2-1

Cash to AccrualAdjusting Entries and

Income Statement

Chapter 2Illustrated Solution: Problem 2-30Illustrated Solution: Problem 2-30

2-2

Gee Enterprises records all transactions on the cash basis.

You have been asked to prepare an income statement on the accrual basis.

Prepare adjusting entries to convert the books from a cash to an accrual basis.

Part 1Part 1

2-3

SituationAmounts due from customers at year-end were $28,000. Of this amount, $3,000 will probably not be collected.

Part 1 (a)Part 1 (a)

2-4

SituationAmounts due from customers at year-end were $28,000. Of this amount, $3,000 will probably not be collected.

Part 1 (a)Part 1 (a)

Solution

Accounts Receivable…………………………… 28,000

Sales………………………………………… 28,000

Doubtful Accounts Expense…………………… 3,000

Allowance for Doubtful Accounts ………… 3,000

2-5

SituationSalaries of $11,000 for December 2002 were paid on January 5, 2003. Ignore payroll taxes.

Part 1 (b)Part 1 (b)

2-6

SituationSalaries of $11,000 for December 2002 were paid on January 5, 2003. Ignore payroll taxes.

Part 1 (b)Part 1 (b)

Solution

Salaries Expense ……………………………… 11,000

Salaries Payable…………………………… 11,000

2-7

SituationGee rents its building for $3,000 a month, payable quarterly in advance. The contract was signed on January 1, 2002.

Part 1 (c)Part 1 (c)

2-8

SituationGee rents its building for $3,000 a month, payable quarterly in advance. The contract was signed on January 1, 2002.

Part 1 (c)Part 1 (c)

Solution

Prepaid Rent……………………………………… 9,000

Rent Expense………………………………… 9,000

2-9

SituationThe bill for December’s utility costs of $2,700 was paid January 10, 2003.

Part 1 (d)Part 1 (d)

2-10

SituationThe bill for December’s utility costs of $2,700 was paid January 10, 2003.

Part 1 (d)Part 1 (d)

Solution

Utilities Expense…………………………………. 2,700

Accrued Liabilities…………………………… 2,700

2-11

SituationEquipment of $30,000 was purchased on January 1, 2002. The expected life is 5 years, no salvage value. Assume straight-line depreciation.

Part 1 (e)Part 1 (e)

2-12

SituationEquipment of $30,000 was purchased on January 1, 2002. The expected life is 5 years, no salvage value. Assume straight-line depreciation.

Part 1 (e)Part 1 (e)

Solution

Depreciation Expense…………………………… 6,000

Accumulated Depreciation—Equipment ….. 6,000

$30,000/5 years.

2-13

SituationCommissions of 15% of sales are paid on the same day cash is received from customers.

Part 1 (f)Part 1 (f)

2-14

SituationCommissions of 15% of sales are paid on the same day cash is received from customers.

Part 1 (f)Part 1 (f)

Solution

Commission Expense……………………………. 3,750

Commission Payable………………………… 3,750$25,000 x 15%. No commission onuncollectible accounts.

2-15

SituationA 1-year insurance policy was issued on company assets on July 1, 2002. Premiums are paid annually in advance.

Part 1 (g)Part 1 (g)

2-16

SituationA 1-year insurance policy was issued on company assets on July 1, 2002. Premiums are paid annually in advance.

Part 1 (g)Part 1 (g)

Solution

Prepaid Insurance………………………………. 3,000

Insurance Expense…………………………. 3,000$6,000 x 6/12.

2-17

SituationGee borrowed $50,000 for one year on May 1, 2002. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1, 2002. (Quarterly payments will also be made on November 1, 2002, February 1, 2003 and May 1, 2003.)

Part 1 (h)Part 1 (h)

2-18

SituationGee borrowed $50,000 for one year on May 1, 2002. Interest payments based on an annual rate of 12% are made quarterly, beginning with the first payment on August 1, 2002. (Quarterly payments will also be made on November 1, 2002, February 1, 2003 and May 1, 2003.)

Part 1 (h)Part 1 (h)

Solution

Interest Expense………………………………… 1,000

Interest Payable ……………………………. 1,000$50,000 x 12% x 2/12.

2-19

SituationThe income tax rate is 40%. No prepayments of income taxes were made during 2002.

Part 1 (i)Part 1 (i)

2-20

SituationThe income tax rate is 40%. No prepayments of income taxes were made during 2002.

Part 1 (i)Part 1 (i)

Solution

Income Tax Expense….………………………… 26,300

Income Taxes Payable..……………………. 26,300$65,750 x .4; see Part 2.

2-21

Prepare the income statement for the year ended December 31, 2002, based on the entries in Part 1.

Part 2Part 2

2-22

Prepare the income statement for the year ended December 31, 2002, based on the entries in Part 1.

Part 2Part 2

2-23

End of ProblemEnd of Problem