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CHAPTER 4Completion of the Accounting CycleASSIGNMENT CLASSIFICATION TABLEBriefABStudy Objectives*1. Prepare a work sheet.Questions1, 2, 3, 4,Exercises1, 2, 3Exercises1, 2, 4, 5Problems1A, 2A, 3A,Problems1B, 2B, 3B,54A, 5A4B, 5B*2. Explain the process ofclosing the books.*3. Describe the content and6, 7, 11,128, 94, 5, 673, 6, 8, 113, 61A, 2A, 3A,4A, 5A1A, 2A, 3A,1B, 2B, 3B,4B, 5B1B, 2B, 3B,purpose of a post-closingtrial balance.4A, 5A4B, 5B*4. State the required steps10, 11, 128115A5Bin the accounting cycle.*5. Explain the approaches to13996Apreparing correctingentries.*6. Identify the sections of aclassified balance sheet.14, 15, 16,17, 18, 19,102, 7, 101A, 2A, 3A,4A, 5A1B, 2B, 3B,4B, 5B20*7. Prepare reversing entries.10, 21, 221111*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix*to the chapter.4-1ASSIGNMENT CHARACTERISTICS TABLEProblemDifficultyTime AllottedNumber1ADescriptionPrepare a work sheet, financial statements, and adjustingLevelSimple(min.)4050and closing entries.2AComplete work sheet and prepare financial statements,Moderate5060closing entries, and post-closing trial balance.3APrepare financial statements, closing entries, and post-Moderate4050closing trial balance.4AComplete work sheet; prepare a classified balance sheet,Moderate5060adjusting and closing entries, and post-closing trialbalance.5A6AComplete all steps in the accounting cycle.Analyze errors and prepare correcting entries and trialComplexModerate70904050balance.1BPrepare a work sheet, financial statements, and adjustingSimple4050and closing entries.2BComplete work sheet and prepare financial statements,Moderate5060closing entries, and post-closing trial balance.3BPrepare financial statements, closing entries, and post-Moderate4050closing trial balance.4BComplete work sheet; prepare a classified balance sheet,Moderate5060adjusting and closing entries, and post-closing trialbalance.5BComplete all steps in the accounting cycle.Complex7090Comprehensive Problem: Chapters 2 to 44-2BLOOMS TAXONOMY TABLE4-3Correlation Chart between Blooms Taxonomy, Study Objectives and End-of-Chapter Exercises and ProblemsKnowledge ComprehensionBE4-1Q4-1Q4-2Q4-3Q4-4Q4-5BE4-3Q4-7BE4-4BE4-5BE4-6E4-3E4-6E4-3E4-6P4-2AE4-11P4-5AP4-5BBE4-9E4-9P4-6ABE4-10E4-2E4-7E4-10P4-2AP4-3AP4-2BP4-3BP4-1AP4-4AP4-5AP4-1BQ4-22BE4-11E4-11InterpretingFinancial ReportingFinancialGroup Decision CaseComparative Analysis StatementsGlobal FocusCookieCommunicationChronicleExploring the WebResearch CaseEthics CaseExploring the WebP4-4BP4-5BP4-3A P4-1AP4-2B P4-4AP4-3B P4-5AP4-1BP4-4BP4-5BE4-8P4-2AP4-3AP4-2BP4-3BE4-11P4-1AP4-4AP4-5AP4-1BP4-4BP4-5BE4-1E4-2P4-2AP4-3AP4-2BP4-3BBE4-2E4-4E4-5P4-1AP4-4AP4-5AP4-1BP4-4BP4-5BApplicationAnalysisSynthesisEvaluationStudy Objective*1.Prepare a work sheet.*2.Explain the process of closing Q4-6the books.Q4-11Q4-12*3.Describe the content andpurpose of a post-closing trialbalance.Q4-11Q4-12BE4-8Q4-13Q4-10Q4-8Q4-9BE4-7Q4-17Q4-18Q4-19Q4-20Q4-10Q4-21*4.State the required steps inthe accounting cycle.*5.Explain the approaches topreparing correcting entries.*6.Identify the sections of a clas- Q4-14sified balance sheet.Q4-15Q4-16*7.Prepare reversing entries.Broadening Your PerspectiveANSWERS TO QUESTIONS1.2.3.4.5.No. A work sheet is not a permanent accounting record. The use of a work sheet is an optionalstep in the accounting cycle.The work sheet is merely a device used to make it easier to prepare adjusting entries and thefinancial statements.The amount shown in the adjusted trial balance column for an account equals the accountbalance in the ledger after adjusting entries have been journalized and posted.The net income of $12,000 will appear in the income statement debit column and the balancesheet credit column. A net loss will appear in the income statement credit column and thebalance sheet debit column.Formal financial statements are needed because the columnar data are not properly arrangedand classified for statement purposes. For example, the dividends account is listed with assets.6.(1)(2)(3)(4)(Dr) Individual revenue accounts and (Cr) Income Summary.(Dr) Income Summary and (Cr) Individual expense accounts.(Dr) Income Summary and (Cr) Retained Earnings (for net income).