22 fundamental ND EDITION accounting principles John J. Wild | Ken W. Shaw | Barbara Chiappetta Fundamental Accounting Principles 22 nd edition John J. Wild University of Wisconsin at Madison Ken W. Shaw University of Missouri at Columbia Barbara Chiappetta Nassau Community College To my students and family, especially Kimberly, Jonathan, Stephanie and Trevor. To my wife Linda and children Erin, Emily and Jacob. To my mother, husband Bob and sons Michael and David. FUNDAMENTAL ACCOUNTING PRINCIPLES, TWENTY-SECOND EDITION Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2015 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2013, 2011, and 2009. No part of this pub- lication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning. Some ancillaries, including electronic and print components, may not be available to customers outside the United States. This book is printed on acid-free paper. 1 2 3 4 5 6 7 8 9 0 DOW/DOW 1 0 9 8 7 6 5 4 ISBN 978-0-07-786227-5 (combined edition) MHID 0-07-786227-9 (combined edition) ISBN 978-0-07-763289-2 (principles, chapters 1-17) MHID 0-07-763289-3 (principles, chapters 1-17) Senior Vice President, Products & Markets: Kurt L. Strand Marketing Manager: Michelle Nolte Vice President, General Manager, Digital Product Analyst: Xin Lin Products & Markets: Marty Lange Director, Content Design & Delivery: Linda Avenarius Vice President, Content Design & Program Manager: Daryl Horrocks Delivery: Kimberly Meriwether David Content Project Managers: Lori Koetters, Brian Nacik Managing Director: Tim Vertovec Buyer: Carol A. Bielski Marketing Director: Brad Parkins Design: Debra Kubiak Brand Manager: Steve Schuetz Content Licensing Specialists: DeAnna Dausener, Keri Johnson Director, Product Development: Rose Koos Cover Image: Paul McGee/Getty Images Director of Digital Content: Patricia Plumb Compositor: Aptara®, Inc. Lead Product Developer: Ann Torbert Printer: R.R. Donnelley Product Developer: Lindsey Schauer All credits appearing on page or at the end of the book are considered to be an extension of the copyright page. Library of Congress Cataloging-in-Publication Data Wild, John J. Fundamental accounting principles / John J. Wild, Ken W. Shaw, Barbara Chiappetta.—22nd edition. pages cm ISBN 978-0-07-786227-5 (alk. paper)—ISBN 0-07-786227-9 (alk. paper)—ISBN 978-0-07-763289-2 (alk. paper : chapters 1–17)—ISBN 0-07-763289-3 (alk. paper : chapters 1–17) 1. Accounting. I. Shaw, Ken W. II. Chiappetta, Barbara. III. Title. HF5636.W675 2015 657—dc23 2014026223 The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites. www.mhhe.com Adapting to the Needs of Today’s Students Fundamental Accounting Principles, 22e Enhancements in technology have changed how we live to engage students more effectively by offering varied and learn. Working with learning resources across devices, instructional methods and more personalized learning paths whether smartphones, tablets, or laptop computers, that build on different learning styles, interests, and abilities. empowers students to drive their own learning by putting The revolutionary technology of the LearnSmart Advantage increasingly intelligent technology into their hands. Series—consisting of LearnSmart™, SmartBook™, and Whether the goal is to become an accountant, a business- SmartBook Achieve™—is available only from McGraw-Hill person, or simply an informed consumer of accounting Education. All three products are based on an intelligent information, Fundamental Accounting Principles (FAP) has learning system that uses a series of adaptive questions to helped generations of students succeed. Its leading-edge pinpoint each student’s knowledge gaps and then provides accounting content, paired with state-of-the-art technol- an optimal learning path. Students spend less time in areas ogy, supports student learning and elevates understanding they already know and more time in areas they don’t. The of key accounting principles. result: Students study more efficiently, learn faster, and retain more knowledge. Valuable reports provide insights FAP excels at engaging students with content that will help into how students are progressing through textbook con- them see the relevance of accounting. Its chapter-opening tent and information useful for shaping in-class time or vignettes showcase dynamic, successful entrepreneurial indi- assessment. viduals and companies and highlight the usefulness of accounting to business owners. This edition’s featured com- Interactive Presentations teach each chapter’s core learn- panies—Apple, Google, and Samsung—capture student ing objectives in a rich, multimedia format, bringing the interest with their products, and their annual reports serve as content to life. Your students will come to class prepared a pathway for learning financial statements. New in this edi- when you assign Interactive Presentations. Students can tion, Need-to-Know illustrations in each chapter demonstrate also review the Interactive Presentations as they study. how to apply key accounting procedures. They are supported Further, Guided Examples provide students with narrated, by guided video presentations. animated, step-by-step walk-throughs of algorithmic ver- sions of assigned exercises. Students appreciate the Guided FAP also delivers innovative technology to help student per- Examples, which help them learn