Chapter 4, Problem 6CP

a.1.

To determine

Identify the number of accounting periods where this transaction directly affects Company C’s financial statements.

Explanation of Solution

Financial statement:

Financial statements are condensed summary of transactions communicated in the form of reports for the purpose of decision making. The financial statements reports, and shows the financial status of the business. The financial statements consist of the balance sheet, income statement, statement of retained earnings, and the cash flow statement.

Explain the number of accounting periods where this transaction directly affects Company C’s financial statements:

The number of accounting periods where this transaction directly affects Company C’s financial statements are 14years $\left(\frac{\$14,000}{\$1,000}\right)$ which is from 2014 to 2027.

a.2.

To determine

Ascertain the depreciation expense which is reported on the 2013 and 2014 income statements.

Explanation of Solution

Ascertain the depreciation expense which is reported on the 2013 and 2014 income statements:

The depreciation expense which is reported on the 2013 and 2014 income statement is $1,000.

a.3.

To determine

Ascertain the manner in which the office equipment would be reported on the 2016 balance sheet.

Explanation of Solution

Ascertain the manner in which the office equipment would be reported on the 2016 balance sheet:

Balance sheet at December 31, 2016
Assets	Amount ($)
Office equipment	$14,000
Less:  Accumulated depreciation (1)	3,000
Net book (carrying) value	$11,000

Table (1)

Working notes:

Calculation of accumulated depreciation:

$\begin{array}{c}\text{Accumulated depreciation = Actual cost }\times \text{ Number of years}\\ \text{= \$1,000}\times \text{3(2016, 2017, 2018)}\\ \text{=\$3,000}\end{array}$ (1)

a.4.

To determine

Explain whether Company C has to make an adjusting entry at the end of each year during the life of the equipment.

Explanation of Solution

Yes, The Company C has to make an adjusting entry at the end of each year during the life of the equipment.

Prepare the adjusting entry at the end of each year during the life of the equipment:

Date		Account Title and Explanation	Debit ($)	Credit ($)
		Depreciation expense (+E, -SE)	1,000
		Accumulated depreciation (+XA, -A)		1,000
		(To record the accumulated depreciation)

Table (2)

• Depreciation expense is an expense account which is a component of stockholders’ equity. There is an increase in expense account which decreases the stockholders’ equity. Hence, debit depreciation expense with $1,000.
• Accumulated depreciation is a contra-asset. There is a decrease in the asset. Hence, credit accumulated depreciation with $1,000.

b.1.

To determine

Identify the number of accounting periods where this transaction directly affects Company C’s financial statements.

Explanation of Solution

Identify the number of accounting periods where this transaction directly affects Company C’s financial statements:

The number of accounting periods where this transaction directly affects Company C’s financial statements is 2years which is from 2016 to 2017 because four month’s rent revenue have been earned in 2016, and two month’s rent revenue will be earned in 2017.

b.2.

To determine

Ascertain the amount of rent revenue on office space of Company C is reported on the 2016 income statements.

Explanation of Solution

Determine the amount of rent revenue on office space of Company C is reported on the 2016 income statements:

The income statement of 2016 should report rent revenue on this office space of Company C is $20,000 $\left(\$30,000\times \frac{4}{6}\right)$ because occupancy was provided only for 4 months in 2016.

b.3.

To determine

Explain whether the transaction creates a liability for Company C as of the end of 2016.

Explanation of Solution

Explain whether the transaction creates a liability for Company C as of the end of 2016:

Yes, the transaction creates $10,000$\left(\$30,000-\$20,000\right)$ liability for Company C at the end of the year 2016, because on this day Company C “owes” the renter two months occupancy which it has already collected the cash.

b.4.

To determine

Prepare the adjusting entry on December 31, 2017 and to explain.

