ch03check

docx

School

University of Economics Ho Chi Minh City *

*We aren’t endorsed by this school

Course

2

Subject

Accounting

Date

Jun 14, 2024

Type

docx

Pages

50

Uploaded by SuperHyena4417

Report
CHAPTER 3 ADJUSTING THE ACCOUNTS
Test Bank for Financial Accounting, Fifth Edition CHAPTER STUDY OBJECTIVES 1. Explain the time period assumption. The time period assumption assumes that the economic life of a business can be divided into artificial time periods. 2. Explain the accrual basis of accounting. Accrual-basis accounting means that events that change a company's financial statements are recorded in the periods in which the events occur, rather than in the periods in which the company receives or pays cash. 3. Explain why adjusting entries are needed. Adjusting entries are made at the end of an accounting period. They ensure that revenues are recorded in the period in which they are earned and that expenses are recognized in the period in which they are incurred. 4. Identify the major types of adjusting entries. The major types of adjusting entries are prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. 5. Prepare adjusting entries for prepayments. Prepayments are either prepaid expenses or unearned revenues. Adjusting entries for prepayments are required at the statement date to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period. 6. Prepare adjusting entries for accruals. Accruals are either accrued revenues or accrued expenses. Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current accounting period that have not been recognized through daily entries. 7. Describe the nature and purpose of an adjusted trial balance. An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to show the effects of all financial events that have occurred during the accounting period. a 8. Prepare adjusting entries for the alternative treatment of prepayments. Prepayments may be initially debited to an expense account. Unearned revenues may be credited to a revenue account. At the end of the period, these accounts may be overstated. The adjusting entries for prepaid expenses are a debit to an asset account and a credit to an expense account. Adjusting entries for unearned revenues are a debit to a revenue account and a credit to a liability account. 3 - 2
Adjusting the Accounts TRUE-FALSE STATEMENTS 1. Because accounting often requires estimates to be made to assess the effect of a transaction, the shorter the time period, the easier it becomes to determine the proper adjustments. F 2. The time period assumption states that the economic life of a business entity can be divided into artificial time periods. T 3. The time period assumption is often referred to as the matching principle. F 4. A company's calendar year and fiscal year are always the same. F 5. Accounting time periods that are one year in length are referred to as interim periods. F 6. Income will always be greater under the cash basis of accounting than under the accrual basis of accounting. F 7. The cash basis of accounting is not in accordance with generally accepted accounting principles. T 8. The matching principle requires that assets be matched with liabilities. F 9. Accrual basis accounting requires that expenses be recognized when incurred regardless of when paid. T 10. The revenue recognition principle dictates that revenue be recognized in the accounting period in which cash is received. F 11. Adjusting entries impact only revenue and expense accounts. F 12. An adjusting entry always involves two balance sheet accounts. F 13. Adjusting entries are often made because some business events are not recorded as they occur. T 14. Adjusting entries are recorded in the general journal but are not posted to the accounts in the general ledger. F 15. Revenue received before it is earned and expenses paid before being used or consumed are both initially recorded as liabilities. F 16. Accrued revenues are revenues which have been received but not yet earned. F 17. The book value of a depreciable asset is always equal to its market value because depreciation is a valuation technique. F 18. Accumulated Depreciation is a liability account and has a credit normal account balance. F 19. Uneaned Revenue is reported on the income statement. F 3 - 3
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition 20. Accumulated Depreciation is deducted from a long-term asset account and reported on the balance sheet. T 21. Unearned revenue is a prepayment that requires an adjusting entry when services are performed. T 22. Prepaid expenses are recorded as assets initially and then charged to expense as they expire with the passage of time or are consumed in the course of business. T 23. A contra asset account is subtracted from a related account in the balance sheet. T a 24. If prepaid costs are initially recorded as expenses, no adjusting entries will be required in the future. F 25. The cost of a depreciable asset less accumulated depreciation reflects the book value of the asset. T 26. Accrued revenues are revenues that have been earned and received before financial statements have been prepared. F 27. Financial statements can be prepared from the information provided by an adjusted trial balance. T a 28. The adjusting entry at the end of the period to record an expired cost may be different depending on whether the cost was initially recorded as an asset or an expense. T a 29. Rent received in advance and credited to a rent revenue account which is still unearned at the end of the period, will require an adjusting entry crediting a liability account for the amount still unearned. T 30. An adjusting entry to record the expiration of insurance intially recorded as an asset requires a credit to Prepaid Insurance. T 31. The matching principle requires that expenses be matched with revenues. T 32. In general, adjusting entries are required each time financial statements are prepared. T 33. Every adjusting entry affects one balance sheet account and one income statement account. T 34. If depreciation expense is not recorded, both assets and expenses will be understated. F 35. If an unearned revenue account is not adjusted for revenues earned during the period, liabilities will be overstated and revenue will be understated. T 36. An adjusted trial balance should be prepared before the adjusting entries are made. F 37. If a prepaid expense account is not adjusted for the portion of the asset which has expired, both assets and expenses are overstated. F 3 - 4
Adjusting the Accounts Answers to True-False Statements Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. 1. F 7. T 13. T 19. F 25. T 31. T a 37. F 2. T 8. F 14. F 20. T 26. F 32. T 3. F 9. T 15. F 21. T 27. T 33. T 4. F 10. F 16. F 22. T a 28. T 34. F 5. F 11. F 17. F 23. T a 29. T 35. T 6. F 12. F 18. F 24. F a 30. T 36. F MULTIPLE CHOICE QUESTIONS 38. Monthly and quarterly time periods are called a. calender periods. b. fiscal periods. c. interim periods. d. quarterly periods. 39. The time period assumption states that a. a transaction can only affect one period of time. b. estimates should not be made if a transaction affects more than one time period. c. adjustments to the enterprise's accounts can only be made in the time period when the business terminates its operations. d. the economic life of a business can be divided into artificial time periods. 40. An accounting time period that is one year in length, but does not begin on January 1, is referred to as a. a fiscal year. b. an interim period. c. the time period assumption. d. a reporting period. 41. Adjustments would not be necessary if financial statements were prepared to reflect net income from a. monthly operations. b. fiscal year operations. c. interim operations. d. lifetime operations. 42. Management usually desires ________ financial statements and the IRS requires all businesses to file _________ tax returns. a. annual, annual b. monthly, annual c. quarterly, monthly d. monthly, monthly 43. The time period assumption is also referred to as the a. calendar assumption. b. cyclicity assumption. c. periodicity assumption. d. fiscal assumption. 3 - 5
