONTINUING COOKIE CHRONICLE
(Note: This is a continuation of the Cookie Chronicle from Chapters 1 through 3.)
CCC4 Natalie had a very busy December. At the end of the month, after journalizing and posting the December transactions and adjusting entries, Natalie prepared the following adjusted trial balance.
Instructions
Using the information in the adjusted trial balance, do the following.
(a) Prepare an income statement and an owner's equity statement for the 2 months ended December 31, 2013, and a classified balance sheet at December 31, 2013. The note payable has a stated interest rate of 6%, and the principal and interest are due on November 16, 2015.
(b) Natalie has decided that her year-end will be December 31, 2013. Prepare and post closing entries as of December 31, 2013.
(c) Prepare a post-closing trial balance.
Broadening Your Perspective
Financial Reporting and Analysis
Financial Reporting Problem: Apple Inc.
BYP4-1 The financial statements of Apple Inc. are presented in Appendix A at the end of this textbook. Instructions for accessing and using the company's complete annual report, including the notes to the financial statements, are also provided in Appendix A.
Answer the questions below using Apple's Consolidated Balance Sheets.
(a) What were Apple's total current assets at September 24, 2011, and September 25, 2010?
(b) Are assets that Apple included under current assets listed in proper order? Explain.
(c) How are Apple's assets classified?
(d) What was Apple's “Cash and cash equivalents” at September 24, 2011?
(e) What were Apple's total current liabilities at September 24, 2011, and September 25, 2010?
Comparative Analysis Problem:
PepsiCo, Inc. vs. The Coca-Cola Company
BYP4-2 PepsiCo's financial statements are presented in Appendix B. Financial statements for The Coca-Cola Company are presented in Appendix C. Instructions for accessing and using the complete annual reports of PepsiCo and Coca-Cola, including the notes to the financial statements, are also provided in Appendices B and C, respectively.
Instructions
(a) Based on the information contained in these financial statements, determine each of the following for PepsiCo at December 31, 2011, and for Coca-Cola at December 31, 2011.
(1) Total current assets.
(2) Net amount of property, plant, and equipment (land, buildings, and equipment).
(3) Total current liabilities.
(4) Total equity.
(b) What conclusions concerning the companies’ respective financial positions can be drawn?
Comparative Analysis Problem:
Amazon.com, Inc. vs. Wal-Mart Stores, Inc.
BYP4-3 Amazon.com, Inc.'s financial statements are presented in Appendix D. Financial statements for Wal-Mart Stores, Inc. are presented in Appendix E. Instructions for accessing and using the complete annual reports of Amazon and Wal-Mart, including the notes to the financial statements, are also provided in Appendices D and E, respectively.
Instructions
(a) Based on the information contained in these financial statements, determine the following for Amazon at December 31, 2011, and Wal-Mart at January 31, 2012.
(1) Total current assets.
(2) Net amount of property and equipment (fixed assets), net.
(3) Total current liabilities.
(4) Total equity.
(b) What conclusions concerning these two companies can be drawn from these data?
Real-World Focus
BYP4-4 Numerous companies have established home pages on the Internet, e.g., Capt'n Eli Root Beer Company (www.captneli.com/rootbeer.php) and Kodak (www.kodak.com).
Instructions
Examine the home pages of any two companies and answer the following questions.
(a) What type of information is available?
(b) Is any accounting-related information presented?
(c) Would you describe the home page as informative, promotional, or both? Why?
Critical Thinking
Decision-Making Across the Organization 
BYP4-5 Whitegloves Janitorial Service was started 2 years ago by Lynn Sanders. Because business has been exceptionally good, Lynn decided on July 1, 2014, to expand operations by acquiring an additional truck and hiring two more assistants. To finance the expansion, Lynn obtained on July 1, 2014, a $25,000, 10% bank loan, payable $10,000 on July 1, 2015, and the balance on July 1, 2016. The terms of the loan require the borrower to have $10,000 more current assets than current liabilities at December 31, 2014. If these terms are not met, the bank loan will be refinanced at 15% interest. At December 31, 2014, the accountant for Whitegloves Janitorial Service Inc. prepared the balance sheet shown below.
