PE 3-10B Vertical analysis

Two income statements for Cornea Company are shown below.


Cornea Company
Income Statements
For Years Ended December 31
2014 2013
Fees earned $1,640,000 $1,300,000
Operating expenses 869,200 715,000
Operating income $ 770,800 $ 585,000


a. Prepare a vertical analysis of Cornea Company’s income statements.
b. Does the vertical analysis indicate a favorable or an unfavorable trend?


Answer:

a.
 CORNEA COMPANY
Income Statements
For Years Ended December 31
2014 2013
Amount Percent Amount Percent
Fees earned $1,640,000 100% $1,300,000 100%
Operating expenses 869,200 53% 715,000 55%
Operating income $ 770,800 47% $ 585,000 45%



b. A favorable trend of decreasing operating expenses and increasing operating income is indicated.

PE 3-10A Vertical analysis

Two income statements for Hemlock Company are shown below.


Hemlock Company
Income Statements
For Years Ended December 31
2014 2013
Fees earned $725,000 $615,000
Operating expenses 435,000 356,700
Operating income $290,000 $258,300



a. Prepare a vertical analysis of Hemlock Company’s income statements.
b. Does the vertical analysis indicate a favorable or an unfavorable trend?


Answer:

a.
 HEMLOCK COMPANY
Income Statements
For Years Ended December 31
2014 2013
Amount Percent Amount Percent
Fees earned $725,000 100% $615,000 100%
Operating expenses 435,000 60% 356,700 58%
Operating income $290,000 40% $258,300 42%


b. An unfavorable trend of increasing operating expenses and decreasing operating income is indicated.

PE 3-8A Effect of omitting adjustments

For the year ending August 31, 2014, Mammalia Medical Co. mistakenly omitted adjusting entries for (1) depreciation of $5,800, (2) fees earned that were not billed of $44,500, and (3) accrued wages of $7,300. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended August 31, 2014.


Answer:
a. Revenues were understated by $44,500.
b. Expenses were understated by $13,100 ($5,800 + $7,300).
c. Net income was understated by $31,400 ($44,500 – $13,100).

PE 3-8B Effect of omitting adjustments

For the year ending April 30, 2014, Urology Medical Services Co. mistakenly omitted adjusting entries for (1) $1,400 of supplies that were used, (2) unearned revenue of $6,600 that was earned, and (3) insurance of $9,000 that expired. Indicate the combined effect of the errors on (a) revenues, (b) expenses, and (c) net income for the year ended April 30, 2014.


Answer:
a. Revenues were understated by $6,600.
b. Expenses were understated by $10,400 ($1,400 + $9,000).
c. Net income was overstated by $3,800 ($10,400 – $6,600).

PE 3-9A Effect of errors on adjusted trial balance

For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much.

a. The adjustment of $9,800 for accrued fees earned was journalized as a debit to Accounts Receivable for $9,800 and a credit to Fees Earned for $8,900.

b. The adjustment of depreciation of $3,600 was omitted from the end-of-period adjusting entries.


Answer:
a. The totals are unequal. The debit total is higher by $900 ($9,800 – $8,900).
b. The totals are equal, since the adjusting entry was omitted.

PE 3-9B Effect of errors on adjusted trial balance

For each of the following errors, considered individually, indicate whether the error would cause the adjusted trial balance totals to be unequal. If the error would cause the adjusted trial balance totals to be unequal, indicate whether the debit or credit total is higher and by how much.

a. The adjustment for accrued wages of $5,200 was journalized as a debit to Wages Expense for $5,200 and a credit to Accounts Payable for $5,200.

b. The entry for $1,125 of supplies used during the period was journalized as a debit to Supplies Expense of $1,125 and a credit to Supplies of $1,152.


Answer:
a. The totals are equal even though the credit should have been to Wages Payable instead of Accounts Payable.
b. The totals are unequal. The credit total is higher by $27 ($1,152 – $1,125).

PE 3-7A Adjustment for depreciation

The estimated amount of depreciation on equipment for the current year is $9,100. Journalize the adjusting entry to record the depreciation.