Test Bank for Financial Accounting, Fifth Edition 44. In general, the shorter the time period, the difficulty of making the proper adjustments to accounts a. is increased. b. is decreased. c. is unaffected. d. depends on if there is a profit or loss. 45. Which of the following is not a common time period chosen by businesses as their accounting period? a. Daily b. Monthly c. Quarterly d. Annually 46. Which of the following time periods would not be referred to as an interim period? a. Monthly b. Quarterly c. Semi-annually d. Annually 47. The fiscal year of a business is usually determined by a. the IRS. b. a lottery. c. the business. d. the SEC. 48. Which of the following are in accordance with generally accepted accounting principles? a. Accrual basis accounting b. Cash basis accounting c. Both accrual basis and cash basis accounting d. Neither accrual basis nor cash basis accounting 49. Horton Enterprises performed services on July 30, billed the customer on August 3, and received payment on September 7. The revenue should be recognized in a. December. b. July. c. August. d. September. 50. In a service-type business, revenue is considered earned a. at the end of the month. b. at the end of the year. c. when the service is performed. d. when cash is received. 51. The matching principle matches a. customers with businesses. b. expenses with revenues. c. assets with liabilities. d. creditors with businesses. 3 - 6
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts 52. Jim's Tune-up Shop follows the revenue recognition principle. Jim services a car on July 31. The customer picks up the vehicle on August 1 and mails the payment to Jim on August 5. Jim receives the check in the mail on August 6. When should Jim show that the revenue was earned? a. July 31 b. August 1 c. August 5 d. August 6 53. A company spends $10 million dollars for an office building. Over what period should the cost be written off? a. When the $10 million is expended in cash b. All in the first year c. Over the useful life of the building d. After $10 million in revenue is earned 54. The matching principle states that expenses should be matched with revenues. Another way of stating the principle is to say that a. assets should be matched with liabilities. b. efforts should be matched with accomplishments. c. owner withdrawals should be matched with owner contributions. d. cash payments should be matched with cash receipts. 55. A dress shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The dress shop follows GAAP and applies the revenue recognition principle. When is the $1,000 considered to be earned? a. December 5 b. December 10 c. November 30 d. December 1 56. A furniture factory's employees work overtime to finish an order that is sold on February 28. The office sends a statement to the customer in early March and payment is received by mid-March. The overtime wages should be expensed in a. February. b. March. c. the period when the workers receive their checks. d. either in February or March depending on when the pay period ends. 57. Expenses sometimes make their contribution to revenue in a different period than when the expense is paid. When wages are incurred in one period and paid in the next period, this often leads to which account appearing on the balance sheet at the end of the time period? a. Due from Employees b. Due to Employer c. Wages Payable d. Wages Expense 58. Under accrual-basis accounting a. cash must be received before revenue is recognized. b. net income is calculated by matching cash outflows against cash inflows. c. events that change a company's financial statements are recognized in the period they occur rather than in the period in which cash is paid or received. d. the ledger accounts must be adjusted to reflect a cash basis of accounting before financial statements are prepared under generally accepted accounting principles. 3 - 7
Test Bank for Financial Accounting, Fifth Edition 59. Adjusting entries are required a. yearly. b. quarterly. c. monthly. d. every time financial statements are prepared. 60. On January 10, its first period of operations, Rebel Enterprises purchased supplies for $3,000 and debited the supplies account for that amount. At January 30, an inventory of supplies showed $1,000 of supplies on hand. At January 30, a. no adjusting journal entry is required. b. the adjusting journal entry should charge the supplies consumed to Supplies Expense. c. the adjusting journal entry should include a debit to Supplies Expense for $1,000. d. the adjusting journal entry should include a debit to Supplies for $2,000. 61. A small company may be able to justify using a cash basis of accounting if they have a. sales under $1,000,000. b. no accountants on staff. c. few receivables and payables. d. all sales and purchases on account. 62 a. On January 7, Scopes Industries purchased supplies for $5,000 and debited Supplies Expense for that amount. At January 30, an inventory of supplies showed $2,000 of supplies on hand. At January 30, a. no adjusting journal entry is required. b. the adjusting journal entry should include a debit to Supplies Expense for $1,000. c. the adjusting journal entry should include a debit to Supplies for $2,000. d. if no adjusting journal entry is made, both Supplies and Supplies Expense will be overstated by $3,000. 63. When salaries are accrued at the end of an accounting period, the two accounts affected will be a. balance sheet accounts. b. income statement accounts. c. Salaries Payable and Salaries Expense. d. Salaries Expense and Cash. 64. If Salaries earned but not paid at the end of an accounting period are not accrued, a. Salaries Expense will be overstated. b. Salaries Payable will be overstated. c. Both Salaries Expense and Salaries Payable will be understated. d. Net income will be understated. 65. If a resource has been consumed but a bill has not been received at the end of the accounting period, then a. an expense should be recorded when the bill is received. b. an expense should be recorded when the cash is paid out. c. an adjusting entry should be made recognizing the expense. d. it is optional whether to record the expense before the bill is received. 66. On January 1, Ergon Enterprises purchased a 12-month insurance policy for $1,800. They recorded the unexpired expense as an asset. The monthly adjusting entry at January 31 a. is not required. b. should include a debit to Prepaid Insurance for $1,800. c. should include a debit to Prepaid Insurance for $150. d. should include a debit to Insurance Expense for $150. 3 - 8
Adjusting the Accounts 67. Adjusting entries are a. not necessary if the accounting system is operating properly. b. usually required before financial statements are prepared. c. made whenever management desires to change an account balance. d. made to balance sheet accounts only. 68. Beltway Company pays weekly salaries for a 5-day week of $2,000 every Friday, January 31 falls on a Thursday. The monthly adjusting entry at January 31 a. should pay salaries of $1,600. b. should accrue salaries of $400. c. should accrue salaries of $1,600. d. should record unearned salaries of $400. 69. On January 1, the Seigel Law Firm received a $12,000 cash retainer for legal services to be rendered ratably over the next 6 months. The full amount was credited to the liability account Unearned Legal Fees. Which of the following statements is true regarding adjusting entries for this liability account? a. the adjusting journal entry at the end of each month should include a debit to Unearned Legal Fees and a credit to Fees Earned for $2,000. b. the adjusting journal entry at the end of each month should include a debit to Unearned Legal Fees and a credit to Cash for $2,000. c. the adjusting journal entry at the end of January should include a debit to Unearned Legal Fees and a credit to Fees Earned for $12,000. d. No adjusting entries should be made until the full amount of the retainer has been earned as of June 30. 70. Adjusting entries can be classified as a. postponements and advances. b. accruals and prepayments. c. prepayments and postponements. d. accruals and advances. 71. Weymeyer Realty generates revenue through its many rental properties. As of August 31, the company has not collected $6,000 of August rental payments because of delinquencies. The monthly adjusting journal entry at August 31 a. is not required until the past due rent payments are collected b. will include a debit to Cash and a credit to Rent Revenue of $6,000. c. will include a debit to Unearned Rent and a credit to Rent Revenue for $200. d. will include a debit to Rent Receivable and a credit to Rent Revenue for $6,000. 72. On January 30, Tensing Company purchased supplies of $2,000. The supplies were all consumed in February. Which of the following statements is true regarding the accounting for these supplies. a. The supplies should be recorded as an asset in January and no adjusting entry is needed until the supplies are used in February. b. The supplies should be charged to Supplies Expense in January and no adjusting entry is needed until the supplies are used in February. c. The supplies should not be recorded in the accounting records until used in February. d. The adjusting journal entry at the end of January will include a debit to Supplies Expense and a credit to Supplies for $2,000. 3 - 9