Explanation of Solution

Prepare the adjusting entry on December 31, 2017 and to explain:

Date		Account Title and Explanation	Debit ($)	Credit ($)
		Unearned rent revenue (-L)	10,000
		Rent revenue (+R, +SE)		10,000
		(To record collection of unearned revenue)

Table (3)

• Unearned revenue is a liability. There is a decrease in the liability. Hence, debit unearned revenue with $10,000.
• Cleaning service revenue is revenue which is a component of stockholders’ equity. There is an increase in the revenue account which increases the stockholders’ equity. Hence, credit cleaning service revenue with $10,000.

Yes, an adjusting entry must be made to increase the rent revenue account and to decrease the liability account.

c.1.

To determine

Explain the number of accounting periods where this transaction directly affects Company C’s financial statements.

Explanation of Solution

Explain the number of accounting periods where this transaction directly affects Company C’s financial statements:

The number of accounting periods where this transaction directly affects Company C’s financial statements is 2years where expense incurred in 2016 and the cash payment in 2017.

c.2.

To determine

Ascertain the manner in which the Company C affects the income statement and balance sheet of $7,500.

Explanation of Solution

In 2016:

The $7,500 which is reported as wages expense in the income statement.

The $7,500 is reported as liability on the balance sheet.

In 2017:

The $7,500 which is reported as liability on the balance sheet in 2016 is paid on January 5, 2017 and 2017 balance sheet shows reduced cash balance and reduced liability balance.

This transaction will not directly affect the 2017 income statement because the adjusting entry has not been made.

c.3.

To determine

Prepare the adjusting entry on December 31, 2016 and to explain.

Explanation of Solution

Prepare the adjusting entry on December 31, 2016 and to explain:

Date		Account Title and Explanation	Debit ($)	Credit ($)
		Wages expense (+E, -SE)	7,500
		Wages payable (+L)		7,500
		(To record the payment of wages payable )

Table (4)

• Wages expense is an expense account which is a component of stockholders equity. There is an increase in the expense which decreases the stock holders’ equity. Hence, debit wages expense with $7,500.
• Wages payable is a liability. There is an increase in the liability. Hence, credit wages payable with $7,500.

Yes, an adjusting entry must be made to record the $7,500 as an expense in 2016 and to record the liability which is to be paid in 2017.

d.1.

To determine

Explain the manner in which service revenue is recorded on this job for 2016.

Explanation of Solution

Yes, Service revenue of $45,000 $(\$60,000\times \frac{3}{4})$ which is to be recorded as earned by Company C by recognizing as services has been performed.

d.2.

To determine

Prepare the adjusting entry on December 31, 2016 and to explain.

Explanation of Solution

Prepare the adjusting entry on December 31, 2016 and to explain:

Date		Account Title and Explanation	Debit ($)	Credit ($)
		Accounts receivable (+A) $(\$60,000\times \frac{3}{4})$	45,000
		Service revenue (+R, +SE)		45,000
		(To record services provided on account)

Table (5)

• Accounts receivable is an asset. There is an increase in the asset. Hence, debit asset with $45,000.
• Service revenue is revenue which is a component of stockholders’ equity. There is an increase in the revenue which increases the stockholders’ equity. Hence, credit service revenue with $45,000.

Yes, adjusting entry is necessary to record the revenue earned and to record the accounts receivable

d.3.

To determine

Prepare the entry for Company C for collecting the full contract price on the completion date which is on February 15, 2017.

Explanation of Solution

Prepare the entry for Company C for collecting the full contract price on the completion date which is on February 15, 2017:

Date		Account Title and Explanation	Debit ($)	Credit ($)
		Cash (+A)	60,000
		Accounts receivable (+A) $(\$60,000\times \frac{3}{4})$		45,000
		Service revenue (+R, +SE)		15,000
		(To record collection of cash)

Table (6)

• Cash is an asset. There is an increase in the asset. Hence, debit asset with $60,000.
• Accounts receivable is an asset. There is a decrease in the asset. Hence, debit asset with $45,000.
• Service revenue is revenue which is a component of stockholders’ equity. There is an increase in the revenue which increases the stockholders’ equity. Hence, credit service revenue with $15,000.