accounting and complete formance. Connect Plus Accounting provides students with a assignments outside of class. media-rich eBook version of the textbook and offers instant grading and feedback for assignments that are completed A General Ledger (GL) application, new to 22e, offers stu- online. Our system for completing exercise and problem dents the ability to see how transactions post from the material takes accounting content to the next level, deliver- general journal all the way through the financial state- ing assessment material in a more intuitive, less restrictive ments. It uses the intuitive, less restrictive format as that format that adapts to the needs of today’s students. used for other homework, and it adds critical thinking components to each GL question, to ensure understanding This technology features: of the entire process. • a general journal interface that looks and feels more The first and only analytics tool of its kind, Connect like that found in practice. Insight™ is a series of visual data displays—each framed • an auto-calculation feature that allows students to focus by an intuitive question—to provide at-a-glance informa- on concepts rather than rote tasks. tion about how your class is doing. Connect Insight pro- • a smart (auto-fill) drop-down design. vides a quick analysis on five key dimensions, available at a moment’s notice from a tablet device: How are my stu- The end result is content that better prepares students for dents doing? How is my section doing? How is this student the real world. doing? How are my assignments going? and How is this Connect Plus Accounting also includes digitally based, inter- assignment going? active, adaptive learning tools that provide an opportunity “I believe that FAP is the best intro accounting text on the market —clear, concise, complete. . . . Additionally, it is clear that the authors stay in touch with the ‘times’.” — JAMES L. LOCK, Northern Virginia Community College iii About the Authors JOHN J. WILD is a distinguished pro- Professor Wild is an active member of the American Accounting fessor of accounting at the University of Association and its sections. He has served on several committees of Wisconsin at Madison. He previously held these organizations, including the Outstanding Accounting Educator appointments at Michigan State University Award, Wildman Award, National Program Advisory, Publications, and the University of Manchester in England. and Research Committees. Professor Wild is author of Financial He received his BBA, MS, and PhD from the Accounting, Managerial Accounting, and College Accounting, each University of Wisconsin. published by McGraw-Hill Education. His research articles on ac- Professor Wild teaches accounting counting and analysis appear in The Accounting Review; Journal of courses at both the undergraduate and Accounting Research; Journal of Accounting and Economics; graduate levels. He has received numerous Contemporary Accounting Research; Journal of Accounting, teaching honors, including the Mabel W. Chipman Excellence-in- Auditing and Finance; Journal of Accounting and Public Policy; and Teaching Award, the departmental Excellence-in-Teaching Award, other journals. He is past associate editor of Contemporary and the Teaching Excellence Award from the 2003 and 2005 busi- Accounting Research and has served on several editorial boards in- ness graduates at the University of Wisconsin. He also received the cluding The Accounting Review. Beta Alpha Psi and Roland F. Salmonson Excellence-in-Teaching In his leisure time, Professor Wild enjoys hiking, sports, travel, Award from Michigan State University. Professor Wild has received people, and spending time with family and friends. several research honors and is a past KPMG Peat Marwick National Fellow and is a recipient of fellowships from the American Accounting Association and the Ernst and Young Foundation. KEN W. SHAW is an associate professor Professor Shaw is an active member of the American Accounting of accounting and the Deloitte Professor of Association and its sections. He has served on many committees of Accounting at the University of Missouri. He these organizations and presented his research papers at national previously was on the faculty at the University and regional meetings. Professor Shaw’s research appears in the of Maryland at College Park. He has also taught Journal of Accounting Research; The Accounting Review; in international programs at the University of Contemporary Accounting Research; Journal of Financial and Bergamo (Italy) and the University of Alicante Quantitative Analysis; Journal of the American Taxation Association; (Spain). He received an accounting degree from Strategic Management Journal; Journal of Accounting, Auditing, Bradley University and an MBA and PhD from and Finance; Journal of Financial Research; and other journals. He the University of Wisconsin. He is a Certified has served on the editorial boards of Issues in Accounting Education; Public Accountant with work experience in public accounting. Journal of Business Research; and Research in Accounting Professor Shaw teaches accounting at the undergraduate and Regulation. Professor Shaw is co-author of Financial and Managerial graduate levels. He has received numerous School of Accountancy, Accounting, Managerial Accounting, and College