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition 73. On February 28, Hilary Inc. receives the month’s utility bill which is due on March 15. Which of the following statements is true regarding the accounting for February utilities? a. The expense should be accrued in February by debiting Utilities Expense and crediting Cash. b. The expense should be accrued in February by debiting Utilities Expense and crediting Utilities Payable. c. The adjusting entry at February 28 should include a debit to Utilities Payable and a credit to Utilities Expense. d. The adjusting entry at February 28 should include a debit to Prepaid Utilities and a credit to Cash. 74. Southeastern Louisiana University sold season tickets for the 2006 football season for $160,000. A total of 8 games will be played during September, October and November. In September, three games were played. The adjusting journal entry at September 30 a. is not required. No adjusting entries will be made until the end of the season in November. b. will include a debit to Cash and a credit to Ticket Revenue for $40,000. c. will include a debit to Unearned Ticket Revenue and a credit to Ticket Revenue for $60,000. d. will include a debit to Ticket Revenue and a credit to Unearned Ticket Revenue for $53,333. 75. Southeastern Louisiana University sold season tickets for the 2006 football season for $160,000. A total of 8 games will be played during September, October and November. In September, two games were played. In October, three games were played. The balance in Unearned Revenue at October 31 is a. $0 b. $40,000 c. $60,000 d. $100,000 76. Southeastern Louisiana University sold season tickets for the 2006 football season for $160,000. A total of 8 games will be played during September, October and November. Assuming all the games are played, the Unearned Revenue balance that will be reported on the December 31 balance sheet will be a. $0 b. $60,000 c. $100,000 d. $160,000 77. At March 1, 2006, Candy Inc. had supplies on hand of $500. During the month, Candy purchased supplies of $1,200 and used supplies of $1,500. The March 31 adjusting journal entry should include: a. a debit to the supplies account for $1,500 b. a credit to the supplies account for $500 c. a debit to the supplies account for $1,200 d. a credit to the supplies account for $1,500 78. Quirk Company purchased office supplies costing $4,000 and debited Office Supplies for the full amount. At the end of the accounting period, a physical count of office supplies revealed $1,600 still on hand. The appropriate adjusting journal entry to be made at the end of the period would be a. Debit Office Supplies Expense, $1,600; Credit Office Supplies, $1,600. b. Debit Office Supplies, $2,400; Credit Office Supplies Expense, $2,400. c. Debit Office Supplies Expense, $2,400; Credit Office Supplies, $2,400. d. Debit Office Supplies, $1,600; Credit Office Supplies Expense, $1,600. 79. If an adjustment is needed for unearned revenues, the a. liability and related revenue are overstated before adjustment. b. liability and related revenue are understated before adjustment. c. liability is overstated and the related revenue is understated before adjustment. d. liability is understated and the related revenue is overstated before adjustment. 3 - 10
Adjusting the Accounts 80. At March 1, 2006, CookieTime Inc. had supplies on hand of $1,500. During the month, Candy purchased supplies of $1,900 and used supplies of $1,800. The March 31 balance sheet should report what balance in the supplies account? a. $1,500 b. $1,600 c. $1,800 d. $1,900 81. Dorting Company purchased a computer system for $3,600 on January 1, 2006. The company expects to use the computer system for 3 years. It has no salvage value. Monthly depreciation expense on the asset is: a. $0 b. $100 c. $1,200 d. $3,600 82. Fleet Services Company purchased equipment for $5,000 on January 1, 2006. The company expects to use the equipment for 5 years. It has no salvage value. What balance would be reported on the December 21, 2006 balance sheet for Accumulated Depreciation? a. $0 because Accumulated Depreciation is reported on the Income Statement b. $1,000 c. $4,000 d. $5,000 83. Hardy Company purchased a computer for $2,400 on December 1. It is estimated that annual depreciation on the computer will be $480. If financial statements are to be prepared on December 31, the company should make the following adjusting entry: a. Debit Depreciation Expense, $480; Credit Accumulated Depreciation, $480. b. Debit Depreciation Expense, $40; Credit Accumulated Depreciation, $40. c. Debit Depreciation Expense, $1,920; Credit Accumulated Depreciation, $1,920. d. Debit Office Equipment, $2,400; Credit Accumulated Depreciation, $2,400. 84. Meyer Realty Company received a check for $21,000 on July 1 which represents a 6 month advance payment of rent on a building it rents to a client. Unearned Rent was credited for the full $21,000. Financial statements will be prepared on July 31. Meyer Realty should make the following adjusting entry on July 31: a. Debit Unearned Rent, $3,500; Credit Rental Revenue, $3,500. b. Debit Rental Revenue, $3,500; Credit Unearned Rent, $3,500. c. Debit Unearned Rent, $21,000; Credit Rental Revenue, $21,000. d. Debit Cash, $21,000; Credit Rental Revenue, $21,000. 85. Maple Tree Inc. purchased a 12-month insurance policy on March 1, 2006 for $900. At March 31, 2006, the adjusting journal entry to record expiration of this asset will include a. a debit to Prepaid Insurance and a credit to Cash for $900. b. a debit to Prepaid Insurance and a credit to Insurance Expense for $100. c. a debit to Insurance Expense and a credit to Prepaid Insurance for $75 d. a debit to Insurance Expense and a credit to Cash for $75. 86. Ogletree Enterprises purchased a 18-month insurance policy on May 31, 2006 for $3,600. The December 31, 2006 balance sheet would report Prepaid Insurance of a. $0 because Prepaid Insurance is reported on the Income Statement. b. $1,400 c. $2,200 d. $3,600 3 - 11
Test Bank for Financial Accounting, Fifth Edition 87. At March 1, J.C. Retro Inc. reported a balance in Supplies of $200. During March, the company purchased supplies for $750 and consumed supplies of $800. If no adjusting entry is made for supplies a. stockholders’ equity will be overstated by $800. b. expenses will be understated by $750. c. assets will be understated by $150. d. net income will be understated by $800. 88. FMI Inc. pays its rent of $120,000 annually on January 1. If the February 29 monthly adjusting entry for prepaid rent is omitted, which of the following will me true a. Failure to make the adjustment does not affect the February financial statements. b. Expenses will be overstated by $10,000 and net income and stockholders’ equity will be understated by $10,000. c. Assets will be overstated by $20,000 and net income and stockholders’ equity will be understated by $20,000. d. Assets will be overstated by $10,000 and net income and stockholders’ equity will be overstated by $10,000. 89. At December 31, 2006, before any year-end adjustments, Karr Company's Insurance Expense account had a balance of $725 and its Prepaid Insurance account had a balance of $1,900. It was determined that $1,500 of the Prepaid Insurance had expired. The adjusted balance for Insurance Expense for the year would be a. $1,500. b. $725. c. $2,225. d. $1,125. 90. On January 1, 2006, P.T. Oracle Company purchased a computer system for $3,240. The company expects to use the system for 3 years. The asset has no salvage value. The book value of the system at December 31, 2007 is a. $0 b. $1,080 c. $2,160 d. $3,240 91. A new accountant working for Metcalf Company records $800 Depreciation Expense on store equipment as follows: Dr. Depreciation Expense ...................................................... 800 Cr. Cash ....................................................................... 800 The effect of this entry is to a. adjust the accounts to their proper amounts on December 31. b. understate total assets on the balance sheet as of December 31. c. overstate the book value of the depreciable assets at December 31. d. understate the book value of the depreciable assets as of December 31. 92. From an accounting standpoint, the acquisition of productive facilities can be thought of as a long- term a. accrual of expense. b. accrual of revenue. c. accrual of unearned revenue. d. prepayment for services. 3 - 12
