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Chapter 5: Financial statement preparation and closing entries.

Key Terms

Change in Excess of Market Value over Cost/Tax Basis of Farm Capital Assets

Change in Non-Current Portion of Deferred Taxes

Closing entries

Closing the accounts

Historical cost

Historical cost principle

Market-based financial statements

Permanent accounts

Temporary accounts

Unadjusted Trial Balance

**********

In Chapter 4, you learned how to tell the difference between the cash-basis system, the accrual-basis system, and the accrual-adjusted approach; how to prepare and post adjusting journal entries for inventory, prepaid items, depreciation, accrued expenses, accrued revenues, changes in value for raised breeding livestock, income taxes, and deferred taxes in the accrual-adjusted approach; and how to prepare an adjusted trial balance.

This chapter outlines the procedures for preparing financial statements from two perspectives. One perspective continues from Chapter 4, which illustrated the recording and posting of adjusting journal entries and concluded with an adjusted trial balance. The other perspective starts with an unadjusted trial balance, then the preparation of cash-basis financial statements, followed by adjustments made directly to the financial statements. This chapter also teaches you how to prepare market-based financial statements and how to perform the closing entries after preparing financial statements.

In this chapter, you will learn how to prepare an income statement, statement of owner equity, balance sheet, and statement of cash flows from an unadjusted trial balance and from an adjusted trial balance. You will then learn how to add adjustments to cash-basis financial statements to convert them into accrual-adjusted financial statements. This chapter also teaches you how to prepare financial statements with market values. Finally, you will learn how to record closing journal entries, why it is necessary to record them, and how to calculate adjustments after the first year of operation.

PREPARING FINANCIAL STATEMENTS
Learning Objective 1 * To list
the steps involved in preparing
financial statements.


So far, you have learned how to record cash transactions in the journal as they occur, and to post them to the ledger accounts. Recall that the journal is a chronological record of transactions and the ledger is a collection of all of the accounts involved in the transactions. You have also learned how to record journal entries for the year-end adjustments--so that the income statement will present an accurate picture of the earnings and expenses of the farm business. The balance sheet will also report a more accurate picture of assets, liabilities, and equity after the adjustments. You have also learned the importance of preparing financial statements at least once a year, to keep the financial information timely.

You can perform year-end adjustments by recording adjusting journal entries (as you learned how to do in Chapter 4) or by adjusting cash-basis financial statements directly without recording journal entries. Figure 5-1 demonstrates the differences between the two ways of making adjustments.

As Figure 5-1 illustrates, if you choose not to record adjusting journal entries, you prepare a trial balance called an Unadjusted Trial Balance, which does not display any adjustments. An unadjusted trial balance would look like the one in Appendix E.

Income Statement
Learning Objective 2 * To
prepare an income statement
from a trial balance.


After preparing the trial balance, the first financial statement to prepare is the income statement. As Figure 5-1 indicates, you can prepare an accrual-adjusted income statement after recording and posting adjusting journal entries. Or, you can first prepare a cash-basis income statement and then add the adjustments. Using the format for the income statement that you learned about in Chapter 1, you can prepare the income statement with the information from the revenues, expenses, gains, and losses accounts on either the adjusted or unadjusted trial balance. Figure 5-2 demonstrates the process of preparing a cash-basis income statement from the Farmers' unadjusted trial balance in Appendix E.
Exercise 5-1 Using the Farmers' adjusted trial balance in Appendix G,
prepare the accrual-adjusted income statement. Answer: Check your income
statement with the income statement in Appendix A.

PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problems 5-1 and 5-2 at the end of the chapter.


Statement of Owner Equity
Learning Objective 3 * To
prepare the statement of owner
equity.


The statement of owner equity summarizes the transactions that involve the equity accounts. You prepare it using the information from the trial balance and the income statement. Figure 5-3 demonstrates the process of preparing a cash-basis statement of owner equity for the Farmers using the format discussed in Chapter 1. The Farmers use the unadjusted trial balance and the net cash income from the cash-basis income statement. The amounts for owner withdrawals, non-farm income, and gifts and inheritances are from the ledger accounts listed in the unadjusted trial balance.
Exercise 5-2 Using the adjusted trial balance in Appendix G and the
accrual-adjusted income statement in Appendix A, prepare the
statement of owner equity. Answer: Check your statement of owner
equity with the one in Appendix A.

PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 5-3 at the end of the chapter.


[FIGURE 5-1 OMITTED]

[FIGURE 5-2 OMITTED]

Balance Sheet
Learning Objective 4 * To
prepare a balance sheet.


After preparing the statement of owner equity, the next statement to prepare is the balance sheet. Following the format for the balance sheet that you learned about in Chapter 1, you can prepare the balance sheet with the information for the asset, liability, and equity accounts on the trial balance and the owners' equity at the end of the year from the statement of owner equity. Remember from Chapter 1 that the balance sheet lists the current assets and current liabilities first in their respective sections. Figure 5-4 demonstrates the process of preparing a cash-basis balance sheet for the Farmers. We use the unadjusted trial balance and the owner equity at the end of the year from the statement of owner equity in Figure 5-3 to prepare the balance sheet. The amounts for the assets and liabilities are from the ledger accounts listed in the unadjusted trial balance.

[FIGURE 5-3 OMITTED]

[FIGURE 5-4 OMITTED]

Notice that the amount of Total Assets is equal to the amount of Total Liabilities and Owners' Equity; thus, the accounting equation is in balance.
Exercise 5-3 Using the adjusted trial balance in Appendix G and the
statement of owner equity in Appendix A, prepare the accrual-adjusted
balance sheet. Answer: Check your balance sheet with the one
in Appendix A.

PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 5-4 at the end of the chapter.


Statement of Cash Flows
Learning Objective 5 * To
prepare the statement of cash
flows.


The statement of cash flows presents an analysis of the cash flows of the farm operation. By reporting the cash involved in financing, investing, and operating activities, the statement answers a basic question of any business operation, "Where did all the money come from and where did it go?" In particular, the statement provides valuable information about operating cash flows. Having adequate cash flows to meet operating expenses is essential to any business organization. If operating cash flows are negative, then the business is operating from either financing activities or investing activities or both. The farm business must generate positive operating cash flows to remain in business. An accrual-adjusted statement of income does not provide enough information to assess the cash position of the farm business because the "change" items are noncash in nature.

To prepare the statement of cash flows, first categorize the activities that involve cash. Refer to the Cash account to categorize each transaction, beginning with operating activities, followed by investing activities, and then financing activities. Figure 5-5 displays the statement of cash flows for the Farmers.

Because this was the Farmers' first year of operation, no cash balance for the farm operation existed at the beginning of the year. Notice also that the cash balance at the end of the year is equal to the balance in the Cash account on the balance sheet. If they are not equal, you have made a mistake in preparing the statement. You must rectify the errors until the ending balance on the statement of cash flows equals the balance in the cash account.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 5-5 at the end of the chapter.


ADJUSTMENTS TO CASH-BASIS FINANCIAL STATEMENTS
Learning Objective 6 * To
adjust cash-basis financial
statements.


If you do not record adjusting journal entries, you should add items to the cash-basis statements to adjust them to accrual numbers. You have to determine the amounts for inventories, prepaid expenses, accrued expenses, accrued revenues, depreciation, raised breeding livestock, income taxes, and deferred taxes.
Suppose that the Farmers had not recorded the adjusting journal
entries illustrated in Chapter 4. At the end of the year, they
prepared cash-basis financial statements as shown in Figures 5-3,
5-4, and 5-5. They examined their inventories and their records and
just as they did in Chapter 4, they determined that the following
items existed:

1. Inventories: amount of raised hay on hand, $2,300; amount of
raised grain on hand, $6,000; purchased feed on hand, $230;
purchased feeder pigs on hand, $750.

2. Prepaid expenses: $700 worth of insurance not yet used up and
$2,500 spent on the maintenance of the perennial crop that they
have not yet harvested.

3. Accrued expenses: $5,000 of interest owed on their loans. They
also owe $340 in unpaid bills.

4. Accrued revenues: They found that someone owes them $3,500.

5. After preparing the cash-basis income statement and consulting
with their tax accountant, they estimated that they owe $3,030 in
income taxes. Deferred taxes are determined after they adjust the
income statement.

They adjust the balance sheet for each of these items.

For the inventories, prepaid expenses, accrued expenses, and
accrued revenues, they also determine the changes in these items
since the beginning of the year. Because this year is their first
year of operation, most of these items did not exist at the
beginning of the year.

                                   Beginning   End of   Difference
                                    of 20X1     20X1

Accounts Receivable                      0     $3,500     $3,500
Feed Inventory Purchased for Use         0        230        230
Feed Inventory Raised for Use            0      2,300      2,300
Crop Inventory Raised for Sale           0      6,000      6,000
Feeder Livestock Inventory
  Purchased for Resale                   0        750        750
Prepaid Expense                          0        700        700
Cash Investment in Growing Crops         0      2,500      2,500
Accounts Payable                         0        340        340
Taxes Payable                        2,160      3,030        870
Interest Payable                         0      5,000      5,000

They adjust the income statement for each of these differences.


You also need to calculate the amount of depreciation for the year. Proceed by increasing accumulated depreciation on the balance sheet by that amount, and include depreciation expense on the income statement.
The Farmers started out with $300 of accumulated depreciation on a
bull, but when they sold the bull, they eliminated the accumulated
depreciation from the records. The Farmers are interested in the
accumulated depreciation only for the assets that they currently
own. They had not calculated any depreciation on any other
non-current assets when they began their farming operation. At the
end of their first year of operation, the Farmers prepare a
schedule and include depreciation expense of $22,150 on the income
statement and $22,150 additional accumulated depreciation on the
balance sheet.

Asset                               Depreciation Expense per Year

Office Furniture                               $250
Buildings, Improvements                       4,400
Tractor                                       3,333
Truck                                         3,000
Leased Harvester                              6,667
Orchard                                       4,500
Depreciation Expense                        $22,150


You also need to adjust the raised breeding livestock account for changes in value due to age progression and changes in base values. Recall from Chapter 4 that the Farmers determined an adjustment to raised breeding livestock for $6,000. They adjust the balance sheet and the income statement for this item.

