1. The company’s consolidated statement of income is provided below:
Years Ended December 31,
(in millions of dollars) 2020 2019
Sales by company-operated restaurant
stores $8,894.9 $8,136.5
Revenue from franchised stores 3,526.5 3,272.3
Total revenues 12,421.4 11,408.8
Operating costs and expenses
Company-operated restaurant expenses:
Food and packaging 2,997.4 2,772.6
Payroll and other employee benefits 2,220.3 2,025.1
Occupancy and other operating
General, administrative and selling
Made-for-You and special charges 321.6
Other operating (income) expense (60.2) (113.5)
Total operating costs and expenses 9,659.5 8,600.5
Operating income 2,761.9 2,808.3
Interest expense 393.8 364.4
Other nonoperating expenses 60.7 36.6
Income before provision for income
taxes 2,307.4 2,407.3
Income tax expense 757.3 764.8
Net income $1,550.1 $1,642.5
Refer to Cabana Club. Prepare all closing entries necessary based on the income statement for the year
ended December 31, 2020.
“You Decide” Essay
2. You are the owner and operator of a catering business. In addition to catering a wide variety of
functions such as business meetings, weddings, birthday parties, etc., you sell decorated cakes in your
store. A particular business customer has signed a $12,000 contract with you to provide refreshments for
its monthly business meetings with the total contract amount due at the contract signing.
Describe the rules you will follow in booking (i.e., recording) the cake sales revenues and catering
contracts such as the one described here.
3. Why is the cash basis of accounting too limited for proper financial reporting?
4. Can We Help?, a local walk-in medical practice, had the following account balances at December 31,
Building $480,000 Accumulated Depreciation–Bldg $12,000
Cash $20,000 Common Stock $300,000
Supplies $2,000 Retained Earnings $190,000
During 2020, the following transactions occurred:
1. On March 1, purchased a one-year mal-practice insurance policy for $12,000 cash.
2. On July 1, borrowed $50,000 cash from First American Bank. The interest rate on the note
payable is 8%. Principal and interest is due in cash in one year.
3. Employee salaries in the amount of $23,000 were paid in cash.
4. At the end of the year, $1,000 of the supplies remained on hand.
5. Provided $100,000 in consulting services for cash during 2013 in cash.
6. At December 31, $6,000 in employee salaries were accrued.
7. On December 31, received $10,000 in cash representing advance payment for services to be
provided in February 2021.
8. Annual depreciation on the building is based on a useful life of 20 years and no salvage
Determine the effect on the accounting equation of the preceding transactions including
any related year-end adjusting entries that may be required. Hint: It may be helpful to
create a table to reflect the increases and decreases in accounts.
B) Prepare an income statement for 2020 ignoring income taxes.
C) Prepare a statement of retained earnings for 2020 assuming no dividends were paid.
D) Prepare a classified balance sheet at December 31, 2020.
5. Several accounts from the financial statements of Hotlanta Promotions, Inc. are listed below. In the two
columns provided for answers, indicate the type of account and the normal account balance. Use the
following identification codes for your answers:
Type of Account Normal Balance
A = Asset Dr = Debit
L = Liability Cr = Credit
SE = Stockholders’ Equity
R = Revenue
E = Expense
Type of Normal
A) Prepaid Rent
B) Television Equipment
C) Unearned Revenue
D) Service Revenue
E) Common Stock
F) Accounts Payable
G) Income Tax Expense
H) Interest Income
I) Salary Expense
J) Notes Payable
6. Several transactions are listed below, with an expanded accounting equation stated to the right side of
each. Use the following identification codes to indicate the effects of each transaction on the accounting
equation: I = Increase; D = Decrease; NE = No Effect. Write your answers in the space provided under
the accounting equation, being sure to include an identification code for each element of the accounting
Assets = Liabilities + Capital + Earnings
A) Issue common stock
B) Borrow money from the
C) Purchase land for cash
D) Purchase a 1-year
E) Purchase supplies on
F) Services are provided for
Receive cash in advance
for services to be
provided next week.
H) Pay utilities for current
I) Pay employee salaries
for current month
7. H&R Clock Company
The following transactions were incurred during July 2019:
July 1 Raised $30,000 by issuing a note to the bank for $15,000 and issuing $15,000 of
July 5 Purchased $5,100 of office supplies on credit; payment is due in 30 days.
July 12 Performed $18,000 of services for customers on credit; collection is due in 30
July 13 Performed services for customers and collected $8,800.
July 20 Paid for the supplies purchased on July 5.
July 22 Collected $15,000 of the amounts due from customers.
July 30 Received and paid the utility bill for the month of July, $640.
July 31 Paid employee salaries of $3,800.
Refer to H&R Clock Company. Prepare a trial balance in proper format. Assume that the company had no
additional accounts or balances other than those created from the July transactions.
8. Complete the following table to compare and contrast sole proprietorships and corporations.
Item Proprietorship Corporation
Ease of formation
Ability to raise large sums of capital
Extent of owner liability
Double taxation of profits?
9. HVAC Service
The following transactions occurred during November:
Nov. 1 Sent bills to clients for services provided in August in the amount of $12,000.
Purchased office equipment of $4,000 and office supplies of $150 from Office
Depot receiving an invoice for $4,150. None of the office supplies were used
Nov. 15 Paid for the office furniture and supplies purchased from Office Depot.
Nov. 23 Received a $350 bill from WKRP Radio for advertising. The bill will be paid
Nov. 30 Paid salaries of $2,500 to employees.
95. Refer to HVAC Service. The journal entry to record payment for the office equipment and supplies
will include a debit to
a. salary expense.
b. salaries payable.
c. prepaid expenses.
d. accounts payable.
10. The bookkeeper for City Rentals closed the books before the accountant had had a chance to prepare
the financial statements. Use the bookkeeper’s closing entries to prepare, in good form, a statement of
retained earnings for the year ended December 31, 2019, the first year of operations for this company.
Dec. 31 Sales Revenue 125,000
Rent Revenue 22,000
Income Summary 147,000
Income Summary 78,400
Salaries and Wages Expense 45,000
Rent Expense 18,000
Utilities Expense 9,200
Supplies Expense 1,000
Insurance Expense 5,200
Retained Earnings 22,000