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts 93. In computing depreciation, the number of years of useful life of the asset is a. known with certainty. b. an estimate. c. always fixed at 5 years. d. always fixed at 3 years. 94. On January 1, 2006, E.D. Reardon Inc. purchased equipment for $30,000. The company is depreciating the equipment at the rate of $400 per month. At January 31, 2007, the balance in Accumulated Depreciation is a. $400 debit b. $4,800 credit c. $5,200 credit d. $26,600 debit 95. On January 1, 2006, M. Johnson Company purchased equipment for $30,000. The company is depreciating the equipment at the rate of $700 per month. The book value of the equipment at December 31, 2006 is a. $0 b. $8,400 c. $21,600 d. $30,000 96. If a business has several types of long-term assets such as equipment, buildings, and trucks, a. there should be only one accumulated depreciation account. b. there should be separate accumulated depreciation accounts for each type of asset. c. all the long-term asset accounts will be recorded in one general ledger account. d. there won't be a need for an accumulated depreciation account. 97. Which of the following would not result in unearned revenue? a. Rent collected in advance from tenants b. Services performed on account c. Sale of season tickets to football games d. Sale of two-year magazine subscriptions 98. If business pays rent in advance and debits a Prepaid Rent account, the company receiving the rent payment will credit a. cash. b. prepaid rent. c. unearned rent revenue. d. accrued rent revenue. 99. Unearned revenue is classified as a. an asset account. b. a revenue account. c. a contra-revenue account. d. a liability. 100. If a business has received cash in advance of services performed and credits a liability account, the adjusting entry needed after the services are performed will be a. debit Unearned Revenue and credit Cash. b. debit Unearned Revenue and credit Service Revenue. c. debit Unearned Revenue and credit Prepaid Expense. d. debit Unearned Revenue and credit Accounts Receivable. 3 - 13
Test Bank for Financial Accounting, Fifth Edition 101. White Laundry Company purchased $6,500 worth of laundry supplies on June 2 and recorded the purchase as an asset. On June 30, an inventory of the laundry supplies indicated only $3,000 on hand. The adjusting entry that should be made by the company on June 30 is a. Debit Laundry Supplies Expense, $3,000; Credit Laundry Supplies, $3,000. b. Debit Laundry Supplies Expense, $3,500; Credit Laundry Supplies, $3,000. c. Debit Laundry Supplies, $3,500; Credit Laundry Supplies Expense, $3,500. d. Debit Laundry Supplies Expense, $3,500; Credit Laundry Supplies, $3,500. 102. On July 1 the Watson Shoe Store paid $6,000 to Ace Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by Watson Shoe Store is a. Debit Rent Expense, $6,000; Credit Prepaid Rent, $1,500. b. Debit Prepaid Rent, $1,500; Credit Rent Expense, $1,500. c. Debit Rent Expense, $1,500; Credit Prepaid Rent, $1,500. d. Debit Rent Expense, $6,000; Credit Prepaid Rent, $6,000. 103. If an adjusting entry is not made for an accrued revenue, a. assets will be overstated. b. expenses will be understated. c. stockholders’ equity will be understated. d. revenues will be overstated. 104. If an adjusting entry is not made for an accrued expense, a. expenses will be overstated. b. liabilities will be understated. c. net income will be understated. d. stockholders’ equity will be understated. 105. Failure to prepare an adjusting entry at the end of the period to record an accrued expense would cause a. net income to be understated. b. an overstatement of assets and an overstatement of liabilities. c. an understatement of expenses and an understatement of liabilities. d. an overstatement of expenses and an overstatement of liabilities. 106. Failure to prepare an adjusting entry at the end of a period to record an accrued revenue would cause a. net income to be overstated. b. an understatement of assets and an understatement of revenues. c. an understatement of revenues and an understatement of liabilities. d. an understatement of revenues and an overstatement of liabilities. 107. Deb Smiley has performed $500 of CPA services for a client but has not billed the client as of the end of the accounting period. What adjusting entry must Deb make? a. Debit Cash and credit Unearned Revenue b. Debit Accounts Receivable and credit Unearned Revenue c. Debit Accounts Receivable and credit Service Revenue d. Debit Unearned Revenue and credit Service Revenue 108. Deb Smiley, CPA, has billed her clients for services performed. She subsequently receives payments from her clients. What entry will she make upon receipt of the payments? a. Debit Unearned Revenue and credit Service Revenue b. Debit Cash and credit Accounts Receivable c. Debit Accounts Receivable and credit Service Revenue d. Debit Cash and credit Service Revenue 3 - 14
Adjusting the Accounts 109. Clark Real Estate signed a four-month note payable in the amount of $8,000 on September 1. The note requires interest at an annual rate of 12%. The amount of interest to be accrued at the end of September is a. $320. b. $80. c. $960. d. $107. 110. A gift shop signs a three-month note payable to help finance increases in inventory for the Christmas shopping season. The note is signed on November 1 in the amount of $40,000 with annual interest of 12%. What is the adjusting entry to be made on December 31 for the interest expense accrued to that date, if no entries have been made previously for the interest? a. Interest Expense ........................................................................... 800 Interest Payable .................................................................. 800 b. Interest Expense ........................................................................... 1,200 Interest Payable .................................................................. 1,200 c. Interest Expense ........................................................................... 800 Cash ................................................................................... 800 d. Interest Expense ........................................................................... 800 Note Payable ...................................................................... 800 111. Trent Tables paid employee wages on and through Friday, January 26, and the next payroll will be paid in February. There are three more working days in January (29–31). Employees work 5 days a week and the company pays $800 a day in wages. What will be the adjusting entry to accrue wages expense at the end of January? a. Wages Expense ........................................................................... 800 Wages Payable ................................................................... 800 b. Wages Expense ........................................................................... 4,000 Wages Payable ................................................................... 4,000 c. Wages Expense ........................................................................... 2,400 Wages Payable ................................................................... 2,400 d. No adjusting entry is required. 112. A company shows a balance in Salaries Payable of $40,000 at the end of the month. The next payroll amounting to $50,000 is to be paid in the following month. What will be the journal entry to record the payment of salaries? a. Salaries Expense .......................................................................... 50,000 Salaries Payable ................................................................. 50,000 b. Salaries Expense .......................................................................... 50,000 Cash ................................................................................... 50,000 c. Salaries Expense .......................................................................... 10,000 Cash ................................................................................... 10,000 d. Salaries Expense .......................................................................... 10,000 Salaries Payable ........................................................................... 40,000 Cash ................................................................................... 50,000 113. The accounts of a business before an adjusting entry is made to record an accrued revenue reflect an a. understated liability and an overstated owner's capital. b. overstated asset and an understated revenue. c. understated expense and an overstated revenue. d. understated asset and an understated revenue. 3 - 15