Then you will have to compute the current deferred taxes and the first component of non-current deferred taxes. The balance sheet reports the amount of current deferred taxes and the first component of non-current deferred taxes. After computing the amount of the current deferred taxes, you would compare that amount with the amount at the beginning of the year and calculate the difference. You also compute the amount of the first component of the non-current deferred taxes, compare these amounts with the amounts at the beginning of the year, and compute the difference. The income statement is adjusted for the differences for the current deferred taxes and the first component of non-current deferred taxes.
The Farmers determined the following amounts for deferred taxes:

Current deferred taxes: $1,450

First component of non-current deferred taxes: $3,300

                                 Beginning   End of   Difference
                                  of 20X1     20X1

Current Deferred Taxes               0       $1,450     $1,450
First component of Non-Current
  Deferred Taxes                     0        3,300      3,300


Begin the adjustments by making any changes and additions to the cash-basis income statement using the formats that you learned about in Chapter 1. Insert each of the differences in inventories, prepaid expenses, accrued expenses, accrued revenues, income taxes, and deferred taxes. Also insert the amount of depreciation expense, the change in value of raised breeding livestock due to age progression, and changes in base values. You then compute gross revenues, net farm income from operations, income before taxes, and accrual-adjusted net income, as indicated in Figure 5-6.

You are then ready to adjust the statement of owner equity. First, replace net cash income with the accrual adjusted net income from the accrual-adjusted income statement. You then compute the amount of owner equity at the end of the year, as illustrated in Figure 5-7.

Continue the adjustments by making changes and additions to the cash-basis balance sheet using the format from Chapter 1, as illustrated in Figure 5-8. Insert the amounts for inventories, prepaid expenses, accrued expenses, accrued revenues, and accumulated depreciation. Then adjust the raised breeding livestock account for changes in value for raised breeding livestock (age progression and base value changes). Add the deferred taxes to the liabilities. The equity section reports the amount of owner equity from the accrual-adjusted statement of owner equity.

None of the adjustments affect the statement of cash flows because none of the adjustments involve the cash account. You can prepare the statement of cash flows as illustrated earlier in this chapter.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned by
completing Problem 5-6 at the end of the chapter.


MARKET-BASED FINANCIAL STATEMENTS
Learning Objective 7 * To
prepare financial statements
with market values


The balance sheet usually shows each asset owned by the farm business at the book value (the original cost of each asset along with the accumulated depreciation) except for raised breeding livestock (which might be reported using base values). GAAP refers to reporting assets at book value as the historical cost principle. Historical cost refers to the original cost or purchase price of the asset. GAAP allows only historical cost reporting for assets on the balance sheet.

The FFSC recommends reporting both cost and market values for assets. Market-based financial statements report the market values for assets. Market values are useful for assessing collateral values for loans, so lenders are sometimes more interested in market values than book values for assets. The market values for all inventory items and non-current assets are determined through some appropriate appraisal process. A qualified appraisal helps verify market values and reduces any bias that the farm owner might have about the values of the farm assets. When market values are uncertain, the least optimistic value should be reported. The market values could be reported alongside the book values on the face of the balance sheet or in a second balance sheet. Reporting market values also requires adjustments to equity for the differences between book (or base values) and market values of assets, and for the difference in the second component of non-current deferred taxes (from the beginning of the year to the end of the year).

Purchased Inventory

For purchased feed for resale, purchased crops for resale, and purchased market livestock for resale, the balance sheet shows the original cost or what the inventory is worth (market value), if that is lower than the original cost. When the quantities of each of these inventories are being determined, you need to check the records for the original prices paid, and then estimate the market values through some valid appraisal process. Journal entries to adjust purchased inventory to market value are not necessary. Simply prepare a second set of financial statements that report market values. Reporting market values for inventory adds to the predictive value of the financial statements because they indicate the amount that will be received when the inventory will be sold.
During the year, Steve and Chris purchased feed for $1,000. They
used $770 of the feed, and the remainder has a cost value of $230.
If the feed will be used only in their farm operation, they would
report the amount of the feed at the cost of $230. If, however,
they might decide to sell the feed, they could report the market
value, if it was lower than $230. If the purchased feed has a
market value of $200 at the end of the year, the Balance Sheet
shows a value of $200. The amount for Change in Purchased Feed
Inventories is $200. The net effect of this adjustment is $800.

  Market value of purchased feed left over at the
    end of the year                                      $200
  - Feed Inventory Purchased for Use at beginning
    of the year                                            $0
  = Change in Purchased Feed Inventory                   $200

Market-Based Income Statement:
  Operating Expenses
    - Purchased Feed                                   (1,000)
    + Change in Purchased Feed Inventory                 $200
      Net Effect on Net Farm Income from Operations     ($800)

Market-Based Balance Sheet:
  Assets:
    Feed Inventory Purchased for Use                     $200

The Farmers purchased $1,500 worth of feeder pigs, sold half when
prices rose, and still have half on hand at the end of the year.
Suppose the remaining pigs had a market value of $700 at the end
of the year. The amount for Change in Purchased Feeder Livestock
Inventory is $700. The net effect of this adjustment is $800.

  Market value of purchased market livestock
    on hand at the end of the year                       $700
  - Feeder Livestock Inventory Purchased for
    Resale at beginning of the year                         0
  = Change in Purchased Feeder Livestock Inventory       $700

Market-Based Income Statement:
  Operating Expenses:
    - Feeder Livestock                                 (1,500)
    + Change in Purchased Feeder Livestock Inventory      700
      Net Effect on Net Farm Income from Operations     {$800)

Market-Based Balance Sheet:
  Assets:
    Feeder Livestock Inventory Purchased for Resale      $700

The FFSC is developing a set
of guidelines for determing
the cost of raising crops and
livestock.


Figure 5-9 demonstrates how to prepare an accrual-adjusted income statement with market adjustments.

Raised Inventory

The Farmers also raised and harvested hay during the year. Raised feedstuffs are most likely reported at market values because cost values are difficult to determine.

Therefore, the numbers in journal entry (33) in Chapter 4 are reporting the market value. The Farmers also harvested a grain crop and raised some feeder calves. As with the raised feedstuffs, the farm accountant values these inventories at market values. Therefore, the year-end adjustments discussed in journal entries (34) and (36) in Chapter 4 already reflect the market values.

Non-Current Assets

If you decide to report market values on the balance sheet, you must determine a market value for each of the non-current assets, usually with the aid of a farm appraiser. Then you calculate book values. The book value for each asset is its original cost minus the amount of accumulated depreciation for that asset, except for raised breeding livestock. The raised breeding livestock are not depreciated and are reported with base values instead of book values. Land is also not depreciated, so the book values are the original cost. Then you compare the market values with the book values for each of the assets. Prepare the market-based balance sheet with the market values. Adjust the statement of owner equity for the changes in these differences. The equity account for the market value adjustment is called Change in Excess of Market Value over Cost/Tax Basis of Farm Capital Assets in the FFSC Guidelines. Adjust all non-current farm assets including land, buildings and improvements, machinery and equipment, perennial crops, and all classes of purchased breeding livestock and poultry.
The Farmers calculated book values by subtracting the accumulated
depreciation for each asset (except land and raised breeding
livestock) from its cost. They also conducted an appraisal of their
non-current assets. The land that Steve and Chris inherited had a
value of $800 per acre at the time of the inheritance and consists
mostly of cropland. Similar land in the area recently sold for $900
per acre. The recently purchased acreage has not changed much in
value since the purchase. The machinery and equipment have a book
value of $58,667 and a total market value of approximately $62,167.
The 145 breeding cows have a base value of $79,500 (after the
adjustment for age progression) and a market value of $64,500. The
appraisal indicates that the market values for other assets are as
follows: office furniture and equipment, $750; orchard, $40,500;
buildings and improvements, $105,600; and leased harvester,
$93,333. Then they computed the difference between the book or base
values and the market values.

Non-current assets (cost--          Book or Base   Market    Difference
  accumulated depreciation)            Values      Values
Breeding Livestock ($73,500 +
  6,000 age adjustment)                79,500       64,500    (15,000)
Machinery and Equipment
  ($65,000 - 3,333 - 3,000)            58,667       62,167      3,500
Office Equipment and Furniture
  ($1,000 - 250)                          750          750          0
Perennial Crops ($45,000 - 4,500)      40,500       40,500          0
Land ($240,000 + 120,000; no
  depreciation)                       360,000      390,000     30,000
Buildings/Improvements
  ($110,000 - 4,400)                  105,600      105,600          0
Leased Assets ($100,000 - 6,667)       93,333       93,333          0
Excess of market value over cost                               18,500

The Balance Sheet does not report depreciation with market values
because depreciation is an allocation of the purchase price, which
is not relevant when reporting market values.

Balance Sheet:
  Non-Current Assets:                Book or Base   Market

    Breeding Livestock                  79,500       64,500
    Machinery and Equipment             58,667       62,167
    Office Furniture and Equipment         750          750
    Orchard                             40,500       40,500
    Buildings and Improvements         105,600      105,600
    Land
      Inherited acreage                240,000      270,000
      Purchased acreage                120,000      120,000
    Leased harvester                    93,333       93,333
    Totals                             738,350      756,850

The difference between the total book and base values of $738,350
and the total market values of $756,850 is $18,500. You compare this
difference with the excess of market values over cost values at the
end of the previous year. The Farmers were not keeping these records
until they started their own farm business this year, so at the
beginning of the year there was no excess of market value over cost.

  Excess of market value over cost at the
    end of the year                         $18,500
  - Excess of market Value over cost at
    beginning of the year                         0
  = Change in Excess of market Value over
    cost/Tax Basis                          $18,500

This amount shows up on the statement of owner equity as part of
Valuation Equity:

Statement of Owner Equity:
  Valuation Equity:
  Change in Excess of Market Value over Cost/Tax
    Basis of Farm Capital Assets                   $18,500


Non-Current Deferred Taxes

Adjustments for differences between book/base values and current market values for non-current assets affect income taxes for the year because they represent increases or decreases in value that would manifest in the future if the assets are sold. They do not affect the actual amount of taxes paid for that year, but they are part of the accrual-adjusted farm financial statements. The balance sheet reports deferred taxes for these increases or decreases in equity in the year in which the market values changed. These types of tax liabilities are reported as the second component of Non-Current Deferred Taxes because they are not likely to be resolved during the next year (unless some of these assets are sold).

* The second component of non-current deferred taxes relates to the difference between book or base values and current market values of non-current assets.

* the difference between current market values and base values of raised breeding livestock and

* the difference between current market values and book values of other non-current assets

You adjust the statement of owner equity for the second component as Change in Non-Current Portion of Deferred Taxes, a contra or adjunct equity account reported with Change in Excess of Market Value over Cost/Tax Basis of Farm Capital Assets to show the tax effects of the market value adjustments.
Suppose that the Farmers determine that $6,850 is the amount of the
second component of non-current deferred taxes. To calculate Change in
Non-Current Portion of Deferred Taxes pertaining to the second
component of non-current deferred taxes:

Amount of the second component of non-current
  deferred taxes at end of the year                           $6,850
--Non-Current Deferred Taxes (second component) at the
  beginning of the year                                          - 0
=Change in Non-Current Portion of Deferred Taxes              $6,850

The Statement of Owner Equity reports this adjustment as part of
valuation equity. The Balance Sheet reports both
components of non-current deferred taxes and valuation equity.