Lynn presented the balance sheet to the bank's loan officer on January 2, 2015, confident that the company had met the terms of the loan. The loan officer was not impressed. She said, “We need financial statements audited by a CPA.” A CPA was hired and immediately realized that the balance sheet had been prepared from a trial balance and not from an adjusted trial balance. The adjustment data at the balance sheet date consisted of the following.
1. Unbilled janitorial services performed were $3,700.
2. Janitorial supplies on hand were $2,500.
3. Prepaid insurance was a 3-year policy dated January 1, 2014.
4. December expenses incurred but unpaid at December 31, $500.
5. Interest on the bank loan was not recorded.
6. The amounts for property, plant, and equipment presented in the balance sheet were reported net of accumulated depreciation (cost less accumulated depreciation). These amounts were $4,000 for cleaning equipment and $5,000 for delivery trucks as of January 1, 2014. Depreciation for 2014 was $2,000 for cleaning equipment and $5,000 for delivery trucks.
Instructions
With the class divided into groups, answer the following.
(a) Prepare a correct balance sheet.
(b) Were the terms of the bank loan met? Explain.
Communication Activity
BYP4-6 The accounting cycle is important in understanding the accounting process.
Instructions
Write a memo to your instructor that lists the steps of the accounting cycle in the order they should be completed. End with a paragraph that explains the optional steps in the cycle.
Ethics Case
BYP4-7 As the controller of Take No Prisoners Perfume Company, you discover a misstatement that overstated net income in the prior year's financial statements. The misleading financial statements appear in the company's annual report which was issued to banks and other creditors less than a month ago. After much thought about the consequences of telling the president, Jeb Wilde, about this misstatement, you gather your courage to inform him. Jeb says, “Hey! What they don't know won't hurt them. But, just so we set the record straight, we'll adjust this year's financial statements for last year's misstatement. We can absorb that misstatement better in this year than in last year anyway! Just don't make such a mistake again.”
Instructions
(a) Who are the stakeholders in this situation?
(b) What are the ethical issues in this situation?
(c) What would you do as a controller in this situation?
All About You
BYP4-8 Companies prepare balance sheets in order to know their financial position at a specific point in time. This enables them to make a comparison to their position at previous points in time, and gives them a basis for planning for the future. In order to evaluate your financial position, you need to prepare a personal balance sheet. Assume that you have compiled the following information regarding your finances. (Hint: Some of the items might not be used in your personal balance sheet.)
| Amount owed on student loan balance (long-term) | $ 5,000 |
| Balance in checking account | 1,200 |
| Certificate of deposit (6-month) | 3,000 |
| Annual earnings from part-time job | 11,300 |
| Automobile | 7,000 |
| Balance on automobile loan (current portion) | 1,500 |
| Balance on automobile loan (long-term portion) | 4,000 |
| Home computer | 800 |
| Amount owed to you by younger brother | 300 |
| Balance in money market account | 1,800 |
| Annual tuition | 6,400 |
| Video and stereo equipment | 1,250 |
| Balance owed on credit card (current portion) | 150 |
| Balance owed on credit card (long-term portion) | 1,650 |
Instructions
Prepare a personal balance sheet using the format you have learned for a classified balance sheet for a company. For the capital account, use Owner's Capital.
FASB Codification Activity
BYP4-9 If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following.
Instructions
(a) Access the glossary (“Master Glossary”) at the FASB Codification website to answer the following.
(1) What is the definition of current assets?
(2) What is the definition of current liabilities?