(Dr) Retained Earnings and (Cr) Dividends.7.8.9.10.11.12.13.Income Summary is a temporary account that is used in the closing process. The account isdebited for expenses and credited for revenues. The difference, either net income or loss, isthen closed to the retained earnings account.The post-closing trial balance contains only balance sheet accounts. Its purpose is to prove theequality of the permanent account balances that are carried forward into the next accountingperiod.The accounts that will not appear in the post-closing trial balance are Depreciation Expense;Dividends; and Service Revenue.A reversing entry is the exact opposite, both in amount and in account titles, of an adjustingentry and is made at the beginning of the new accounting period. Reversing entries are anoptional step in the accounting cycle.The steps that involve journalizing are: (1) journalize the transactions, (2) journalize the adjustingentries, and (3) journalize the closing entries.The three trial balances are the: (1) trial balance, (2) adjusted trial balance, and (3) post-closingtrial balance.Correcting entries differ from adjusting entries because they: (1) are not a required part of theaccounting cycle, (2) may be made at any time, and (3) may affect any combination of accounts.4-4Questions Chapter 4 (Continued)*14.The standard classifications in a balance sheet are:AssetsCurrent AssetsLong-term InvestmentsProperty, Plant, and EquipmentIntangible AssetsLiabilities and Stockholders EquityCurrent LiabilitiesLong-term LiabilitiesStockholders Equity*15.*16.*17.*18.A companys operating cycle is the average time required to go from cash to cash in producingrevenues.Current assets are cash and other resources that are reasonably expected to be realized incash or sold or consumed in the business within one year of the balance sheet date or thecompanys operating cycle, whichever is longer. Current assets are listed in the order of theirliquidity.Long-term investments are resources that can be realized in cash. However, the conversioninto cash is not expected within one year or the operating cycle, whichever is longer. Property,plant, and equipment are tangible resources of a relatively permanent nature that are used inthe business and not intended for sale.The major differences between current liabilities and long term-liabilities are:DifferenceSource of payment.Time of expectedpayment.Nature of items.Current LiabilitiesExisting current assets or othercurrent liabilities.One year or the operating cycle.Debts pertaining to the operatingcycle and other short-term debts.Long-term LiabilitiesOther than existing current assetsor creating current liabilities.Beyond one year or the operatingcycle.Mortgages, bonds, and other long-term liabilities.*19.(a)(b)The owners equity section for a corporation is called stockholders equity.The two accounts and the purpose of each are: (1) Capital stock is used to recordinvestments of assets in the business by the owners (stockholders). (2) Retainedearnings is used to record net income retained in the business.*20.*21.The report form balance sheet differs from the account form balance sheet in the location of theliabilities and stockholders equity section. In the report form this section is placed below assets.In the account form the section is placed to the right of assets.After reversing entries have been made, the balances will be Interest Payable, zero balance;Interest Expense, a credit balance.*22.(a)Jan. 10Salaries Expense .8,000Cash.8,000Because of the January 1 reversing entry that credited Salaries Expense for $4,500,Salaries Expense will have a debit balance of $3,500 which equals the expense for thecurrent period.4-5Questions Chapter 4 (Continued)(b)Jan. 10Salaries Payable .Salaries Expense .Cash.4,5003,5008,000Note that Salaries Expense will again have a debit balance of $3,500.4-6SOLUTIONS TO BRIEF EXERCISESBRIEF EXERCISE 4-1The steps in using a work sheet are performed in the following sequence:(1) prepare a trial balance on the work sheet, (2) enter adjustment data, (3)enter adjusted balances, (4) extend adjusted balances to appropriatestatement columns and (5) total the statement columns, compute netincome (loss), and complete the work sheet. Filling in the blanks, theanswers are 1, 3, 4, 5, 2.The solution to BRIEF EXERCISE 4-2 is on page 4-8.BRIEF EXERCISE 4-3Income StatementBalance SheetAccountDr. Cr.Dr. Cr.Accumulated DepreciationDepreciation ExpenseCommon StockDividendsService RevenueSuppliesAccounts PayableBRIEF EXERCISE 4-4XXXXXXXDec. 