Statement of Owner Equity:
  Valuation Equity:
    Change in Excess of Market Value over Cost/Tax
      Basis of Farm Capital Assets                           $18,500
    Change in Non-Current Portion of Deferred Taxes          (6,850)
      Effect on Equity                                       $11,650

Balance Sheet:
  Liabilities:
    Current Liabilities:
      Taxes Payable                         $3,030
      Current Deferred Taxes                 1,450
    Non-Current Liabilities:
      Non-Current Deferred Taxes
        ($3,300 + 6,850)                    10,150

  Equity:
    Valuation Equity                         11,650


Figure 5-10 demonstrates how to prepare an accrual-adjusted statement of owner equity with market adjustments, followed by an accrual-adjusted balance sheet with market adjustments.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned by
completing Problem 5-7 at the end of the chapter.


CLOSING ENTRIES
Learning Objective 8 * To
prepare closing journal entries.


The closing entries are the final journal entries prepared at the end of the year to prepare the accounts for the beginning of next year. These entries transfer the balances in the income statement accounts and some of the equity accounts to the Retained Capital account. The transfer of these balances is known as closing the accounts. Closing the accounts accomplishes two purposes.

* It transfers the amount of net income to Retained Capital so that Retained Capital reports the amount of earnings of the farm operation. Net income accumulates in Retained Capital each year.

* It makes the income statement accounts and certain equity accounts begin the next year with a balance of zero.

The income statement and statement of owners' equity report the activities for one year only. The income statement and statement of owner equity accounts (except Retained Capital and Valuation Equity) must begin each year with a balance of zero so that they will not carry over any amounts from one year to the next. For this reason, they are considered to be temporary accounts. The balance sheet accounts are not closed and are considered to be permanent accounts, because they report the results of activities on a continuous basis.

The first closing entry closes all of the income statement accounts. These accounts begin with the numbers 4, 5, 6, 7, 8, and 9. To close the accounts, debit all accounts with credit balances and credit all accounts with debit balances for the amount of the balance. For the closing entry to balance (in which debits equal credits), make a debit or a credit to Retained Capital. The amount needed for the closing

journal entry to balance is the difference between the total of the debits and the total of the credits. This amount is also the Net Cash Income shown on the cash-basis income statement or the Accrual-Adjusted Net Income if the income statement is accrual adjusted. This closing entry adds the income for the year to Retained Capital. When the closing entry is posted, the income statement accounts will have zero balances.

The second closing entry closes the equity accounts for owner withdrawals, non-farm income, and the capital contributions. If these accounts have debit (credit) balances, they are credited (debited) in the closing entry. This closing entry adds the non-farm income and capital contributions to and subtracts owner withdrawals from Retained Capital. After posting this entry, the balance in the Retained Capital account corresponds with the amount shown on the statement of owner equity for Retained Capital.
The Farmers begin the closing process by examining the trial
balance to identify the accounts that need to be closed. If they
did not record the adjusting entries as illustrated in Chapter 4,
they would look to the unadjusted trial balance for the income
statement and equity accounts that should be closed. The accounts
in boldface are the income statement accounts that need to be
closed.

The Farmers begin the closing process by examining the trial balance to
identify the accounts that need to be closed. If they did not record
the adjusting entries as illustrated in Chapter 4, they would look to
the unadjusted trial balance for the income statement and equity
accounts that should be closed. The accounts in boldface are the income
statement accounts that need to be closed.

UNADJUSTED TRIAL BALANCE
Steve and Chris Farmer
December 31, 20X1

Accounts                                         Debits        Credits

1000 Cash                                        $203.80
1500 Breeding Livestock                        73,500.00
1600 Machinery and Equipment                   65,000.00
1650 Office Equipment and Furniture             1,000.00
1700 Perennial Crops                           45,000.00
1800 Land, Buildings and Improvements         470,000.00
1910 Leased Assets                            100,000.00
2100 Taxes Payable                                             2,160.00
2310 Notes Payable Due within One Year                        50,000.00
2400 Real Notes Payable--Non-Current                         120,000.00
2600 Obligations on Leased Assets                             76,018.00
3100 Retained Capital                                        104,540.00
3110 Owner Withdrawals                            150.00
3120 Non-Farm Income                                             100.00
3130 Other Capital Contributions/Gifts/
  Inheritances                                               350,000.00
4000 Cash Crop Sales                                          12,600.00
4100 Cash Sales of Market Livestock                           50,900.00
4500 Gains (Losses) from Sale of Culled
  Breeding Livestock                              250.00
5000 Feeder Livestock                            1500.00
5020 Purchased Feed                             1,000.00
6100 Wage Expense                               1,200.00
6110 Payroll Tax Expense                          129.20
6310 Truck and Machinery Hire                     150.00
6520 Herbicides, Pesticides                       500.00
6630 Livestock Supplies, Tools, and
  Equipment                                        75.00
6700 Insurance                                  1,200.00
6710 Real Estate and Personal Property
  Taxes                                         1,300.00
8100 Interest Expense                           1,200.00
8200 Gains (Losses) on Sales of Farm
  Capital Assets                                  800.00
9100 Income Tax Expense                         2,160.00
Totals                                       $766,318.00    $766,318.00

The Farmers can see from the trial balance that the accounts with
credit balances that need to be closed are the sales accounts.
They debit these accounts in the closing journal entry. The remaining
accounts that need to be closed are the loss and expense accounts with
debit balances. They credit these accounts in the closing journal
entry. The following closing entry would be prepared to close these
accounts.

(47)   Dec. 31   4000 Cash Crop Sales                12,600
                 4100 Cash Sales of Market
                   Livestock                         50,900
                      4500 Loss from Sale of
                        Culled Breeding Livestock                250
                      5000 Feeder Livestock                    1,500
                      5020 Purchased Feed                      1,000
                      6100 Wage Expense                        1,200
                      6110 Payroll Tax Expense                   129.20
                      6310 Truck and Machinery
                        Hire                                     150
                      6520 Herbicides, Pesticides                500
                      6630 Livestock, Tools and
                        Equipment                                 75
                      6700 Insurance                           1,200
                      6710 Real Estate and
                        Personal Property Taxes                1,300
                      8100 Interest Expense                    1,200
                      8200 Loss on Sales of Farm
                        Capital Assets                           800
                      9100 Income Tax Expense                  2,160
                      3100 Retained Capital                   52,035.80

The credit to Retained Capital is the amount needed to make sure that
the debits equal the credits. This amount is also the Net Cash Income
shown on the cash-basis Income Statement. This closing entry adds Net
Cash Income to Retained Capital.

The Farmers also close the equity accounts to Retained Capital by
debiting those accounts with credit balances and crediting those
accounts with debit balances.

(48)   Dec. 31   3120 Non-Farm Income                   100
                 3130 Other Capital Contributions
                      Gifts/Inheritances            350,000
                      3110 Owner Withdrawals                        150
                      3100 Retained Capital                     349,950

This closing entry adds the non-farm income and capital contributions
to and subtracts owner withdrawals from Retained Capital. Notice that
the balance in the Retained Capital account ($506,525.80) corresponds
with the amount shown on the cash-basis statement of owner equity for
Retained Capital.

3100 Retained Capital

Date     Description               JE#   Debits  Credits     Balance

Beginning Balance                                                  0

Jan. 2   To set up farm equity      (1)          116,700     116,700
Jan. 2   To set up farm equity      (2)  12,160              104,540
Dec. 31  To close income
           statement accounts      (47)           52,035.80  156,575.80
Dec. 31  To close equity accounts  (48)          349,950     506,525.80


If you choose to record adjusting journal entries to make year-end adjustments, you need to include all of the income statement accounts in the closing entries, including the "change" items and other accounts used for adjustments. You would close all accounts beginning with 4, 5, 6, 7, 8, and 9 as illustrated above, including the "change" accounts. These accounts should not carry over any information from the previous year and should begin the next year with a zero balance.

Because of closing entries (47) and (48), the accounts now have a zero balance. Appendix H displays the income statement and equity accounts after posting the closing entries.
PRACTICE WHAT YOU HAVE LEARNED Practice what you have learned and
complete Problem 5-8 at the end of the chapter.


ADJUSTMENTS FOR SUBSEQUENT YEARS
Learning Objective 9 * To
determine the amount of the
adjustments in subsequent years


Adjustments in subsequent years for accrual-adjusted financial statements must take into account the amounts of inventories, prepaid expenses, accrued expenses, accrued revenues, income taxes, and deferred taxes from the previous year and adjust for the differences in these items from the previous year to the current year. The following examples demonstrate the procedures for recording adjusting journal entries for the Farmers' second year of operation. If directly adjusting the cash-basis financial statements, the computations are the same as those in these examples.

Inventories

The following transactions and events occurred for the Farmers in the year 20X2:

* The Farmers purchased $1,000 worth of feed in 20X2. The amount remaining at the end of the year had a cost and market value of $100.

* Steve and Chris harvested hay in 20X2, and $2,500 worth of that hay is still on hand on December 31, 20X2.

* The value of raised crops at the end of 20X2 is $5,000.

* They sold the remaining feeder pigs at the beginning of 20X2 and had no feeder pigs on hand at the end of the year.

* During 20X2, the Farmers raised a new calf crop. The Farmers sold these calves in 20X2 before the end of the year for $47,000 and did not have any feeder cattle on hand at the end of the year.

For the purchased feed, the Change in Purchased Feed Inventory would be the decrease between the current value of $100 and the cost of $230 reported in 20X1. The market-based income statement reports the difference between the current value of $100 and last year's market value of $200.
                                                   Cost    Market

Amount of purchased feed left over                 $100     $100
--Feed Inventory Purchased for Use at beginning    (230)    (200)
    of the year
= Change in Purchased Feed Inventory              $(130)   $(100)


If you make adjustment by recording journal entries, you record the following adjustment for the cost values:
(32a) Dec. 31 5030 Change in Purchased Feed Investories   130
                   1224 Feed Inventory Purchased for Use       130

1224 FEED INVENTORY PURCHASED FOR USE

Date      Description                JE#     Debits   Credits   Balance

Beginning Balance                                                 0
Dec. 31   Adjusting entry for
            value of purchased
            feed on hand              (32)      230             230
Dec. 31   Adjusting entry for
            value of purchased
            feed on hand             (32a)             130      100

Income Statement:                             Cost      Market

  Gross Revenue                               $XXX        $XXX
  --Purchased Feed                          (1,000)     (1,000)
  + Change in Purchased Feed Inventory        (130)       (100)
      Net Effect on Net Farm Income from
        Operations                         ($1,130)    ($1,100)

Balance Sheet:
  Assets:
    Feed Inventory Purchased for Use          $100         100


This adjusting entry adjusts the balance of Feed Inventory Purchased for Use down to $100.