(b) A company wants to offset its accounts payable against its cash account and show a cash amount net of accounts payable on its balance sheet. Identify the criteria (found in the FASB Codification) under which a company has the right of set off. Does the company have the right to offset accounts payable against the cash account?
Answers to Chapter Questions
Answers to Insight and Accounting Across the Organization Questions
p. 171 Cisco Performs the Virtual Close Q: Who else benefits from a shorter closing process? A: Investors benefit from a shorter closing process. The shorter the closing, the sooner the company can report its financial results. This means that the financial information is more timely and therefore more relevant to investors.
p. 177 Yale Express Loses Some Transportation Bills Q: What might Yale Express's vice president have done to produce more accurate financial statements without waiting months for Republic's outstanding transportation bills? A: Yale's vice president could have engaged his accountants and auditors to prepare an adjusting entry based on an estimate of the outstanding transportation bills. (The estimate could have been made using past experience and the current volume of business.)
p. 181 Regaining Goodwill Q: Name two industries today which are probably rated low on the reputational characteristics of “being trusted” and “having high ethical standards.” A: Two possible industries are financial companies (Goldman Sachs or AIG) or oil companies (BP).
p. 182 Can a Company Be Too Liquid? Q: What can various company managers do to ensure that working capital is managed efficiently to maximize net income? A: Marketing and sales managers must understand that by extending generous repayment terms, they are expanding the company's receivables balance and slowing the company's cash flow. Production managers must strive to minimize the amount of excess inventory on hand. Managers must coordinate efforts to speed up the collection of receivables, while also ensuring that the company pays its payables on time but never too early.
Answers to Self-Test Questions
1. b 2. c 3. c 4. a 5. b 6. c 7. a 8. d 9. c 10. d 11. b 12. c 13. c 14. d 15. a *16. c
A Look at IFRS
The classified balance sheet, although generally required internationally, contains certain variations in format when reporting under IFRS.
Key Points
- The procedures of the closing process are applicable to all companies, whether they are using IFRS or GAAP.
- IFRS recommends but does not require the use of the title “statement of financial position” rather than balance sheet.
- The format of statement of financial position information is often presented differently under IFRS. Although no specific format is required, most companies that follow IFRS present statement of financial position information in this order:
- Noncurrent assets
- Current assets
- Equity
- Noncurrent liabilities
- Current liabilities
- IFRS requires a classified statement of financial position except in very limited situations. IFRS follows the same guidelines as this textbook for distinguishing between current and noncurrent assets and liabilities.
- Under IFRS, current assets are usually listed in the reverse order of liquidity. For example, under GAAP cash is listed first, but under IFRS it is listed last.
- Some companies report the subtotal net assets, which equals total assets minus total liabilities. See, for example, the statement of financial position of Zetar plc in Appendix F.
- IFRS has many differences in terminology from what are shown in your textbook. For example, in the sample statement of financial position illustrated on the next page, notice in the investment category that stock is called shares.
- Both IFRS and GAAP require disclosures about (1) accounting policies followed, (2) judgments that management has made in the process of applying the entity's accounting policies, and (3) the key assumptions and estimation uncertainty that could result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year.
- Comparative prior-period information must be presented and financial statements must be prepared annually.
- Both GAAP and IFRS are increasing the use of fair value to report assets. However, at this point IFRS has adopted it more broadly. As examples, under IFRS companies can apply fair value to property, plant, and equipment; natural resources; and in some cases intangible assets.
Looking to the Future
The IASB and the FASB are working on a project to converge their standards related to financial statement presentation. A key feature of the proposed framework is that each of the statements will be organized in the same format, to separate an entity's financing activities from its operating and investing activities and, further, to separate financing activities into transactions with owners and creditors. Thus, the same classifications used in the statement of financial position would also be used in the income statement and the statement of cash flows. The project has three phases. You can follow the joint financial presentation project at the following link: http://www.fasb.org/project/financial_statement_presentation.shtml.