Answer:


Depreciation Expense 9,100
Accumulated Depreciation—Equipment 9,100
Depreciation on equipment.

PE 3-7B Adjustment for depreciation

The estimated amount of depreciation on equipment for the current year is $7,700. Journalize the adjusting entry to record the depreciation.


Answer:

Depreciation Expense 7,700
Accumulated Depreciation—Equipment 7,700
Depreciation on equipment.

PE 3-6A Adjustment for accrued expense

Connect Realty Co. pays weekly salaries of $16,250 on Friday for a five-day workweek ending on that day. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Wednesday.


Answer:

Salaries Expense 9,750
Salaries Payable 9,750
Accrued salaries [($16,250 ÷ 5 days) × 3 days].

PE 3-6B Adjustment for accrued expense

Prospect Realty Co. pays weekly salaries of $27,600 on Monday for a six-day workweek ending the preceding Saturday. Journalize the necessary adjusting entry at the end of the accounting period, assuming that the period ends on Friday.


Answer:

Salaries Expense 23,000
Salaries Payable 23,000
Accrued salaries [($27,600 ÷ 6 days) × 5 days].

PE 3-5A Adjustment for accrued revenues

At the end of the current year, $12,840 of fees have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees.


Answer:

Accounts Receivable 12,840
Fees Earned 12,840
Accrued fees.

PE 3-5B Adjustment for accrued revenues

At the end of the current year, $17,555 of fees have been earned but have not been billed to clients. Journalize the adjusting entry to record the accrued fees.


Answer:

Accounts Receivable 17,555
Fees Earned 17,555
Accrued fees.

PE 3-4B Adjustment for unearned revenue

On June 1, 2014, Herbal Co. received $18,900 for the rent of land for 12 months. Journalize the adjusting entry required for unearned rent on December 31, 2014.


Answer:

Unearned Rent 11,025
Rent Revenue 11,025
Rent earned [($18,900 ÷ 12 months) × 7 months].

PE 3-4A Adjustment for unearned revenue

The balance in the unearned fees account, before adjustment at the end of the year, is $78,500. Journalize the adjusting entry required, assuming the amount of unearned fees at the end of the year is $33,675.


Answer:

Unearned Fees 44,825
Fees Earned 44,825
Fees earned ($78,500 – $33,675).

PE 3-3A Adjustment for prepaid expense

The supplies account had a beginning balance of $1,975 and was debited for $4,125 for supplies purchased during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of supplies on hand is $1,850.


Answer:

Supplies Expense 4,250
Supplies 4,250
Supplies used ($1,975 + $4,125 – $1,850).

PE 3-3B Adjustment for prepaid expense

The prepaid insurance account had a beginning balance of $9,600 and was debited for
$12,900 of premiums paid during the year. Journalize the adjusting entry required at the end of the year, assuming the amount of unexpired insurance related to future periods is $7,360.


Answer:

Insurance Expense 15,140
Prepaid Insurance 15,140
Insurance expired ($9,600 + $12,900 – $7,360).

PE 3-1B Accounts requiring adjustment

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry.
a. Building
b. Cash
c. Interest Expense
d. Miscellaneous Expense
e. Nathan Archer, Capital
f. Prepaid Insurance


Answer:
a. No
b. No
c. Yes
d. No
e. No
f. Yes

PE 3-2A Type of adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense.

a. Cash received for services not yet rendered
b. Insurance paid for the next year
c. Rent revenue earned but not received
d. Salaries owed but not yet paid


Answer:
a. Unearned revenue
b. Prepaid expense
c. Accrued revenue
d. Accrued expense

PE 3-2B Type of adjustment

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense.

a. Cash received for use of land next month
b. Fees earned but not received
c. Rent expense owed but not yet paid
d. Supplies on hand


Answer:
a. Unearned revenue
b. Accrued revenue
c. Accrued expense
d. Prepaid expense

PE 3-1A Accounts requiring adjustment

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry.
a. Accumulated Depreciation
b. Albert Stucky, Drawing
c. Land
d. Salaries Payable
e. Supplies
f. Unearned Rent


Answer:
a. Yes
b. No
c. No
d. Yes
e. Yes
f. Yes