For the raised feed, the Change in Crop Inventory would be the increase between the current value of $2,500 and the value of $2,300 reported in 20X1. Because these values for raised feed are based on market values, the market-based financial statements will report the same results as the cost-based financial statements.
                                                    Cost      Market

Amount of raised feed left over at the end of the
  year                                              $2,500    $2,500
--Feed Inventory Raised for Use at beginning of
  the year                                          (2,300)   (2,300)
= Change in Crop Inventory                            $200      $200


Using journal entries, you would adjust the amount of raised feed on hand in the following way.
(33a) Dec. 31 1223 Feed Inventory Raised for Use   200
                   4010 Change in Crop Inventory        200

1223 FEED INVENTORY RAISED FOR USE

Date      Description                JE#     Debits   Credits   Balance

Beginning Balance                                                   0
Dec. 31   Adjusting entry for
            market value of hay on
            hand                      (33)    2,300             2,300
Dec. 31   Adjusting entry for
            market value of hay on
            hand                     (33a)      200             2,500

Income Statement:                                     Cost     Market

  Cash Crop Sales                                     $XXX       $XXX
  + Change in Crop Inventory ($2,500 - 2,300)          200        200
      Effect on Gross Revenue                         $200       $200

Balance Sheet:
  Assets:
    Feed Inventory Raised for Use                   $2,500     $2,500


This adjusting entry adjusts the balance of Feed Inventory Raised for Use up to $2,500.

You would perform similar procedures at the end of 20X2 for crops raised for sale. In 20X1, Steve and Chris stored part of their grain crop, valued at $6,000 (journal entry (34)). In 20X2, they sold last year's crop for its market value of $6,000 and this year's crop has a value of only $5,000. They make an adjustment on the income statement as Change in Crop Inventory for the decrease in value from $6,000 to $5,000.

                                                      Cost     Market

Amount of raised crop left over at the end of the
  year                                               $5,000     $5,000
--Crop Inventory Raised for Sale at beginning of
    the year                                         (6,000)    (6,000)
= Change in Crop Inventory                          $(1,000)   $(1,000)

Journal entries adjust the amount of the crop on hand in the
following way.

(34a) Dec. 31 4010 Change in Crop Inventory           1,000
                   1231 Crop Inventory Raised for
                        Sale                                     1,000

1231 CROP INVENTORY RAISED FOR SALE

Date      Description              JE#     Debits   Credits   Balance

Beginning Balance                                                 0
Dec. 31   Adjusting entry for
            market value of crop
            on hand                 (34)   6,000              6,000
Dec. 31   Adjusting entry for
            market value of crop
            on hand                (34a)            1,000     5,000

Income Statement:                                     Cost     Market

  Cash Crop Sales                                    $6,000    $6,000
  + Change in Crop Inventory ($5,000 - 6,000)        (1,000)   (1,000)
      Effect on Gross Revenue                        $5,000    $5,000
Balance Sheet:
  Assets:
    Crop Inventory Raised for Sale                   $5,000    $5,000


For the feeder pigs purchased for resale, the adjustment is for the difference between the current value of $0 and the $750 cost of the purchased pigs that were on hand at the end of 20X1. Market-based financial statements report the difference between the current value of $0 and last year's market value of $900.
                                                      Cost     Market

Amount of purchased market livestock left over at       $0        $0
  the end of the year
--Feeder Livestock Purchased for Resale at            (750)     (700)
  beginning of the year
= Change in Purchased Feeder Livestock Inventory     $(750)    $(700)

Using journal entries, you would record the adjustment as follows just
before you prepare the financial statements.

(35a) Dec. 31 5010 Change in Purchased Feeder          750
              Livestock Inventory
                   1212 Feeder Livestock Inventory
                        Purchased for Resale                     750

1212 FEEDER LIVESTOCK INVENTORY PURCHASED FOR RESALE

Date      Description            JE#     Debits   Credits   Balance

Beginning Balance                                             0
Dec. 31   Adjusting entry for
            value of purchased
            feeder pigs           (35)   750                750
Dec. 31   Adjusting entry for    (35a)            750         0
            value of purchased
            feeder pigs

Income Statement:                                       Cost     Market

  Operating Expenses:
    Feeder Livestock                                       $0       $0
    + Change in Purchased Feeder Livestock Inventory     (750)    (700)
        Net Effect on Net Farm Income from Operations   $(750)   $(700)


Because of these adjustments, Feeder Livestock Inventory Purchased for Resale has a $0 balance and the balance sheet does not show it.

In the year 20X1, the Farmers raised and sold feeder calves. Therefore, they did not report any feeder livestock raised for sale on the balance sheet that year. In 20X2, they raised and sold another calf crop and again did not have any raised feeder livestock on hand at the end of the year. No adjustment is necessary because they have no inventory to report. The income statement merely reports the sales that occurred.

Prepaid Expenses

The difference in prepaid expenses at the end of last year and the end of this year is the amount of the adjustments made in subsequent years.

* The amount of insurance premiums paid by the Farmers in 20X2 is the same as they were in 20X1.

* They sold the 20X1 crop in 20X2. They harvested a new apple crop in 20X2 and did not sell it by the end of the year. The new apple crop incurred costs of $2,750 in 20X2.

In the year 20X1, Steve and Chris purchased insurance for $1,200 for a one-year policy on August 1 (journal entry (25)). Next year on August 1, they record another insurance premium payment in the same way and, if there are no changes to the amount of the premium, the amount of prepaid insurance at the end of the year will be the same as the previous year. The Prepaid Insurance account balance will be $700 at the end of 20X2 and at the end of each following year until the amount of the premium changes or they drop the policy. Because there is no difference in prepaid expenses, no adjustment for Change in Prepaid Insurance is required. The income statement reports the amount of cash paid for insurance premiums, which is the annual amount of insurance expense.
1300 PREPAID EXPENSES

Date      Description                 JE#    Debits   Credits   Balance

Beginning Balance                                                 0
Dec. 31   Adjusting entry for
            insurance paid in
            advance                   (37)   700                700

Income Statement:                                   Cost and Market
Operating Expenses:
  Insurance                                         $(1,200)
  + Change in Prepaid Insurance                           0
  Net Effect on Net Farm Income, Accrual Adjusted   $(1,200)


For the apple crop from the orchard, the income statement must report the cash sale of last year's crop, the cash expenditures for this year's crop ($2,750), and the difference in Cash Investment in Growing Crops between 20X1 and 20X2 (an increase of $250). If the cost of the investment is the same as the market value, the market-based financial statement will report the same numbers as the cost-based financial statements. If last year's crop was sold for $2,900, they would report the following effects:
                                                    Cost       Market

Amount of the Cash Investment in Growing Crops      $2,750     $2,750
  at the end of the year
Cash Investment in Growing Crops at the             (2,500)    (2,500)
  beginning of the year
= Change in Investment in Growing Crops               $250       $250


Using journal entries, they record the following adjusting entry before financial statements are prepared to report the Change in Investment in Growing Crops.
(38a)  Dec. 31  1400 Cash Investment in Growing Crops     250
                     6830 Change in Investment in Growing Crops   250

1400 CASH INVESTMENT IN GROWING CROPS

Date      Description           JE#     Debits   Credits   Balance

Beginning Balance                                              0
Dec. 31   Adjusting entry for
            expenditures in
            orchard              (38)   2,500              2,500
Dec. 31   Adjusting entry for   (38a)     250              2,750
            expenditures in
            orchard

Income Statement:                                    Cost and Market

    Cash Crop Sales                               $2,900
      Effect on Gross Revenue                                $2,900
  Operating Expenses
    + Change in Investment in Growing Crops          250
        Net Effect on Operating Expenses                        250
        Net Effect on Net Farm Income from
          Operations                                         $3,150
Balance Sheet:
  Assets:
    Cash Investment in Growing Crops                          2,750


Another approach to this situation is to realize the net effect from the sale of the crop. The revenue from the 20X1 crop is $2,900 and the expense of producing that crop was $2,500 for a profit of $400. The additional positive effect on net farm income is the investment of $2,750 for the 20X2 crop. The $400 profit plus the $2,750 investment equals $3,150, the amount reported on the income statement.

Accrued Expenses

They report the differences in accrued expenses from the previous year to the current year. The procedures are similar to the procedures for inventories and prepaid expenses.

* The Farmers owed $500 in interest at the end of 20X2.

* The Farmers owed $500 in unpaid bills at the end of 20X2.

In Chapter 3, Steve and Chris borrowed $50,000 to purchase a tractor on March 1, 20X1 (journal entry (7)). They make the payment a year later and pay off the entire note plus interest of $6,000. They report the payment for interest as Interest Expense. Suppose that Steve and Chris borrowed additional money during the year 20X2 and the amount of accrued interest on the new loan as of December 31, 20X2 was $500. An adjustment is required on the income statement for the difference between the $5,000 Interest Payable reported on the 20X1 balance sheet and the $500 interest owed at the end of 20X2.
Amount of the interest owed at the end of the
  year                                               $500
--Interest Payable at the beginning of the year    (5,000)
= Change in Interest Payable                      $(4,500)


Using journal entries, they would record the following adjusting journal entry before preparing the 20X2 financial statements.
(40a) Dec 31 2200 Interest Payable                  4,500
                  5810 Change in Interest Payable           4,500

2200 INTEREST PAYABLE
Date      Description           JE#     Debits   Credits   Balance

Beginning Balance                                              0
Dec. 31   Adjusting entry to
            record change in
            interest payable     (40)            5,000     5,000
Dec. 31   Adjusting entry to    (40a)   4,500                500
            record change in
            interest payable

Income Statement:
  Interest Expense                                  $(6,000)
  --Change in Interest Payable                        4,500
  Net Effect on Net Farm Income, Accrual Adjusted   $(1,500)

Balance Sheet:
  Liabilities:
  Interest Payable                                     $500


At the end of 20X2, and at the end of every year thereafter, the Farmers need to determine the amount of unpaid bills and report the amount on the balance sheet as Accounts Payable. The amount for the Change in Accounts Payable is the difference between the amount of Accounts Payable of the previous year ($340) and the amount of Accounts Payable at the end of the current year ($500). Using journal entries, they would record the following adjusting journal entry before preparing financial statements.
(41a) Dec. 31 6810 Change in Accounts Payable           160
                   2000 Accounts Payable                       160

                2000 ACCOUNTS PAYABLE

Date      Description           JE#     Debits

Beginning Balance

Dec. 31   Adjusting entry
            to record change
            in accounts
            payable             (41)
Dec. 31   Adjusting entry
            to record change
            in accounts
            payable            (41a)

Date      Description          Credits  Balance

Beginning Balance                          0

Dec. 31   Adjusting entry
            to record change
            in accounts
            payable             340       340
Dec. 31   Adjusting entry
            to record change
            in accounts
            payable             160       500

Income Statement:

    Operating Expenses
    + Change in Accounts Payable                    $(160)
    Net effect on Net Farm Income from Operations   $(160)

Balance Sheet:

    Liabilities:
    Accounts Payable                                $ 500


As indicated in Chapter 4, they would perform the preceding procedures for any unpaid taxes or other current liabilities. They compare the amount currently owed to the amount owed at the end of last year and record the difference on the income statement. The balance sheet reports the correct amount of liabilities.