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition 114. Carter Guitar Company borrowed $10,000 from the bank signing a 9%, 3-month note on September 1. Principal and interest are payable to the bank on December 1. If the company prepares monthly financial statements, the adjusting entry that the company should make for interest on September 30, would be a. Debit Interest Expense, $900; Credit Interest Payable, $900. b. Debit Interest Expense, $75; Credit Interest Payable, $75. c. Debit Note Payable, $900; Credit Cash, $900. d. Debit Cash, $225; Credit Interest Payable, $225. 115. The adjusted trial balance is prepared a. after financial statements are prepared. b. before the trial balance. c. to prove the equality of total assets and total liabilities. d. after adjusting entries have been journalized and posted. 116. An adjusted trial balance a. is prepared after the financial statements are completed. b. proves the equality of the total debit balances and total credit balances of ledger accounts after all adjustments have been made. c. is a required financial statement under generally accepted accounting principles. d. cannot be used to prepare financial statements. 117. Which of the statements below is not true? a. An adjusted trial balance should show ledger account balances. b. An adjusted trial balance can be used to prepare financial statements. c. An adjusted trial balance proves the mathematical equality of debits and credits in the ledger. d. An adjusted trial balance is prepared before all transactions have been journalized. a 118. Al is a barber who does his own accounting for his shop. When he buys supplies he routinely debits Supplies Expense. Al purchased $1,500 of supplies in January and his inventory at the end of January shows $600 of supplies remaining. What adjusting entry should Al make on January 31? a. Supplies Expense ......................................................................... 600 Supplies .............................................................................. 600 b. Supplies Expense ......................................................................... 1,500 Cash ................................................................................... 1,500 c. Supplies ........................................................................................ 600 Supplies Expense ............................................................... 600 d. Supplies Expense ......................................................................... 900 Supplies .............................................................................. 900 a 119. Alternative adjusting entries do not apply to a. accrued revenues and accrued expenses. b. prepaid expenses. c. unearned revenues. d. prepaid expenses and unearned revenues. 3 - 16
Adjusting the Accounts a 120. Joe is a lawyer who requires that his clients pay him in advance of legal services rendered. Joe routinely credits Legal Service Revenue when his clients pay him in advance. In June Joe collected $8,000 in advance fees and completed 75% of the work related to these fees. What adjusting entry is required by Joe's firm at the end of June? a. Unearned Revenue ...................................................................... 6,000 Legal Service Revenue ....................................................... 6,000 b. Unearned Revenue ...................................................................... 2,000 Legal Service Revenue ....................................................... 2,000 c. Cash ............................................................................................. 8,000 Legal Service Revenue ....................................................... 8,000 d. Legal Service Revenue ................................................................ 2,000 Unearned Revenue ............................................................. 2,000 a 121. Burton Enterprises purchased a Delivery Truck on March 1, 2006 for $29,000. The company is depreciating the truck at the rate of $500 per month. Failure to make an adjusting entry for depreciation at March 31 will have what impact on the financial statements? a. Assets will be overstated by $29,000 b. Assets will be overstated by $500 c. Net income will be understated by $500 d. Liabilities will be understated by $28,500 a 122. Media Links Inc. sold annual subscriptions to their magazinefor $12,000 in July, 2006. The magazine comes out monthly. The new subscribers will begin receiving magazines in August. Media Links recorded the subscriptions by debiting Cash and crediting Subscription Revenue. If the company makes no adjusting entry for subscriptions in July, what will be the impact on the financial statements? a. Unearned Revenue will be overstated by $11,000. b. Unearned Revenue will be understated by $12,000. c. Accounts Receivable will be understated by $12,000 d. Subscription Revenue will be understated by $1,000. 3 - 17
Test Bank for Financial Accounting, Fifth Edition a 123. On January 2, 2006, Federal Savings and Loan purchased a general liability insurance policy for $1,800 for coverage for the calendar year. The entire $1,800 was charged to Insurance Expense on January 2, 2006. If the firm prepares monthly financial statements, the proper adjusting entry on January 31, 2006, will be: a. Insurance Expense ....................................................................... 1,650 Prepaid Insurance ............................................................... 1,650 b. Prepaid Insurance ........................................................................ 1,650 Insurance Expense ............................................................. 1,650 c. Insurance Expense ....................................................................... 150 Prepaid Insurance ............................................................... 150 d. Prepaid Insurance ........................................................................ 150 Insurance Expense ............................................................. 150 124. Which of the following statements concerning accrual-basis accounting is incorrect? a. Accrual-basis accounting follows the revenue recognition principle. b. Accrual-basis accounting is the method required by generally accepted accounting principles. c. Accrual-basis accounting recognizes expenses only when they are paid. d. Accrual-basis accounting follows the matching principle. 125. The revenue recognition principle dictates that revenue be recognized in the accounting period a. before it is earned. b. after it is earned. c. in which it is earned. d. in which it is collected. 126. An expense is recorded under the cash basis only when a. services are performed. b. it is earned. c. cash is paid. d. it is incurred. 127. For prepaid expense adjusting entries a. an expense—liability account relationship exists. b. prior to adjustment, expenses are overstated and assets are understated. c. the adjusting entry results in a debit to an expense account and a credit to an asset account. d. none of these. 128. Expenses paid and recorded as assets before they are used are called a. accrued expenses. b. interim expenses. c. prepaid expenses. d. unearned expenses. 3 - 18