The IASB and the FASB face a difficult task in attempting to update, modify, and complete a converged conceptual framework. For example, how do companies choose between information that is highly relevant but difficult to verify versus information that is less relevant but easy to verify? How do companies define control when developing a definition of an asset? Is a liability the future sacrifice itself or the obligation to make the sacrifice? Should a single measurement method, such as historical cost or fair value, be used, or does it depend on whether it is an asset or liability that is being measured? It appears that the new document will be a significant improvement over its predecessors and will lead to principles-based standards, which will help financial statement users make better decisions.
IFRS Practice
IFRS Self-Test Questions
1. Which of the following statements is false?
(a) Assets equals liabilities plus equity.
(b) Under IFRS, companies sometimes net liabilities against assets to report “net assets.”
(c) The FASB and IASB are working on a joint conceptual framework project.
(d) Under IFRS, the statement of financial position is usually referred to as the statement of assets and equity.
2. A company has purchased a tract of land and expects to build a production plant on the land in approximately 5 years. During the 5 years before construction, the land will be idle. Under IFRS, the land should be reported as:
(a) land expense.
(b) property, plant, and equipment.
(c) an intangible asset.
(d) a long-term investment.
3. Current assets under IFRS are listed generally:
(a) by importance.
(b) in the reverse order of their expected conversion to cash.
(c) by longevity.
(d) alphabetically.
4. Companies that use IFRS:
(a) may report all their assets on the statement of financial position at fair value.
(b) may offset assets against liabilities and show net assets and net liabilities on their statement of financial positions, rather than the underlying detailed line items.
(c) may report noncurrent assets before current assets on the statement of financial position.
(d) do not have any guidelines as to what should be reported on the statement of financial position.
5. Companies that follow IFRS to prepare a statement of financial position generally use the following order of classification:
(a) current assets, current liabilities, noncurrent assets, noncurrent liabilities, equity.
(b) noncurrent assets, noncurrent liabilities, current assets, current liabilities, equity.
(c) noncurrent assets, current assets, equity, noncurrent liabilities, current liabilities.
(d) equity, noncurrent assets, current assets, noncurrent liabilities, current liabilities.
IFRS Exercises
IFRS4-1 In what ways does the format of a statement of financial of position under IFRS often differ from a balance sheet presented under GAAP?
IFRS4-2 What term is commonly used under IFRS in reference to the balance sheet?
IFRS4-3 The statement of financial position for Sundell Company includes the following accounts (in British pounds): Accounts Receivable £12,500; Prepaid Insurance £3,600; Cash £15,400; Supplies £5,200; and Debt Investments (short-term) £6,700. Prepare the current assets section of the statement of financial position, listing the accounts in proper sequence.
IFRS4-4 Glarus Company recently received the following information related to the company's December 31, 2014, statement of financial position (in Swiss francs).
Prepare the assets section of the company's classified statement of financial position.
IFRS4-5 The following information is available for Lessila Bowling Alley at December 31, 2014.
Prepare a classified statement of financial position. Assume that $13,900 of the notes payable will be paid in 2015.
IFRS4-6 Nate Roche is interested in comparing the liquidity and solvency of a U.S. software company with a Chinese competitor. Is this possible if the two companies report using different currencies?
International Comparative Analysis Problem:
Apple vs. Zetar plc
IFRS4-7 The financial statements of Zetar plc are presented in Appendix F. Instructions for accessing and using the company's complete annual report, including the notes to its financial statements, are also provided in Appendix F.
Instructions
Identify five differences in the format of the statement of financial position used by Zetar plc compared to a company, such as Apple, that follows GAAP. (Apple's financial statements are available in Appendix A.)
Answers to IFRS Self-Test Questions
1. d 2. d 3. b 4. c 5. c
Remember to go back to The Navigator box on the chapter opening page and check off your completed work.
__________
1We explain closing entries for a partnership and for a corporation in Chapters 12 and 13, respectively.