Accrued Revenues

You also make adjustments for money owed to the farm business and for changes in value for raised breeding livestock.

* The Farmers were owed $5,000 at the end of 20X2.

* The increase in value of raised breeding livestock at the end of 20X2 was $3,000.

The income statement reports the difference between the Accounts Receivable of $3,500 at the end of 20X1 and the $5,000 in Accounts Receivable at the end of 20X2 as Change in Accounts Receivable.
Amount of money owed to the farm business at the end of
the year                                                     $5,000

- Accounts Receivable at beginning of the year               (3,500)

= Change in Accounts Receivable                              $1,500


Using journal entries, they record the following adjusting journal entry before they prepare the financial statements.
(42a) Dec. 31 1100 Accounts Receivable     1,500
4700 Change in Accounts Receivable         1,500

          1100 ACCOUNTS RECEIVABLE

Date      Description               JE#     Debits

Beginning Balance

Dec. 31   Adjusting entry to
            record change in
            accounts receivable    (42)      3,500
Dec. 31   Adjusting entry to
            record change in
            accounts receivable    (42a)     1,500

Date      Description             Credits   Balance

Beginning Balance                              0

Dec. 31   Adjusting entry to
            record change in
            accounts receivable              3,500
Dec. 31   Adjusting entry to
            record change in
            accounts receivable              5,000

Income Statement:

Cash Sales of Market Livestock
  and Poultry                         $XXX
    + Change in Accounts Receivable   $1,500
    Effect on Gross Revenue                     $1,500

Balance Sheet:

    Assets:
    Accounts Receivable               5,000


If Steve and Chris had determined that the change in the value of their raised cattle herd due to age progression was an increase of $3,000 from 20X1 to 20X2, they would report an adjustment on the balance sheet by adding $3,000 to the base values reported at the beginning of the year. They adjust the income statement for Change in Value Due to Change in Quantity of Raised Breeding Livestock for the same amount. They record the following adjusting journal entry so that the balance sheet reports the adjusted value for the breeding livestock.
(43a) Dec. 31 1500 Breeding Livestock                     3,000
                 4600 Change in Value Due to Change in
                      Quantity of Raised Breeding Livestock       3,000

1500 BREEDING LIVESTOCK

Date      Description                        JE#      Debits

Beginning Balance

Jan. 2    Set up farm account for
            breeding cattle                   (1)      76,000
Mar. 10   Sale of bull to neighbor           (10)
Nov. 20   Sale of culled cows                (19)
Dec. 31   Adjustment for change in
            quantity of raised breeding
            cows                             (43)       6,000
Dec. 31   Adjustment for change in
            quantity of raised breeding
            cows                            (43a)       3,000

Date      Description                      Credits   Balance

Beginning Balance                                           0

Jan. 2    Set up farm account for
            breeding cattle                            76,000
Mar. 10   Sale of bull to neighbor           1,000     75,000
Nov. 20   Sale of culled cows                1,500     73,500
Dec. 31   Adjustment for change in
            quantity of raised breeding
            cows                                       79,500
Dec. 31   Adjustment for change in
            quantity of raised breeding
            cows                                       82,500

Income Statement:

+Change in Value Due to Change in Quantity of             $3,000
Raised Breeding Livestock

   Effect on Gross Revenue                                $3,000

Balance Sheet:

   Assets:

      Breeding Livestock                        $82,500


Each year the progression of animals from one age group to another is assessed and the appropriate adjustments are made. Each year you also need to assess whether or not changes in base value are required. Chapter 8 discusses more details on these topics and procedures.

Income Taxes and Deferred Taxes

Adjustments are required for income taxes owed and deferred taxes. The differences between these tax liabilities at the end of the previous year and the end of the current year are reported. Each year, the balance sheet reports the estimated amounts for income taxes owed and deferred taxes. Chapter 9 discusses these procedures in more detail.
PRACTICE WHAT YOU HAVE LEARNED Practice the calculations of
adjustments by completing Problem 5-9 at the end of the chapter.


CHAPTER SUMMARY

The first five chapters of this book have outlined the procedures for the annual accounting procedures for a farm operation. These procedures culminate in accrual-adjusted financial statements that provide a report on the financial performance and financial position of the farm business. Market-based financial statements can be prepared to accompany the cost-based financial statements. The closing entries complete the journal entries for each year and prepare the accounts for the next year.

The following chapters provide details of various procedures needed to calculate the numbers shown on the financial statements. These chapters provide examples of disclosure notes and supplementary schedules to clarify the calculations. Various valuation methods for assets, liabilities, equity, revenues, and expenses are also presented.

PROBLEMS

5-1 * Using the answer from Problem 4-9 in Chapter 4, prepare an accrual-adjusted income statement.

5-2 * Use the unadjusted trial balance below and prepare a cash-basis income statement. Make a list of the differences between this income statement and the accrual-adjusted income statement in Problem 5-1.
UNADJUSTED TRIAL BALANCE

Accounts                                      Debits

1000 Cash                                  $17,600.00
1600 Machinery and Equipment               235,000.00
1650 Office Equipment and Furniture          2,000.00
1800 Land, Buildings and Improvements      650,000.00
2310 Notes Payable Due within One Year
2400 Real Notes Payable--Non-Current
3100 Retained Capital
3130 Other Capital Contributions/
  Gifts/Inheritances
4000 Cash Crop Sales
6100 Wage Expense                           12,000.00
6110 Payroll Tax Expense                     1,668.00
6520 Herbicides, Pesticides                  5,000.00
6700 Insurance                               5,200.00
6710 Real Estate and Personal
  Property Taxes                             7,200.00
8200 Gains (Losses) on Sales
  of Farm Capital Assets                     1,600.00
9100 Income Tax Expense                      3,600.00
Totals                                    $940,868.00

Accounts                                     Credits

1000 Cash
1600 Machinery and Equipment
1650 Office Equipment and Furniture
1800 Land, Buildings and Improvements
2310 Notes Payable Due within One Year      10,000.00
2400 Real Notes Payable--Non-Current       250,000.00
3100 Retained Capital                       80,868.00
3130 Other Capital Contributions/
  Gifts/Inheritances                       480,000.00
4000 Cash Crop Sales                       120,000.00
6100 Wage Expense
6110 Payroll Tax Expense
6520 Herbicides, Pesticides
6700 Insurance
6710 Real Estate and Personal
  Property Taxes
8200 Gains (Losses) on Sales
  of Farm Capital Assets
9100 Income Tax Expense
Totals                                    $940,868.00


5-3 * Using the trial balance from Problem 4-9 in Chapter 4 and the answer from Problem 5-1 in this chapter, prepare an accrual-adjusted statement of owner equity. Then, using the unadjusted trial balance and the answer from Problem 5-2, prepare a cash-basis statement of owner equity. Make a list of the differences between the two statements.

5-4 * Using the answer from Problem 4-9 in Chapter 4 and the accrual-adjusted statement of owner equity from the answer in Problem 5-3 in this chapter, prepare an accrual-adjusted balance sheet. Using the unadjusted trial balance from Problem 5-2 and the cash-basis statement of owner equity from the answer in Problem 5-3, prepare a cash-basis balance sheet. Make a list of differences between the two balance sheets.

5-5 * Using the cash account below, prepare a statement of cash flows. The payment on March 1 included $5,000 of interest paid.
                                1000 CASH

Date      Description                JE#     Debits

Beginning Balance

Jan. 30   Sale of stored grain               120,000
Feb. 1    Income tax payment
Mar. 1    To record interest
            and principal
            payment
Apr. 10   Sale of truck                        5,000
Apr. 15   Purchase of new truck
June 1    Payment for herbicide
July 1    Payment of real estate
            and property taxes
Aug. 1    Payment of insurance
            premium for next 12
            months
Oct. 1    Operating loan                      10,000
Dec. 31   Employee paycheck
Apr. 10   FICA, FIT, FUTA, SUTA
            taxes paid

Date      Description              Credits   Balance

Beginning Balance                             $5,186

Jan. 30   Sale of stored grain               125,186
Feb. 1    Income tax payment        3,600    121,586
Mar. 1    To record interest
            and principal
            payment                 5,000     71,586
Apr. 10   Sale of truck                       76,586
Apr. 15   Purchase of new truck    32,000     44,586
June 1    Payment for herbicide     5,000     39,586
July 1    Payment of real estate
            and property taxes      7,200     32,386
Aug. 1    Payment of insurance
            premium for next 12
            months                  5,200     27,186
Oct. 1    Operating loan                      37,186
Dec. 31   Employee paycheck        12,000     25,186
Apr. 10   FICA, FIT, FUTA, SUTA
            taxes paid              2,586     22,600


5-6 * Using the information below, make adjustments to the cash-basis income statement in your answer to Problem 5-2, the cash-basis statement of owner equity in your answer to Problem 5-3, and the cash-basis balance sheet in your answer to Problem 5-4.

a. The value of the Farmers' raised crop (still in storage at the end of the year) was $105,500. They had no stored crop on hand at the beginning of the year.

b. The Farmers raised hay during the year and the value of the hay is $4,500 on hand on December 31. They had no raised feed on hand at the beginning of the year.

c. The Farmers purchased pelleted feed for $2,000 and salt and mineral blocks for $350 on December 15. All of it was still on hand at the end of the year. This purchase was not paid for by December 31. The Farmers had no purchased feed on hand at the beginning of the year.

d. The Farmers had no market livestock on hand at the beginning of the year but plan to purchase some feeder calves soon after the end of the year.

e. The Farmers purchased a one-year insurance policy on August 1 for $5,200. No prepaid expenses existed at the beginning of the year.

f. The Farmers determined that their unpaid bills at the end of the year are $2,350 for the feed that they purchased on December 15. They will not pay the bills before December 31. They had no bills at the beginning of the year.

g. The Farmers determined that the amount of current deferred taxes at the end of the year is $4,000. No current deferred taxes existed at the beginning of the year.

h. Depreciation expense amounted to $31,000.