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts 129. Demaet Cruise Lines purchased a five-year insurance policy for its ships on April 1, 2006 for $120,000. Assuming that April 1 is the effective date of the policy, the adjusting entry on December 31, 2006 is a. Prepaid Insurance ......................................................................... 18,000 Insurance Expense ................................................................ 18,000 b. Insurance Expense ........................................................................ 18,000 Prepaid Insurance ................................................................. 18,000 c. Insurance Expense ........................................................................ 24,000 Prepaid Insurance ................................................................. 24,000 d. Insurance Expense ........................................................................ 6,000 Prepaid Insurance ................................................................. 6,000 130. Gardner Company purchased a truck from Kutner Co. by issuing a 6-month, 10% note payable for $60,000 on November 1. On December 31, the accrued expense adjusting entry is a. No entry is required. b. Interest Expense ............................................................................ 6,000 Interest Payable ..................................................................... 6,000 c. Interest Expense ............................................................................ 12,000 Interest Payable ..................................................................... 12,000 d. Interest Expense ............................................................................ 1,000 Interest Payable ..................................................................... 1,000 131. If the adjusting entry for depreciation is not made, a. assets will be understated. b. stockholders’ equity will be understated. c. net income will be understated. d. expenses will be understated. 132. Cathy Cline, an employee of Merlin Company, will not receive her paycheck until April 2. Based on services performed from March 15 to March 30 her salary was $900. The adjusting entry for Merlin Company on March 31 is a. Salaries Expense ............................................................................ 900 Salaries Payable ..................................................................... 900 b. No entry is required. c. Salaries Expense ............................................................................ 900 Cash ........................................................................................ 900 d. Salaries Payable ............................................................................. 900 Cash ........................................................................................ 900 133. Which of the following statements related to the adjusted trial balance is incorrect? a. It shows the balances of all accounts at the end of the accounting period. b. It is prepared before adjusting entries have been made. c. It proves the equality of the total debit balances and the total credit balances in the ledger. d. Financial statements can be prepared directly from the adjusted trial balance. 134. Financial statements are prepared directly from the a. general journal. b. ledger. c. trial balance. d. adjusted trial balance. 3 - 19
Test Bank for Financial Accounting, Fifth Edition EXERCISES Ex. 135 Prepare the monthly adjusting journal entries for Charlotte Ruston Inc. for the month ending March 31, 2006 using the following information (you may omit explanations for the transactions): 1. The balance in Supplies at March 1, 2006 is $2,000. The company made no purchases of supplies during March. An inventory of supplies on hand at March 31 reported supplies of $800. 2. The company pays weekly salaries for a 5-day week of $3,500 every Friday. March 31 falls on a Tuesday. 3. The company has an outstanding note payable of $10,000 due at December 31, 2006. Interest is accrued monthly on the note. The annual rate is 6%. 4. The company depreciates its plant and equipment at the rate of $4,000 per month. 5. The company purchased a 18-month insurance policy for $2,250 on January 1, 2006. Solution 135 (10 min.) 1. Supplies Expense $1,200 Supplies $1,200 2. Salaries Expense $1,400 Salaries Payable $1,400 3. Interest Expense $50 Interest Payable $50 4. Depreciation Expense $4,000 Accumulated Depreciation $4,000 5. Insurance Expense $125 Prepaid Insurance $125 Ex. 136 Reiley Company prepared the following income statement using the cash basis of accounting: REILEY COMPANY Income Statement, Cash Basis For the Year Ended December 31, 2005 Service revenue (does not include $40,000 of services rendered on account because the collection will not be until 2006) .................................................... $370,000 Expenses (does not include $25,000 of expenses on account because payment will not be made until 2006) ................................................................ 220,000 Net income ............................................................................................................. $150,000 Additional data: 1. Depreciation on a company automobile for the year amounted to $6,000. This amount is not included in the expenses above. 2. On January 1, 2005, paid for a two-year insurance policy on the automobile amounting to $1,800. This amount is included in the expenses above. 3 - 20
Adjusting the Accounts Instructions (a) Recast the above income statement on the accrual basis in conformity with generally accepted accounting principles. Show computations and explain each change. (b) Explain which basis (cash or accrual) provides a better measure of income. Solution 136 (15 min.) (a) REILEY COMPANY Income Statement For the Year Ended December 31, 2005 Service revenue .............................................................................................. $410,000 Expenses ........................................................................................................ 250,100 Net income ...................................................................................................... $159,900 Service revenue should include the $40,000 for services performed on account. The accrual basis states that revenue is reflected in the period when the service is performed. ($370,000 + $40,000 = $410,000). Expenses should include the $25,000 for expenses incurred but not yet paid. The accrual basis states that expenses should be reflected in the period when incurred. Expenses also should only include half of the $1,800 insurance premium since $900 applies to 2005. The other $900 is an asset and should be reflected on the balance sheet as prepaid insurance. The $6,000 of depreciation for the automobile is included as an expense in 2005. ($220,000 + $25,000 – $900 + $6,000 = $250,100). (b) The accrual basis of accounting provides a better measure of income than the cash basis. The accrual basis is required under generally accepted accounting principles and recognizes revenues when earned and expenses when incurred. Revenues and expenses recognized under the accrual basis are related to the economic environment in which they occur and thus allow trends to be more meaningfully interpreted. The cash basis often fails to recognize revenue in the period when earned and expenses when incurred. Additionally, expenses are not matched with revenues when earned; therefore, the matching principle is violated. Ex. 137 Before month-end adjustments are made, the February 28 trial balance of Ed's Enterprise contains revenue of $9,000 and expenses of $4,400. Adjustments are necessary for the following items: Depreciation for February is $1,300. Revenue earned but not yet billed is $3,300. Accrued interest expense is $700. Revenue collected in advance that is now earned is $3,500. Portion of prepaid insurance expired during February is $400. Instructions Calculate the correct net income for Ed's Income Statement for February. 3 - 21
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Solution 137 (5 min.) Net Income before Adjustments ($9,000 – 4,400) $ 4,600 Add: Unearned Revenues $3,500 Accrued Revenues 3,300 6,800 11,400 Subtract: Depreciation Expense 1,300 Interest Expense 700 Insurance Expense 400 2,400 Net Income after Adjustments $ 9,000 Ex. 138 On December 31, 2005, Gomez Company prepared an income statement and balance sheet and failed to take into account three adjusting entries. The incorrect income statement showed net income of $40,000. The balance sheet showed total assets, $120,000; total liabilities, $45,000; and stockholders’ equity, $75,000. The data for the three adjusting entries were: (1) Depreciation of $7,000 was not recorded on equipment. (2) Wages amounting to $8,000 for the last two days in December were not paid and not recorded. The next payroll will be in January. (3) Rent of $12,000 was paid for two months in advance on December 1. The entire amount was debited to Rent Expense when paid. Instructions Complete the following tabulation to correct the financial statement amounts shown (indicate deductions with parentheses): Stockholders’ Item Net Income Total Assets Total Liabilities Equity Incorrect balances $ 40,000 $120,000 $ 45,000 $ 75,000 Effects of: Depreciation Wages Rent Correct Balances Solution 138 (5 min.) Stockholders’ Item Net Income Total Assets Total Liabilities Equity Incorrect balances $40,000 $120,000 $45,000 $75,000 Effects of: Depreciation (7,000 ) (7,000 ) (7,000 ) Wages (8,000 ) 8,000 (8,000 ) Rent 6,000 6,000 6,000 Correct Balances $31,000 $119,000 $53,000 $66,000 3 - 22
