Chapter 4 – Exercise 1 (1 of 3)

1. Chapter 4 – Exercise 1 (1 of 3) Lisa and Charlie operate a yacht maintenance service that they incorporated as Reliable Yacht Repair Inc. They recently talked to their banker about obtaining a loan. The banker sounded interested, but wants to see last month’s income statement. She reminded them that the bank only accepts financial statements that are prepared in accordance with GAAP. Lisa and Charlie ask you for advice. Charlie prepared the following trial balance shown below on May 31, 20B. He carefully put the company’s accounts in alphabetical order (it seemed like a logical approach to him). All of the company’s accounts have normal balances (debit or credit).

2. Chapter 4 – Exercise 1 (2 of 3) (…continued) Accounts payable $ 300 (L) credit Accounts receivable 800 (A) debit Cash 19,500 (A) debit Share capital 9,300 (SE) credit Maintenance revenue 800 (Revenue) credit Maintenance supplies inventory 125 (A) debit Maintenance supplies expense 50 (Exp. Deb. Bal) Notes payable 18,000 (L) Notes receivable 1,000 (A- Prepaid expenses 300 (A) Property, plant and equipment 10,000 (A) long term captop Refinishing revenue 150 (Rev Retained earnings 3,200 (SE) Unearned revenue 200 (L) Utilities expense 175 (E) Prepare an unadjusted trial balance for Reliable Yacht Repair Inc as of May 31, 20B.

3. Chapter 4 – Exercise 1 (3 of 3) SOLUTION: Reliable Yacht Repair, Inc Unadjusted Trial Balance at May 31, 20B typeAccount Namedebitcredit A Cash x A Accounts Rec x A Notes Rec x A mainten x A … . (A and E) (L, SE, R) 31,950 31,950

4. Chapter 4 – Exercise 2 (1 of 3) Review the unadjusted trial balance you prepared in Exercise 1. Identify the accounts that might require adjustment at June 30, 20B, and describe what information you would need to determine the nature and amount of the adjusting entry for each of the accounts identified.

5. Chapter 4 – Exercise 2 (2 of 3) SOLUTION: Accounts which might require adjustment and information needed: • Accounts Recievable and maintenance and/or refinishing revenue - amount of any maintenance and refinishing services that have been performed but not billed or recorded • Accumulated amortization and amortization expense – estimated residual values and lives of the property, plant and equipment • Maintenance supplies inventory and maintenance supplies expense – adjust to actual supplies on hand at year-end

6. Chapter 4 – Exercise 2 (3 of 3) -prepaid expenses and related expense account(s) – date of prepayment and length of time until prepayment expires • Accounts payable and related expense account(s) – nature and amount of any unpaid bills and estimates on any unbilled amounts that have not been recorded at year-end • Interest payable and expense – date of note(s), principal amount(s), and interest rate(s) • Unearned revenue and maintenance and/or refinishing revenue – amount and type of work performed to date for customer(s) who paid in advance

7. Chapter 4 – Exercise 3 (A) Prepare adjusting entries, dated September 30, 20B, for each of the following transactions described below. Assume that you are adjusting the related accounts as of the end of the year and that no adjustments have been made since the dates given below. Assume that the fiscal year end is September 30. Part A The company had $4,000 of office supplies on hand October 1, 20A, purchased $6,300 of supplies during the year, and $1,200 of supplies were on hand on September 30, 20B.

8. Chapter 4 – Exercise 3 (B) B) On December 1, 20A, a three-year insurance premium of $27,000 was paid for coverage beginning on that date. The payment was recorded in the prepaid insurance account.

9. Chapter 4 – Exercise 3 (C) C) A delivery truck was purchased for $33,000 on January 1, 20B. The truck’s residual value is estimated at $3,000 at the end of its useful life of 5 years and will be amortized using the straight-line basis.

10. Chapter 4 – Exercise 3 (D) D) The company rents some of its unused factory space to a small manufacturer. The lease required an advance payment of $18,000 for six month’s rent. The advance payment received from the tenant was recorded as unearned revenue upon receipt on August 1, 20B.

11. Chapter 4 – Exercise 3 (E) E) Employees work five days per week and are paid $75,000 every other Friday. The last payday during the company’s fiscal year was Friday, September 26, 20B. The employees continued to work through September 30, 20B, but they will not be paid until Friday, October 10, 20B.

12. Chapter 4 – Exercise 3 (F) F) The Accounting Department sends bills to customers every Friday and records the revenue earned at that time. The last bills were sent on Friday, September 26, 20B. Services performed on September 29 and September 30, 20B, amounted to $29,000. This amount has not been recorded.

13. Chapter 4 – Exercise 6 (1 of 4) Assume that Charlie (once again) prepared a trial balance in alphabetical order for Reliance Yacht Repair Inc on September 30, 20B, the end of the company’s fiscal year. Accounts payable $ 1,500 L Accounts receivable 6,000 A Accumulated amortization 2,000 XA Cash 6,900 A Share capital 7,800 SE Insurance expense 500 E Interest expense 80 E Maintenance revenue 7,500 R Maintenance supplies inventory 1,500 A Maintenance supplies expense 2,500 E Notes payable 2,500 L Notes receivable 5,500 A Prepaid expenses 500 A Property, plant and equipment 4,000 A Retained earnings 2,180 SE Refinishing revenue 3,500 R Unearned revenue 2,000 L Utilities expense 1,500 E

14. Chapter 4 – Exercise 6 (2 of 4) Prepare the closing entries for company.

15. Chapter 4 – Exercise 6 (3 of 4) Post the journal entries to the retained earnings account. T-Account

16. Chapter 4 – Exercise 6 (4 of 4) Prepare a post-closing trial balance. Reliable Yacht Repair, Inc Unadjusted Trial Balance at September 30, 20B typeAccount Namedebitcredit A Cash 6,900 A Accounts receivable 6,000 A Notes receivable 5,500 A Maintenance supplies inventory 1,500 … XA Accumulated amortization 2,000 L Accounts payable 1,500 … Retained earnings = revenue + expense accounts Totals 24,400 24,400