5-7 * Using the answers to Problem 5-6 and the market value information below, prepare market-based financial statements.

a. The Farmers purchased pelleted feed for $2,000 and salt and mineral blocks for $350 on December 15. All of it was still on hand at the end of the year. The market value of the pelleted feed was $2,500 at the end of the year. The market value of the salt and mineral blocks was similar to the purchase price of $350. The Farmers had no purchased feed on hand at the beginning of the year.

b. The market values of the Farmers' non-current assets were as follows at the end of the year:
                                      Cost        Market

Machinery and Equipment           $235,000.00   $240,000.00
Office Equipment and Furniture       2,000.00      2,000.00
Land, Buildings and Improvements   650,000.00    680,000.00


c. The Farmers determined that $5,290 is the amount of the second component of non-current deferred taxes at the end of the year. Non-current deferred taxes did not exist at the beginning of the year.

5-8 * Prepare the closing entries from the trial balance in Problem 5-2.

5-9 * Calculate the amount of the adjustments for each of the following situations.

a. The value of the Farmers' raised crop (still in storage at the end of the year) was $105,500. They had a stored crop on hand at the beginning of the year with a value of $108,000.

b. The Farmers raised hay during the year and the value of the hay is $4,500 on hand on December 31. The raised feed on hand at the beginning of the year had a value of $2,500.

c. The Farmers purchased pelleted feed for $2,000 and salt and mineral blocks for $350 on December 15. All of it was still on hand at the end of the year. This purchase was not paid for by December 31. The Farmers had purchased feed on hand at the beginning of the year with the following costs: pelleted feed, $1000; and grain, $500.

d. The Farmers purchased a one-year insurance policy on August 1 for $5,200. The amount of prepaid insurance at the beginning of the year was $1,800.

e. The Farmers determined that their unpaid bills at the end of the year are $2,350 for the feed that they purchased on December 15. They will not pay the bills before December 31. They had unpaid bills at the beginning of the year in the amount of $3,500.

f. The Farmers determined that the amount of current deferred taxes at the end of the year is $4,000. Current deferred taxes at the beginning of the year were $4,600.
Exercise 5-4 Analyze the Farmers' cash account in Appendix E
and verify how they determined the dollar amounts for each of
the activities in the statement of cash flows in Figure 5-5.
Answer: Your first step is to classify each of the transactions.

1000 CASH

Date      Description                        JE#    Debits

Jan. 2    Set up farm bank account            (1)    20,000
Feb. 1    Income tax payment                 (31)
Feb. 12   Transfer from personal checking
            account                           (3)       100
Mar. 1    Money borrowed to purchase land     (6)   120,000
Mar. 1    Money borrowed to purchase
            tractor                           (7)    50,000
Mar. 1    Purchase of land                    (9)
Mar. 1    Purchase of tractor                (11)
Mar. 10   Sale of bull to neighbor           (10)       900
Mar. 17   Transfer to personal
            checking account                  (4)
Apr. 1    Employee paycheck                  (26)
Apr. 10   FICA taxes and FIT paid to IRS     (27)
Apr. 10   FUTA tax paid to IRS               (28)
Apr. 10   SUTA tax paid to state agency      (29)
Apr. 17   Purchase of cattle tags            (22)
May 10    Purchase of feed                   (20)
May 16    Purchase of feeder pigs            (15)
May 20    Investment in apple orchard        (14)
June 1    Payment for herbicide              (23)
July 1    Payment of real estate and
            property taxes                   (30)
July 17   Sale of half of the feeder pigs    (16)       900
Aug. 1    Payment of insurance premium       (25)
Aug. 1    Lease payment on harvester         (13)
Aug. 16   Sale of grain at harvest time      (17)    12,000
Oct. 1    To record interest and principal
            payment                           (8)
Oct. 31   Sale of grown hay to neighbor      (21)       600
Nov. 20   Sale of culled cows                (19)     1,250
Dec. 1    Truck expense to haul
            feeder cattle                    (24)
Dec. 1    Sale of feeder cattle              (18)    50,000

Date      Description                        Credits

Jan. 2    Set up farm bank account                        Financing
Feb. 1    Income tax payment                   2,160      Operating
Feb. 12   Transfer from personal checking
            account                                       Financing
Mar. 1    Money borrowed to purchase land                 Financing
Mar. 1    Money borrowed to purchase
            tractor                                       Financing
Mar. 1    Purchase of land                   120,000      Investing
Mar. 1    Purchase of tractor                 46,000      Investing
Mar. 10   Sale of bull to neighbor                        Investing
Mar. 17   Transfer to personal
            checking account                     150      Financing
Apr. 1    Employee paycheck                    1,018      Operating
Apr. 10   FICA taxes and FIT paid to IRS         274      Operating
Apr. 10   FUTA tax paid to IRS                     9.60   Operating
Apr. 10   SUTA tax paid to state agency           27.60   Operating
Apr. 17   Purchase of cattle tags                 75      Operating
May 10    Purchase of feed                     1,000      Operating
May 16    Purchase of feeder pigs              1,500      Operating
May 20    Investment in apple orchard         45,000      Investing
June 1    Payment for herbicide                  500      Operating
July 1    Payment of real estate and
            property taxes                     1,300      Operating
July 17   Sale of half of the feeder pigs                 Operating
Aug. 1    Payment of insurance premium         1,200      Operating
Aug. 1    Lease payment on harvester          23,982      Investing
Aug. 16   Sale of grain at harvest time                   Operating
Oct. 1    To record interest and principal                Financing and
            payment                           11,200        Operating
Oct. 31   Sale of grown hay to neighbor                   Operating
Nov. 20   Sale of culled cows                             Investing
Dec. 1    Truck expense to haul
            feeder cattle                        150      Operating
Dec. 1    Sale of feeder cattle                           Operating

Your next step is to analyze each type of activity and identify
the inflows and outflows within each activity.

Feb. 1    Income tax payment                (31)     (2,160)
Apr. 1    Employee paycheck                 (26)     (1,018)
Apr. 10   FICA taxes and FIT paid to IRS    (27)       (274)
Apr. 10   FUTA tax paid to IRS              (28)         (9.60)
Apr. 10   SUTA tax paid to state agency     (29)        (27.60)
Apr. 17   Purchase of cattle tags           (22)        (75)
May 10    Purchase of feed                  (20)     (1,000)
May 16    Purchase of feeder pigs           (15)     (1,500)
June 1    Payment for herbicide             (23)       (500)
July 1    Payment of real estate and
            property taxes                  (30)     (1,300)
July 17   Sale of half of the feeder pigs   (16)         900
Aug. 1    Payment of insurance premium      (25)     (1,200)
Aug. 16   Sale of grain at harvest time     (17)      12,000
Oct. 1    To record interest and
            principal payment                (8)     (1,200)
Oct. 31   Sale of grown hay to neighbor     (21)         600
Dec. 1    Truck expense to haul
            feeder cattle                   (24)       (150)
Dec. 1    Sale of feeder cattle             (18)      50,000
Mar. 1    Purchase of land                   (9)   (120,000)
Mar. 1    Purchase of tractor               (11)    (46,000)
Mar. 10   Sale of bull to neighbor          (10)         900
May 20    Investment in apple orchard       (14)    (45,000)
Aug. 1    Lease payment on harvester        (13)    (23,982)
Nov. 20   Sale of culled cows               (19)       1,250
Jan. 2    Set up farm bank account           (1)      20,000
Feb. 12   Transfer from personal
            checking account                 (3)         100
Mar. 1    Money borrowed to purchase land    (6)     120,000
Mar. 1    Money borrowed to
            purchase tractor                 (7)      50,000
Mar. 17   Transfer to personal checking
            account                          (4)         150
Oct. 1    To record interest and
            principal payment                (8)      10,000

Feb. 1    Income tax payment                Operating--Cash paid for
                                              taxes
Apr. 1    Employee paycheck                 Operating--Cash paid for
                                              operating expenses
Apr. 10   FICA taxes and FIT paid to IRS    Operating--Cash paid for
                                              taxes
Apr. 10   FUTA tax paid to IRS              Operating--Cash paid for
                                              taxes
Apr. 10   SUTA tax paid to state agency     Operating--Cash paid for
                                              taxes
Apr. 17   Purchase of cattle tags           Operating--Cash paid for
                                              operating expenses
May 10    Purchase of feed                  Operating--Cash paid for
                                              operating expenses
May 16    Purchase of feeder pigs           Operating--Cash paid for
                                              operating expenses
June 1    Payment for herbicide             Operating--Cash paid for
                                              operating expenses
July 1    Payment of real estate and        Operating--Cash paid for
            property taxes                    taxes
July 17   Sale of half of the feeder pigs   Operating--Cash received
                                              (sale of livestock)
Aug. 1    Payment of insurance premium      Operating--Cash paid for
                                              operating expenses
Aug. 16   Sale of grain at harvest time     Operating--Cash received
                                              (sale of crops)
Oct. 1    To record interest and            Operating--Cash paid for
            principal payment                 interest
Oct. 31   Sale of grown hay to neighbor     Operating--Cash received
                                              (sale of crops)
Dec. 1    Truck expense to haul             Operating--Cash paid for
            feeder cattle                     operating expenses
Dec. 1    Sale of feeder cattle             Operating--Cash received
                                              (sale of livestock)
Mar. 1    Purchase of land                  Investing--Cash paid
                                              (land/buildings)
Mar. 1    Purchase of tractor               Investing--Cash paid
                                              (machinery/equipment)
Mar. 10   Sale of bull to neighbor          Investing--Cash received
                                              (breeding livestock)
May 20    Investment in apple orchard       Investing--Cash paid
                                              (investments)
Aug. 1    Lease payment on harvester        Investing--Cash paid
                                              (machinery/equipment)
Nov. 20   Sale of culled cows               Investing--Cash received
                                              (breeding livestock)
Jan. 2    Set up farm bank account          Financing--Cash received
                                              from owners
Feb. 12   Transfer from personal            Financing--Cash received
            checking account                  from owners
Mar. 1    Money borrowed to purchase land   Financing--Proceeds
                                              from loans
Mar. 1    Money borrowed to                 Financing--Proceeds
            purchase tractor                  from loans
Mar. 17   Transfer to personal checking     Financing--Owner
            account                           withdrawals
Oct. 1    To record interest and            Financing--Principal
            principal payment                 payments for loans

Then, combine the transactions that are alike.