Accounting, all College of Business and university-level teaching awards. He was published by McGraw-Hill Education. voted the “Most Influential Professor” by three School of In his leisure time, Professor Shaw enjoys tennis, cycling, music, Accountancy graduating classes, and is a two-time recipient of the and coaching his children’s sports teams. O’Brien Excellence in Teaching Award. He is the advisor to his school’s chapter of the Association of Certified Fraud Examiners. BARBARA CHIAPPETTA received Northeast Region. She had also received the Nassau Community her BBA in Accountancy and MS in Education College dean of instruction’s Faculty Distinguished Achievement from Hofstra University and is a tenured full Award. Professor Chiappetta was honored with the State University of professor at Nassau Community College. For New York Chancellor’s Award for Teaching Excellence in 1997. As a the past two decades, she has been an active confirmed believer in the benefits of the active learning pedagogy, executive board member of the Teachers of Professor Chiappetta has authored Student Learning Tools, an active Accounting at Two-Year Colleges (TACTYC), learning workbook for a first-year accounting course, published by serving 10 years as vice president and as pres- McGraw-Hill Education. ident from 1993 through 1999. As an active In her leisure time, Professor Chiappetta enjoys tennis and par- member of the American Accounting Association, she has served on ticipates on a U.S.T.A. team. She also enjoys the challenge of bridge. the Northeast Regional Steering Committee, chaired the Curriculum Her husband, Robert, is an entrepreneur in the leisure sport industry. Revision Committee of the Two-Year Section, and participated in nu- She has two sons—Michael, a lawyer, specializing in intellectual merous national committees. Professor Chiappetta has been inducted property law in New York, and David, a composer, pursuing a career into the American Accounting Association Hall of Fame for the in music for film in Los Angeles. iv Dear Colleagues and Friends, As we roll out the new edition of Fundamental Accounting Principles, we thank each of you who provided suggestions to improve the textbook and its teaching resources. This new edition reflects the advice and wisdom of many dedicated reviewers, symposium and workshop participants, students, and instructors. Throughout the revision process, we steered this textbook and its teaching tools in the manner you directed. As you’ll find, the new edition offers a rich set of features—especially digital features—to improve student learning and assist instructor teaching and grading. We believe you and your students will like what you find in this new edition. Many talented educators and professionals have worked hard to create the mate- rials for this product, and for their efforts, we’re grateful. We extend a special thank-you to our contributing and technology supplement authors, who have worked so diligently to support this product: Contributing Author: Kathleen O’Donnell, Onondaga Community College Accuracy Checkers: Dave Krug, Johnson County Community College; Mark McCarthy, East Carolina University; Helen Roybark, Radford University; Barbara Schnathorst; and Beth Woods LearnSmart Author: April Mohr, Jefferson Community and Technical College, SW Interactive Presentations: Jeannie Folk, College of DuPage PowerPoint Presentations: Beth Kane, Northwestern University Instructor Resource Manual: Patricia Walczak, Lansing Community College Test Bank Contributors: Anna Boulware, St. Charles Community College, and Brenda J. McVey, University of Mississippi Digital Contributor, Connect Content, General Ledger Problems, and Exercise PowerPoints: Kathleen O’Donnell, Onondaga Community College In addition to the invaluable help from the colleagues listed above, we thank the entire FAP 22e team at McGraw-Hill Education: Tim Vertovec, Steve Schuetz, Michelle Nolte, Lindsey Schauer, Lori Koetters, Ann Torbert, Brad Parkins, Patricia Plumb, Xin Lin, Kevin Moran, Debra Kubiak, Carol Bielski, Keri Johnson, DeAnna Dausener, Sarah Evertson, Ben Pearsall, Brian Nacik, Ron Nelms, and Daryl Horrocks. We could not have published this new edition without your efforts. John J. Wild Ken W. Shaw Barbara Chiappetta v Easy to Use. Proven Effective. McGraw-Hill CONNECT PLUS ACCOUNTING McGraw-Hill Connect Plus Accounting is a digital teaching and learning environment that gives students the means to better connect with their coursework, with their instructors, and with the important concepts they will need to know for success now and in the future. With Connect Plus Accounting, instructors can easily deliver assignments, quizzes, and tests online. Students can review course material and practice important skills. McGraw-Hill Connect Plus Accounting provides all of the following learning and teaching resources: • SmartBook, powered by LearnSmart • Auto-graded Excel simulations • SmartBook Achieve • Interactive Presentations • Auto-graded online homework • Guided Examples • General ledger problems In short, Connect Plus Accounting offers students powerful tools and features that optimize their time and energy, en- abling them to focus on learning. SmartBook, Powered by LearnSmart LearnSmartTM is the market-leading adaptive study resource that is proven to strengthen memory recall, increase