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 139 Indicate (a) the type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense), and (b) the accounts before adjustment (overstated or understated) for each of the following: 1. Supplies of $200 have been used. 2. Salaries of $600 are unpaid. 3. Rent received in advance totaling $300 has been earned. 4. Services provided but not recorded total $500. Solution 139 (7 min.) (a) Type of Adjustment (b) Accounts before Adjustment 1. Prepaid Expense Assets Overstated Expenses Understated 2. Accrued Expense Expenses Understated Liabilities Understated 3. Unearned Revenue Liabilities Overstated Revenues Understated 4. Accrued Revenue Assets Understated Revenues Understated Ex. 140 Ellis Company accumulates the following adjustment data at December 31. 1. Revenue of $800 collected in advance has been earned. 2. Salaries of $600 are unpaid. 3. Prepaid rent totaling $450 has expired. 4. Supplies of $550 have been used. 5. Revenue earned but unbilled total $750. 6. Utility expenses of $200 are unpaid. 7. Interest of $250 has accrued on a note payable. Instructions (a) For each of the above items indicate: 1. The type of adjustment (prepaid expense, unearned revenue, accrued revenue, or accrued expense). 2. The account relationship (asset/liability, liability/revenue, etc.). 3. The status of account balances before adjustment (understatement or overstatement). 4. The adjusting entry. (b) Assume net income before the adjustments listed above was $16,500. What is the adjusted net income? 3 - 23
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Prepare your answer in the tabular form presented below. Account Balances Before Adjustment Type of Account (Understatement Adjustment Relationship or Overstatement) Adjusting Entry Solution 140 (20 min.) (a) Account Balances Before Adjustment Type of Account (Understatement Adjustment Relationship or Overstatement) Adjusting Entry 1. Unearned revenue. L/R Liab. O Unearned Revenue 800 Rev. U Service Revenue 800 2. Accrued expense. E/L Exp. U Salary Expense 600 Liab. U Salaries Payable 600 3. Prepaid expense. E/A Exp. U Rent Expense 450 Asset O Prepaid Rent 450 4. Prepaid expense. E/A Exp. U Supplies Expense 550 Asset O Supplies 550 5. Accrued revenue. A/R Asset U Accounts Receivable 750 Rev. U Service Revenue 750 6. Accrued expense. E/L Exp. U Utilities Expense 200 Liab. U Accounts Payable 200 7. Accrued expense. E/L Exp. U Interest Expense 250 Liab. U Interest Payable 250 Codes: A = Asset R = Revenue L = Liability O = Overstatement E = Expense U = Understatement (b) Net income before adjustments .................................................... $16,500 Add: Unearned revenue (1) ....................................................... $800 Accrued revenue (5) ......................................................... 750 1,550 18,050 Less: Accrued salaries (2) .......................................................... 600 Prepaid rent expired (3) .................................................... 450 Supplies used (4) .............................................................. 550 Accrued utilities (6) ........................................................... 200 Accrued interest (7) ........................................................... 250 2,050 Adjusted net income ..................................................................... $16,000 3 - 24
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 141 The adjusted trial balance of the Nance Company includes the following balance sheet accounts that frequently require adjustment. For each account, indicate (a) the type of adjusting entry (prepaid expenses, unearned revenues, accrued revenues, or accrued expenses) and (b) the related account in the adjusting entry. (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies 2. Accounts Receivable 3. Prepaid Insurance 4. Accumulated Depreciation— Equipment 5. Interest Payable 6. Salaries Payable 7. Unearned Revenue Solution 141 (15 min.) (a) (b) Balance Sheet Account Type of Adjusting Entry Related Account 1. Supplies Prepaid Expense Supplies Expense 2. Accounts Receivable Accrued Revenue Service Revenue 3. Prepaid Insurance Prepaid Expense Insurance Expense 4. Accumulated Depreciation— Equipment Prepaid Expense Depreciation Expense 5. Interest Payable Accrued Expense Interest Expense 6. Salaries Payable Accrued Expense Salaries Expense 7. Unearned Revenue Unearned Revenues Service Revenue 3 - 25
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Ex. 142 Match the statements below with the appropriate terms by entering the appropriate letter code in the spaces provided. TERMS: A. Prepaid Expenses B. Unearned Revenues C. Accrued Revenues D. Accrued Expenses STATEMENTS: _____ 1. A revenue not yet earned; collected in advance. _____ 2. Office supplies on hand that will be used in the next period. _____ 3. Interest revenue collected; not yet earned. _____ 4. Rent not yet collected; already earned. _____ 5. An expense incurred; not yet paid or recorded. _____ 6. A revenue earned; not yet collected or recorded. _____ 7. An expense not yet incurred; paid in advance. _____ 8. Interest expense incurred; not yet paid. Solution 142 (5 min.) 1. B 5. D 2. A 6. C 3. B 7. A 4. C 8. D Ex. 143 The Royals, a semi-professional baseball team, prepare financial statements on a monthly basis. Their season begins in April, but in March the team engaged in the following transactions: (a) Paid $150,000 to Wichita City as advance rent for use of Wichita City Stadium for the six month period April 1 through September 30. (b) Collected $300,000 cash from sales of season tickets for the team's 20 home games. This amount was credited to Unearned Ticket Revenue. During the month of April, the Royals played four home games and five road games. Instructions Prepare the adjusting entries required at April 30 for the transactions above. You may omit the explantions for the transactions. 3 - 26
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Solution 143 (5 min.) (a) Rent Expense ................................................................................ 25,000 Prepaid Rent ........................................................................ 25,000 ($150,000 ÷ 6 = $25,000) (b) Unearned Ticket Revenue ............................................................. 60,000 Ticket Revenue .................................................................... 60,000 ($300,000 ÷ 20 = $15,000; $15,000 × 4 = $60,000) Ex. 144 Use the following information to prepare adjusting journal entries for Roadsters Inc at June 30, 2006. 1. Roadsters has performed but not billed customers for services of $3,000. 2. The Supplies account balance is $2,090. An inventory of supplies on hand at the end of June shows supplies with a cost of $1,050 on hand. 3. Salaries earned but not to be paid until the next pay day on July 5 total $4,200. 4. Roadsters accepted a deposit of $500 in May for work to be performed in June. The project is now complete. 5. Roadsters rents warehouse space to another business, Rhino Imports, for $1,000 per month. Rhino has not yet paid June rent. 6. Roadsters owes $20,000 on a Note Payable. Interest is accrued monthly at an annual rate of 9%. Solution 144 1. Accounts Receivable $3,000 Service Revenue $3,000 2. Supplies Expense $1,040 Supplies $1,040 3. Salaries Expense $4,200 Salaries Payable $4,200 4. Unearned Revenue $500 Service Revenue $500 5. Rent Receivable $1,000 Rent Revenue $1,000 6. Interest Expense $150 Interest Payable $150 3 - 27