Cash received from sale of livestock:
    900       Operating--Cash received (sale of livestock)
 50,000       Operating--Cash received (sale of livestock)
$50,900

Cash received from sale of crops:
 12,000       Operating--Cash received (sale of crops)
    600       Operating--Cash received (sale of crops)
$12,600

Cash paid for feeder livestock:
 (1,500)      Operating--Cash paid for feeder livestock
($1,500)

Cash paid for all other operating expenses:
 (1,018)      Operating--Cash paid for operating expenses
    (75)      Operating--Cash paid for operating expenses
 (1,000)      Operating--Cash paid for operating expenses
   (500)      Operating--Cash paid for operating expenses
 (1,200)      Operating--Cash paid for operating expenses
   (150)      Operating--Cash paid for operating expenses
($3,943)

Cash paid for interest:
(1,200)       Operating--Cash paid for interest
$1,200)

Cash paid for taxes:
    (2,160)   Operating--Cash paid for taxes
      (274)   Operating--Cash paid for taxes
       (10)   Operating--Cash paid for taxes
       (28)   Operating--Cash paid for taxes
    (1,300)   Operating--Cash paid for taxes
($3,771.20)

Cash received from the sale of breeding livestock:
   900        Investing--Cash received (breeding livestock)
 1,250        Investing--Cash received (breeding livestock)
$2,150

Cash paid for purchase of machinery and equipment:
 (46,000)     Investing--Cash paid (machinery/equipment)
 (23,982)     Investing--Cash paid (machinery/equipment)
($69,982)

Cash paid for purchase of land and buildings and improvements:
 (120,000)    Investing--Cash paid (land/buildings)
($120,000)

Cash paid for purchase of investments:
 (45,000)     Investing--Cash paid (investments)
($45,000)

Proceeds from real estate and other term loans:
 120,000      Financing--Proceeds from loans
  50,000      Financing--Proceeds from loans
$170,000

Cash received from contributions by owners:
 20,000       Financing--Cash received from owners
    100       Financing--Cash received from owners
$20,100

Principal payments for loans:
  10,000      Financing--Principal payments for loans
($10,000)

Owner withdrawals:
  150         Financing--Owner withdrawals
($150)

Your final task is to present the totals on the statement
of cash flows as illustrated in Figure 5-5.

Exercise 5-5 Using the adjusted trial balance for the Farmers, prepare
the closing journal entries for the income statement accounts and the
equity accounts that need to be closed. Verify that the credit to
Retained Earnings in the first closing entry is the same amount as
Accrual-Adjusted Net Income on the accrual-adjusted income statement.
Verify that the balance in the Retained Capital account after both
closing entries are posted is the same as the amount on the
accrual-adjusted statement of owner equity. Answer:

ADJUSTED TRIAL BALANCE
Steve and Chris Farmer
December 31, 20X1

Accounts                                          Debits       Credits

1000 Cash                                        $203.80
1100 Accounts Receivable                        3,500.00
1212 Feeder Livestock Inventory
  Purchased for Resale                            750.00
1223 Feed Inventory Raised for Use              2,300.00
1224 Feed Inventory Purchased for
  Use                                             230.00
1231 Crop Inventory Raised for
  Sale                                          6,000.00
1300 Prepaid Expenses                             700.00
1400 Cash Investment in Growing
  Crop                                          2,500.00
1500 Breeding Livestock                        79,500.00
1600 Machinery and Equipment                   65,000.00
1650 Office Equipment and
  Furniture                                     1,000.00
1700 Perennial Crops                           45,000.00
1800 Land, Buildings and
  Improvements                                470,000.00
1910 Leased Assets                            100,000.00
1980 Accumulated Depreciation                                22,150.00
2000 Accounts Payable                                           340.00
2100 Taxes Payable                                            3,030.00
2200 Interest Payable                                         5,000.00
2310 Notes Payable Due within One
  Year                                                       50,000.00
2400 Real Notes
  Payable--Non-Current                                      120,000.00
2500 Non-Current Deferred Taxes                               3,300.00
2510 Current Deferred Taxes                                   1,450.00
2600 Obligations on Leased Assets                            76,018.00
3100 Retained Capital                                       104,540.00
3110 Owner Withdrawals                            150.00
3120 Non-Farm Income                                            100.00
3130 Other Capital Contributions/
  Gifts/Inheritances                                        350,000.00
4000 Cash Crop Sales                                         12,600.00
4010 Changes in Crop Inventories                              8,300.00
4100 Cash Sales of Market
  Livestock                                                  50,900.00
4500 Gains (Losses) from Sale of
  Culled Breeding Livestock                       250.00
4600 Change in Value Due to Change
  in Quantity of Raised Breeding                              6,000.00
  Livestock
4700 Change in Accounts Receivable                            3,500.00
5000 Feeder Livestock                           1,500.00
5010 Changes in Purchased Feeder
  Livestock Inventory                                           750.00
5020 Purchased Feed                             1,000.00
5030 Changes in Purchased Feed
  Inventory                                                     230.00
6100 Wage Expense                               1,200.00
6110 Payroll Tax Expense                          129.20
6310 Truck and Machinery Hire                     150.00
6520 Herbicides, Pesticides                       500.00
6630 Livestock Supplies, Tools,
  and Equipment                                    75.00
6700 Insurance                                  1,200.00
6710 Real Estate and Personal
  Property Taxes                                1,300.00
6780 Depreciation Expense                      22,150.00
6810 Change in Accounts Payable                   340.00
6820 Change in Prepaid Insurance                                700.00
6830 Change in Investment in
  Growing Crop                                                2,500.00
8100 Interest Expense                           1,200.00
8110 Change in Interest Payable                 5,000.00
8200 Gains (Losses) on Sales of
  Farm Capital Assets                             800.00
9100 Income Tax Expense                         2,160.00
9110 Change in Taxes Payable                    5,620.00
Totals                                       $821,408.00   $821,408.00
First closing entry:

(47) Dec. 31 4000 Cash Crop Sales                 12,600
             4010 Change in Crop Inventory         8,300
             4100 Cash Sales of Market
                  Livestock                       50,900
             4600 Change in Value Due to
                  Change in Quantity of
                  Raised Breeding
                  Livestock                        6,000
             4700 Change in Accounts
                  Receivable                       3,500
             5010 Changes in Purchased
                  Feeder Livestock
                  Inventory                          750
             5030 Changes in Purchased
                  Feed Inventory                     230
             6820 Change in Prepaid
                  Insurance                          700
             6830 Change in Investment in
                    Growing Crop                   2,500
                  4500 Loss from Sale of
                       Culled Breeding
                       Livestock                                250
                  5000 Feeder Livestock                       1,500
                  5020 Purchased Feed                         1,000
                  6100 Wage Expense                           1,200
                  6110 Payroll Tax Expense                      129.20
                  6310 Truck and Machinery
                       Hire                                     150
                  6520 Herbicides,
                       Pesticides                               500
                  6630 Livestock, Tools
                       and Equipment                             75
                  6700 Insurance                              1,200
                  6710 Real Estate and
                       Personal Property
                       Taxes                                  1,300
                  6780 Depreciation                          22,150
                       Expense
                  6810 Change in Accounts
                       Payable                                  340
                  8100 Interest Expense                       1,200
                  8110 Change in Interest
                       Payable                                5,000
                  8200 Loss on Sales of
                       Farm Capital Assets                      800
                  9100 Income Tax Expense                     2,160
                  9110 Change in Taxes
                       Payable                                5,620
                  3100 Retained Capital                      40,905.80

Verify that the credit to Retained Earnings equals
Accrual-Adjusted Net Income:

ACCRUAL-ADJUSTED INCOME STATEMENT
Steve and Chris Farmer
December 31, 20X1

Cash Crop Sales                               $12,600.00
Change in Crop Inventories                      8,300.00
Cash Sales of Market Livestock                 50,900.00
Loss from Sale of Culled Breeding
  Livestock                                      (250.00)
Change in Value Due to Change in Quantity
  of Raised Breeding Livestock                  6,000.00
Change in Accounts Receivable                   3,500.00
  Gross Revenues                              $81,050.00
Feeder Livestock                               (1,500.00)
Changes in Purchased Feeder Livestock
  Inventory                                          750
Purchased Feed                                 (1,000.00)
Changes in Purchased Feed Inventory                  230
Wage Expense                                   (1,200.00)
Payroll Tax Expense                              (129.20)
Truck and Machinery Hire                         (150.00)
Herbicides, Pesticides                           (500.00)
Livestock Supplies                                (75.00)
Insurance                                      (1,200.00)
Real Estate and Personal Property Taxes        (1,300.00)
Depreciation Expense                          (22,150.00)
Change in Accounts Payable                          (340)
Change in Prepaid Insurance                          700
Change in Investment in Growing Crop            2,500.00
Interest Expense                               (1,200.00)
Change in Interest Payable                     (5,000.00)
  Net Farm Income from Operations             $49,485.80
Loss on Sales of Farm Capital Assets             (800.00)
  Income before Taxes                         $48,685.80
Income Tax Expense                             (2,160.00)
Change in Taxes Payable                          (870.00)
Change in Taxes Payable                        (1,450.00)
Change in Taxes Payable                        (3,300.00)
  Accrual Adjusted Net Income                 $40,905.80

Second closing entry:

(48) Dec. 31 3120 Non-Farm Income                    100
             3130 Other Capital
                  Contributions/
                  Gifts/Inheritances             350,000
             3110 Owner Withdrawals                                150
             3100 Retained Capital                             349,950

Verify that the balance in the Retained Capital account equals Owner
Equity at the end of the year on Statement of Owner Equity:

3100 RETAINED CAPITAL

Date     Description               JE#   Debits  Credits     Balance

Beginning Balance                                                  0
Jan. 2   To set up farm equity      (1)          116,700     116,700
Jan. 2   To set up farm equity      (2)  12,160              104,540
Dec. 31  To close income
           statement accounts      (47)           40,905.80  145,445.80
Dec. 31  To close equity accounts  (48)          349,950     495,395.80

ACCRUAL-ADJUSTED STATEMENT OF OWNER EQUITY
Steve and Chris Farmer
December 31, 20X1

Owners' Equity, Beginning                                  $104,540.00
Accrual-Adjusted Net Income                                  40,905.80
Owner Withdrawals                                              (150.00)
Non-Farm Income                                                    100
Other Capital Contributions/Gifts/Inheritances              350,000.00
Owner Equity, End of Year                                  $495,395.80

FIGURE 5-5 * The Farmers' statement of cash flows.

Steve and Chris Farmer
Statement of Farm Business Cash Flows
For the Period Ending December 31, 20X1

Cash received from sale of livestock
  (other than culled breeding livestock)             $50,900.00
Cash received from sale of crops                      12,600.00
Cash paid for feeder livestock                        (1,500.00)
Cash paid for all other operating expenses            (3,943.00)
Cash paid for interest                                (1,200.00)
Cash paid for taxes                                   (3,771.20)
       Net cash provided by operating activities      53,085.80

Cash received from the sale of breeding livestock      2,150.00
Cash paid for purchase of machinery and equipment    (69,982.00)
Cash paid for purchase of land and
  buildings and improvements                        (120,000.00)
Cash paid for purchase of investments                (45,000.00)
       Net cash used by investing activities        (232,832.00)

Proceeds from real estate and other term loans       170,000.00
Cash received from contributions by owners            20,100.00
Principal payments for loans                         (10,000.00)
Owner withdrawals                                       (150.00)
       Net cash provided by financing activities     179,950.00

Net increase in cash from operating,
  investing, and financing activities                   $203.80
Cash balance at beginning of year                             0
Cash balance at end of year                             $203.80

FIGURE 5-6 * Adjusting the cash-basis income statement to
create an accrual-adjusted income statement.