class retention, and boost grades. LearnSmart al- lows students to study more efficiently because they are made aware of what they know and don’t know. SmartBookTM, which is powered by LearnSmart, is the first and only adaptive reading experience de- signed to change the way students read and learn. It creates a personalized reading experience by highlighting the most impactful concepts a student needs to learn at that moment in time. As a stu- dent engages with SmartBook, the reading experi- ence continuously adapts by highlighting content based on what the student knows and doesn’t know. This ensures that the focus is on the content he or she needs to learn, while simultaneously pro- moting long-term retention of material. Use SmartBook’s real-time reports to quickly iden- tify the concepts that require more attention from individual students—or the entire class. The end result? Students are more engaged with course content, can better prioritize their time, and come to class ready to participate. SmartBook Achieve SmartBook Achieve™—a revolutionary study and learning experience—pinpoints an individual student’s knowledge gaps and provides targeted, interactive learning help at the moment of need. The rich, dynamic learning resources deliv- ered in that moment of need help students learn the material, retain more knowledge, and earn better grades. The program’s continuously adaptive learning path ensures that every minute a student spends with Achieve is returned as the most value-added minute possible. vi Tailored to You. Online Assignments Connect Plus Accounting helps students learn more efficiently by pro- viding feedback and practice material when they need it, where they need it. Connect Plus grades homework automatically and gives im- mediate feedback on any questions students may have missed. Our assignable, gradable end-of-chapter content includes a general jour- nal application that looks and feels more like what you would find in a general ledger software package. Also, select questions have been redesigned to test students’ knowledge more fully. They now include tables for students to work through rather than requiring that all cal- culations be done off-line. McGraw-Hill’s redesigned student interface pro- vides a real-world feel to interactive assignments and end-of-chapter assessment content. This robust accounting software allows for flexibility in learning styles and provides opportunities for courses to be delivered in traditional, online, and blended settings. General Ledger Problems New General Ledger problems for select questions enable students to see how transactions post from the general journal all the way through the financial statements. It provides a much-improved experience for stu- dents working with accounting cycle questions. Students’ work in the general journal is automatically posted to the ledger, navigation is much simpler, scrolling is no longer an issue, and students can easily link back to their original en- tries simply by clicking the ledger if edits are needed. Many questions now have critical thinking components added, to maximize students’ foundational knowledge of accounting concepts and principles. Interactive Presentations Interactive Presentations provide engaging narratives of all chapter learning ob- jectives in an assignable interactive online format. They follow the structure of the text and are organized to match the specific learning objectives within each chapter. While the Interactive Presentations are not meant to replace the text- book, they provide additional explanation and enhancement of material from the text chapter, allowing students to learn, study, and practice at their own pace, with instant feedback. Guided Examples The Guided Examples in Connect Plus Accounting provide a narrated, animated, step- by-step walk-through of select exercises similar to those assigned. These short presentations, which can be turned on or off by instructors, provide reinforcement when students need it most. Excel Simulations Simulated Excel questions, assignable within Connect Plus Accounting, allow stu- dents to practice their Excel skills—such as basic formulas and formatting—within the context of accounting. These questions feature animated, narrated Help and Show Me tutorials (when enabled), as well as automatic feedback and grading for both students and professors. vii Easy to Use. Proven Effective. McGraw-Hill CONNECT PLUS ACCOUNTING Features Simple Assignment Management and Smart Grading With Connect Plus Accounting, creating assignments is easier than ever, enabling instructors to spend more time teaching and less time managing. Simple assign- ment management and smart grading allow you to: • Create and deliver assignments easily with selectable end-of-chapter questions and Test Bank items. • Have assignments scored automatically, giving students immediate feedback on their work and side-by-side comparisons with correct answers. • Access and review each response, manually change grades, or leave comments for students to review. • Reinforce classroom concepts with practice assignments and instant quizzes and exams. Powerful Instructor and Studeennntttt RRRReeepppooorrrttttsss Connect Plus Accounting keeps instructors informed about how each student, section, and class is performing, allowing for more productive use of lecture