31313131Service Revenue .Income Summary .Income Summary .Salaries Expense.Supplies Expense .Income Summary .Retained Earnings .Retained Earnings .Dividends.4-750,00027,00023,0002,00050,00023,0004,00023,0002,000BRIEF EXERCISE 4-24-8KEO COMPANYWork SheetAccount Titles4,00058,00025,000(c)(a) 1,2008001,200(c) 800(b) 1,10025,8001,10080059,100(a) 1,200(b) 1,1002,800Trial BalanceDr. Cr.AdjustmentsDr. Cr.AdjustedTrial BalanceDr. Cr.IncomeStatementDr. Cr.59,10025,800BalanceSheetDr. Cr.2,8001,1008001,200Prepaid InsuranceService RevenueSalaries ExpenseAccounts ReceivableSalaries PayableInsurance ExpenseBRIEF EXERCISE 4-5Salaries Expense23,000 (2) 23,000Supplies Expense4,000 (2) 4,000Income Summary(2) 27,000 (1) 50,000(3) 23,00050,000 50,000Retained Earnings(4) 2,000 (3) 23,000Service Revenue(1) 50,000 50,000Dividends2,000 (4) 2,000Bal. 21,000BRIEF EXERCISE 4-6July 3131Green Fee Revenue.Income Summary.Income Summary.Salaries Expense .Maintenance Expense .Green Fee Revenue14,60010,70014,6008,2002,500DateExplanationRef. DebitCreditBalance14,6007/31Closing entry14,6000Salaries ExpenseDateExplanationRef. DebitCreditBalance8,2007/31Closing entry8,20004-9BRIEF EXERCISE 4-6 (Continued)Maintenance ExpenseDateExplanationRef. DebitCreditBalance2,5007/31Closing entry2,5000BRIEF EXERCISE 4-7The accounts that will appear in the post-closing trial balance are:Accumulated DepreciationCommon StockSuppliesAccounts PayableBRIEF EXERCISE 4-8The proper sequencing of the required steps in the accounting cycle is asfollows:1.2.3.4.5.6.7.8.9.Analyze business transactions.Journalize the transactions.Post to ledger accounts.Prepare a trial balance.Journalize and post adjusting entries.Prepare an adjusted trial balance.Prepare financial statements.Journalize and post closing entries.Prepare a post-closing trial balance.Filling in the blanks, the answers are 4, 2, 8, 7, 5, 3, 9, 6, 1.BRIEF EXERCISE 4-91.Service Revenue .Accounts Receivable.4-10780780BRIEF EXERCISE 4-9 (Continued)2.Accounts Payable ($1,850 $1,580).Store Supplies .270270BRIEF EXERCISE 4-10KREN COMPANYPartial Balance SheetCurrent assetsCash .Short-term investments.Accounts receivable.Supplies.Prepaid insurance .Total current assets.*BRIEF EXERCISE 4-11$18,4006,70012,5005,2003,600$46,400Nov. 1Salaries Payable. 1,200Salaries Expense .1,200The balances after posting the reversing entry are Salaries Expense (Cr.)$1,200 and Salaries Payable $0.4-11SOLUTIONS TO EXERCISESEXERCISE 4-1CAJON COMPANY(Partial) Work SheetFor the Month Ended April 30, 2006AdjustedTrial BalanceIncomeStatementBalance SheetAccount TitlesDr.Cr.Dr.Cr.Dr.Cr.CashAccounts ReceivablePrepaid RentEquipmentAccum. DepreciationNotes PayableAccounts PayableCommon StockRetained EarningsDividendsService RevenueSalaries ExpenseRent ExpenseDepreciation ExpenseInterest Expense14,7527,8402,28023,0503,6509,840760671574,9215,7005,67225,0008,96012,5909,8407606715712,59014,7527,8402,28023,0503,6504,9215,7005,67225,0008,960Interest PayableTotalsNet IncomeTotals_62,9005762,900_11,3281,26212,590_12,590_12,590_51,572_51,5725750,3101,26251,5724-12EXERCISE 4-2CAJON COMPANYIncome StatementFor the Month Ended April 30, 2006RevenuesService revenue .ExpensesSalaries expense.Rent expense .Depreciation expense .Interest expense.Total expenses .Net income.CAJON COMPANYRetained Earnings StatementFor the Month Ended April 30, 2006$9,84076067157$12,59011,328$ 1,262Retained Earnings, April 1.Add: Net income.Less: Dividends .Retained Earnings, April 30 .CAJON COMPANYBalance SheetApril 30, 2006AssetsCurrent assetsCash .Accounts receivable.Prepaid rent .Total current assets.Property, plant, and equipment$ 8,9601,26210,2223,650$ 6,572$14,7527,8402,28024,872Equipment.$23,050Less: Accumulated depreciation .Total assets .4-134,92118,129$43,001EXERCISE 4-2 (Continued)CAJON COMPANYBalance Sheet (Continued)April 30, 2006Liabilities and Stockholders EquityCurrent liabilitiesNotes payable .Accounts payable .Interest payable .Total current liabilities .Stockholders equity$ 5,7005,6725711,429Common Stock .Retained Earnin
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