                                               Difference

Crop Inventory Raised for Sale                      6,000
Feed Inventory Raised for Use                       2,300
                                                    8,300

$6,000 age progression adjustment
Accounts Receivable                                 3,500
Feeder Livestock Inventory Purchased for              750
  Resale
Feed Inventory Purchased for Use                      230
Accumulated Depreciation                           22,150
Accounts Payable                                      340
Prepaid Expense                                       700
Cash Investment in Growing Crops                    2,500
Interest Payable                                    5,000
Taxes Payable                                         870
Current Deferred Taxes                              1,450
Non-Current Deferred Taxes (First Component)        3,300

             ACCRUAL-ADJUSTED INCOME STATEMENT
                  Steve and Chris Farmer
                     December 31, 20X1

Cash Crop Sales                                   $12,600.00
Change in Crop Inventories                          8,300.00
Cash Sales of Market Livestock                     50,900.00
Loss from Sale of Culled Breeding Livestock          (250.00)
Change in Value Due to Change in
      Quantity of Raised Breeding Livestock            6,000
Change in Accounts Receivable                          3,500
      Gross Revenues                              $81,050.00
Feeder Livestock                                   (1,500.00)
Changes in Purchased Feeder Livestock Inventory       750.00
Purchased Feed                                     (1,000.00)
Changes in Purchased Feed Inventory                   230.00
Wage Expense                                       (1,200.00)
Payroll Tax Expense                                  (129.20)
Truck and Machinery Hire                             (150.00)
Herbicides, Pesticides                               (500.00)
Livestock Supplies                                    (75.00)
Insurance                                          (1,200.00)
Real Estate and Personal Property Taxes            (1,300.00)
Depreciation Expense                              (22,150.00)
Change in Accounts Payable                           (340.00)
Change in Prepaid Insurance                           700.00
Change in Investment in Growing Crop                 2500.00
Interest Expense                                   (1,200.00)
Change in Interest Payable                         (5,000.00)
      Net Farm Income from Operations             $49,485.80
Loss on Sales of Farm Capital Assets                 (800.00)
      Income before Taxes                         $48,685.80
Income Tax Expense                                 (2,160.00)
Change in Taxes Payable                              (870.00)
Change in Taxes Payable                            (1,450.00)
Change in Taxes Payable                            (3,300.00)
      Accrual Adjusted Net Income                 $40,905.80

FIGURE 5-7 * Adjusting the cash-basis statement of owner equity
to create an accrual-adjusted statement of owner equity.

                                      ACCRUAL-ADJUSTED STATEMENT
                                           OF OWNER EQUITY
                                        Steve and Chris Farmer
                                          December 31, 20X1

Accrual
  Adjusted                    Owners' Equity, Beginning   $104,540.00
    Net Income   $40,905.80   Accrual Adjusted Net
                                Income                      40,905.80
                              Owner Withdrawals               (150.00)
                              Non-Farm Income                  100.00
                              Other Capital
                                    Contributions/
                                    Gifts/Inheritances     350,000.00
                              Owner Equity, End of Year   $495,395.80

FIGURE 5-8 Adjusting the cash-basis balance sheet to create
an accrual-adjusted balance sheet.

                                   End of 20X1

Accounts Receivable                     $3,500
Feed Inventory Purchased for Use           230
Feed Inventory Raised for Use            2,300
Crop Inventory Raised for Sale           6,000
Feeder Livestock Inventory
  Purchased for Resale                     750
Prepaid Expense                            700
Cash Investment in Growing Crops         2,500
Breeding Livestock ($73,500 +
  6,000 age adjustment)
Depreciation Expense                    22,150
Accounts Payable                           340
Taxes Payable                            3,030
Interest Payable                         5,000
Current Deferred Taxes                   1,450
Non-Current Deferred Taxes
  (first component)                      3,300
Owner Equity, End of Year           495,395.80

ACCRUAL-ADJUSTED BALANCE SHEET
Steve and Chris Farmer
December 31, 20X1

Assets:
Cash                                      $203.80
Accounts Receivable                      3,500.00
Feed Inventory Purchased for Use           230.00
Feed Inventory Raised for Use            2,300.00
Crop Inventory Raised for Sale           6,000.00
Feeder Livestock Inventory
   Purchased for Resale                    750.00
Prepaid Expense                            700.00
Cash Investment in Growing Crops         2,500.00
Breeding Livestock                      79,500.00
Machinery and Equipment                 65,000.00
Office Equipment and Furniture           1,000.00
Perennial Crops                         45,000.00
Land/Buildings/Improvements            470,000.00
Leased Assets                          100,000.00
Accumulated Depreciation               (22,150.00)
                  Total Assets         754,533.80

Liabilities:
Accounts Payable                           340.00
Taxes Payable                            3,030.00
Interest Payable                         5,000.00
Current Deferred Taxes                   1,450.00
Non-Current Deferred Taxes               3,300.00
Notes Payable Due within One Year       50,000.00
Real Notes Payable                     120,000.00
Obligations on Leased Assets            76,018.00
                  Total Liabilities    259,138.00
Owner Equity, End of Year              495,395.80
Total Liabilities and Equity          $754,533.80

FIGURE 5-9 * Preparing an accrual-adjusted income statement
with market adjustments.

                                   Difference

Feeder Livestock Inventory
  Purchased for Resale                    700

Feed Inventory Purchased for Use          200

MARKET-BASED ACCRUAL-ADJUSTED INCOME STATEMENT
Steve and Chris Farmer
December 31, 20X1

Cash Crop Sales                                    $12,600.00
Change in Crop Inventories                           8,300.00
Cash Sales of Market Livestock                      50,900.00
Loss from Sale of Culled Breeding Livestock           (250.00)
Change in Value Due to Change in
  Quantity of Raised Breeding Livestock              6,000.00
Change in Accounts Receivable                        3,500.00
                  Gross Revenues                   $81,050.00
Feeder Livestock                                    (1,500.00)
Changes in Purchased Feeder Livestock Inventory        700.00
Purchased Feed                                      (1,000.00)
Changes in Purchased Feed Inventory                    200.00
Wage Expense                                        (1,200.00)
Payroll Tax Expense                                   (129.20)
Truck and Machinery Hire                              (150.00)
Herbicides, Pesticides                                (500.00)
Livestock Supplies                                     (75.00)
Insurance                                           (1,200.00)
Real Estate and Personal Property Taxes             (1,300.00)
Depreciation Expense                               (22,150.00)
Change in Accounts Payable                            (340.00)
Change in Prepaid Insurance                            700.00
Change in Investment in Growing Crop                 2,500.00
Interest Expense                                    (1,200.00)
Change in Interest Payable                          (5,000.00)
                 Net Farm Income from Operations   $49,405.80
Loss on Sales of Farm Capital Assets                  (800.00)
                 Income before Taxes               $48,605.80
Income Tax Expense                                  (2,160.00)
Change in Taxes Payable                               (870.00)
Change in Taxes Payable                             (1,450.00)
Change in Taxes Payable                             (3,300.00)
                 Accrual Adjusted Net Income       $40,825.80

FIGURE 5-10 Preparing an accrual-adjusted statement of owner equity
with market adjustments and an accrual-adjusted balance sheet with
market adjustments.

                                       MARKET-BASED ACCRUAL-ADJUSTED
                                         STATEMENT OF OWNER EQUITY

                                          Steve and Chris Farmer
                                             December 31, 20X1

                                    Owners' Equity,
                                      Beginning             $104,540.00
Accrual-Adjusted
  Net Income                        Accrual Adjusted
  (market-based)        $40,825.80    Net Income             $40,825.80
                                    Owner Withdrawals          (150.00)
                                    Non-Farm Income              100.00
                                    Other Capital
                                      Contributions/Gifts/
                                      Inheritances           350,000.00

                                    Addition to Retained
                                      Capital                390,775.80

                                        Retained Capital    $495,315.80
                                    Change in excess of
Excess of market value                market value over
  over cost                 18,500    cost                    18,500.00
Second component of                 Change in Non-Current
  Non-Current                6,850    Deferred Taxes         (6,850.00)
  Deferred Taxes
  (difference)

                                    Owner Equity, End of
                                      Year                  $506,965.80

                                       MARKET-BASED ACCRUAL-ADJUSTED
                                               BALANCE SHEET

                                          Steve and Chris Farmer
   Market Values at End of 20X1              December 31, 20X1

                                    Assets:

                                    Cash                       $203.80
                                    Accounts Receivable        3,500.00
Feed Inventory
  Purchased for Use                 Feed Inventory
  (market value)               200    Purchased for Use          200.00
                                    Feed Inventory Raised
                                      for Use                  2,300.00
                                    Crop Inventory Raised
                                      for Sale                 6,000.00
Feeder Livestock                    Feeder Livestock
  Inventory Purchased                 Inventory Purchased
  for Resale                   700    for Resale                 700.00
                                    Prepaid Expense              700.00
                                    Cash Investment in
                                      Growing Crops            2,500.00
Breeding Livestock          64,500  Breeding Livestock        64,500.00
Machinery and                       Machinery and
  Equipment                 62,167    Equipment               62,167.00
Office Furniture and                Office Equipment and
  Equipment                    750    Furniture                  750.00
Orchard                     40,500  Perennial Crops           40,500.00
Land/Buildings/
  Improvements                      Land/Buildings/
  (390,000 + 105,600)      495,600    Improvements           495,600.00
Leased harvester            93,333  Leased Assets             93,333.00

                                    Total Assets            $772,953.80

                                    Liabilities:

                                    Accounts Payable            $340.00
                                    Taxes Payable              3,030.00
                                    Interest Payable           5,000.00
                                    Current Deferred Taxes     1,450.00
Non-Current
  Deferred Taxes                    Non-Current Deferred
  (3,300 + 6,850)           10,150    Taxes                   10,150.00
                                    Notes Payable Due
                                      within One Year         50,000.00
                                    Real Notes Payable       120,000.00
                                    Obligations on Leased
                                      Assets                  76,018.00

                                    Total Liabilities       $265,988.00

                                    Equity:

                                    Retained Capital        $495,315.80
                                    Valuation Equity          11,650.00

Owner Equity, End of
  Year                  506,965.80  Total Equity            $506,965.80

                                    Total Liabilities and
                                      Equity                $772,953.80
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Publication:Introduction to Agricultural Accounting
Geographic Code:1USA
Date:Jan 1, 2008
Words:14099
Previous Article:Chapter 4: End of year accounting procedures.
Next Article:Chapter 6: Revenue and expense measurements.
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