and office hours. The progress-tracking function enables you to: • V iew scored work immediately and track individual or group performance with assignment and grade reports. • A ccess an instant view of student or class performance relative to learning objectives. • C ollect data and generate reports required by many accreditation organizations, such as AACSB and AICPA. Connect Insight The first and only analytics tool of its kind, Connect InsightTM is a series of vi- sual data displays—each framed by an intuitive question—to provide at-a- glance information about how your class is doing. Connect Insight provides a quick analysis on five key insights, available at a moment’s notice from your tablet device: • How are my students doing? • How are my assignments going? • How is my section doing? • How is this assignment going? • How is this student doing? Instructor Library The Connect Plus Accounting Instructor Library is a repository for additional resources to improve student engagement in and out of class. You can select and use any asset that enhances your lecture. The Connect Plus Accounting Instructor Library includes: • Presentation slides. • Test Bank. • Animated PowerPoint exhibits and exercises. • Instructor’s Resource Manual. • Solutions Manual. The Connect Plus Accounting Instructor Library also allows you to upload your own files. For more information about Connect Plus Accounting, go to www.connect.mheducation.com, or contact your local McGraw-Hill Higher Education representative. viii Tailored to You. Other Technology Offered by McGraw-Hill Tegrity Campus: Lectures 24/7 Tegrity Campus is a service that makes class time available 24/7 by automatically capturing every lecture. With a simple one-click start-and-stop process, you capture all computer screens and cor- responding audio in a format that is easily searchable, frame by frame. Students can replay any part of any recorded class with easy-to-use browser-based viewing on a PC, Mac, or mobile device. Help turn your students’ study time into learning moments immediately supported by your lecture. With Tegrity Campus, you also increase intent listening and class participation by easing students’ concerns about note-taking. To learn more about Tegrity, watch a two-minute Flash demo at http://tegritycampus.mhhe.com. McGraw-Hill Campus™ McGraw-Hill CampusTM is a new one-stop teaching and learning experience available to users of any learning management system. This institutional service allows faculty and students to enjoy single sign-on (SSO) access to all McGraw-Hill Higher Education materials, including the award- winning McGraw-Hill Connect Plus platform, from directly within the institution’s website. To learn more about McGraw- Hill Campus, visit http://mhcampus.mhhe.com. Custom Publishing through Create™ McGraw-Hill CreateTM is a self-service website that allows instructors to create custom course materials by drawing upon McGraw-Hill’s comprehensive, cross-disciplinary content. Instructors can add their own content quickly and easily and tap into other rights-secured, third-party sources as well, then arrange the content in a way that makes the most sense for their course. Through Create, you can: • Combine material from different sources and even upload your own content. • Personalize your product with the course name and information. • Choose the best format for your students—color print, black-and-white print, or eBook. • Edit and update your course materials as often as you’d like. Begin creating now at www.mcgrawhillcreate.com. ALEKS: A Superior, Student-Friendly Accounting Experience Artificial intelligence: Fills knowledge gaps. Cycle of learning and assessment: Increases learning momentum and engages students. Customizable curriculum: Aligns with your course syllabi and textbooks. Dynamic, automated reports: Monitors detailed student and class progress. To learn more, visit www.aleks.com/highered/business. CourseSmart CourseSmart is a way for faculty to find and review eTextbooks. It’s also a great option for students who are interested in accessing their course materials digitally and saving money. CourseSmart offers thousands of the most commonly adopted textbooks across hundreds of courses from a wide variety of higher education publishers. With the CourseSmart eTextbook, students can save up to 45 percent off the cost of a print book, reduce their impact on the environment, and access pow- erful web tools for learning. CourseSmart is an online eTextbook, which means users access and view their textbook online when connected to the Internet. Students can also print sections of the book for maximum portability. CourseSmart eTextbooks are available in one standard online reader with full text search, notes and highlighting, and e-mail tools for sharing notes between classmates. For more information on CourseSmart, go to www.coursesmart.com. McGraw-Hill Customer Experience Group Contact Information At McGraw-Hill, we understand that getting the most from new technology can be challenging. That’s why our services don’t stop after you purchase our products. You can contact our Product Specialists 24 hours a day to get product train- ing online. Or you can search the knowledge bank of Frequently Asked Questions on our support website. For customer support, call 800-331-5094 or visit www.mhhe.com/support. ix