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Ex. 145 The following information is available for BlueStar Company for the month ending December 31, 2006: 1. Supplies used during the month totalled $1,596. 2. BlueStar paid the annual premium of $6,000 on their insurance on December 1. 3. BlueStar performed services valued at $14,000 during the last week of December. Their clients have not yet been billed. 4. BlueStar pays their staff for a 5-day work week each Friday. The weekly payroll totals $3,450. December 31 falls on a Wednesday. 5. BlueStar has a 5-year note payable to SouthTrust Bank for $40,000 due on July 31, 2009. Interest is payable annually on July 31 and is accrued monthly at the annual rate of 7.5%. Use the information to determine the balance to be reported on the December 31 financial statements for the following accounts: Account Unadjusted balance, 12/31/2006 Adjusted balance, 12/31/2006 Supplies $2,040 Prepaid Insurance $6,000 Accounts Receivable $32,000 Salaries Payable $0 Interest Payable $1,000 Solution 145 Account Unadjusted balance, 12/31/2006 Adjusted balance, 12/31/2006 Supplies $2,040 $444(a) Prepaid Insurance $6,000 $5,500(b) Accounts Receivable $32,000 $46,000(c) Salaries Payable $0 $2,070(d) Interest Payable $1,000 $1,250(e) (a) $2,040 - $1,596 = $444 (b) $6,000/ 12 = $500 insurance expense per month $6,000 balance - $500 expired cost = $5,500 (c) $32,000 + $14,000 = $46,000 (d) $3,450/ 5 = $690 salary expense per day * 3 days = $2,070 (e) $25,000 (7.5%) (1/12) = $250; $1,000 + $250 = $1,250 3 - 28
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 146 Baer Coat Company purchased equipment on June 1 for $54,000, paying $12,000 cash and signing a 12%, 2-month note for the remaining balance. The equipment is expected to depreciate $12,000 each year. Baer Coat Company prepares monthly financial statements. Instructions (a) Prepare the general journal entry to record the acquisition of the equipment on June lst. (b) Prepare any adjusting journal entries that should be made on June 30th. (c) Show how the equipment will be reflected on Baer Coat Company's balance sheet on June 30th. Solution 146 (10 min.) (a) June 1 Equipment ...................................................................... 54,000 Cash ...................................................................... 12,000 Notes Payable ....................................................... 42,000 (To record acquisition of equipment and signing of a 2-month, 12% note) (b) June 30 Depreciation Expense .................................................... 1,000 Accumulated Depreciation—Equipment ................ 1,000 (To record monthly depreciation) $12,000 ÷ 12 = $1,000/month 30 Interest Expense ............................................................ 420 Interest Payable .................................................... 420 (To accrue interest on notes payable) $42,000 × 12% × 1/12 = $420 (c) Assets Equipment $54,000 Less: Accumulated Depreciation—Equipment 1,000 $53,000 Ex. 147 Unruh Company prepares monthly financial statements. Below are listed some selected accounts and their balances in the September 30 trial balance before any adjustments have been made for the month of September. UNRUH COMPANY Trial Balance (Selected Accounts) September 30, 2005 ——————————————————————————————————————————— Debit Credit Office Supplies ...................................................................................... $ 2,700 Prepaid Insurance ................................................................................. 4,200 Office Equipment ................................................................................... 16,200 Accumulated Depreciation—Office Equipment ...................................... $ 900 Unearned Rent Revenue ....................................................................... 1,200 3 - 29
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition ( Note: Debit column does not equal credit column because this is a partial listing of selected account balances) An analysis of the account balances by the company's accountant provided the following additional information: 1. A physical count of office supplies revealed $1,200 on hand on September 30. 2. A two-year life insurance policy was purchased on June 1 for $4,800. 3. Office equipment depreciated $5,400 per year. 4. The amount of rent received in advance that remains unearned at September 30 is $500. Instructions Using the above additional information, prepare the adjusting entries that should be made by Unruh Company on September 30. Solution 147 (10 min.) 1. Office Supplies Expense ................................................................. 1,500 Office Supplies ....................................................................... 1,500 (To record the amount of office supplies used) 2. Insurance Expense .......................................................................... 200 Prepaid Insurance ................................................................... 200 (To record insurance expired $4,800 ÷ 24) 3. Depreciation Expense ..................................................................... 450 Accumulated Depreciation—Office Equipment ....................... 450 (To record monthly depreciation $5,400 ÷ 12) 4. Unearned Rent Revenue ................................................................. 700 Rent Revenue ......................................................................... 700 (To record rent revenue earned) Ex. 148 Prepare the required end-of-period adjusting entries for each independent case listed below. Case 1 Starr Company began the year with a $3,000 balance in the Office Supplies account. During the year, $8,500 worth of additional office supplies were purchased. A physical count of office supplies on hand at the end of the year revealed that $6,400 worth of office supplies had been used during the year. No adjusting entry has been made until year end. Case 2 Eaton Company has a calendar year-end accounting period. On July 1, the company purchased office equipment for $30,000. It is estimated that the office equipment will depreciate $400 each month. No adjusting entry has been made until year end. 3 - 30
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Case 3 Ward Realty is in the business of renting several apartment buildings and prepares monthly financial statements. It has been determined that 3 tenants in $600 per month apartments and one tenant in the $1,000 per month apartment had not paid their August rent as of August 31st. Solution 148 (10 min.) Case 1—December 31 Office Supplies Expense .................................................... 6,400 Office Supplies ....................................................... 6,400 (To record office supplies used during the year) Case 2—December 31 Depreciation Expense ........................................................ 2,400 Accumulated Depreciation—Office Equipment ....... 2,400 (To record depreciation expense for six months) $400 × 6 months = $2,400 Depreciation Case 3—August 31 Rent Receivable ................................................................. 2,800 Rent Revenue ......................................................... 2,800 (To accrue rent earned but not yet received) Ex. 149 Logan Insurance Agency prepares monthly financial statements. Presented below is an income statement for the month of June that is correct on the basis of information considered. LOGAN INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Premium Commission Revenue ................................................... $35,000 Expenses Salary expense ............................................................................. $6,000 Advertising expense ..................................................................... 800 Rent expense ............................................................................... 4,200 Depreciation expense ................................................................... 2,800 Total expenses ............................................................................. 13,800 Net income ............................................................................................ $21,200 Additional Data: When the income statement was prepared, the company accountant neglected to take into consideration the following information: 1. A utility bill for $2,000 was received on the last day of the month for electric and gas service for the month of June. 2. A company insurance salesman sold a life insurance policy to a client for a premium of $28,000. The agency billed the client for the policy and is entitled to a commission of 20%. 3. Supplies on hand at the beginning of the month were $3,000. The agency purchased additional supplies during the month for $2,500 in cash and $2,200 of supplies were on hand at June 30. 3 - 31
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition 4. The agency purchased a new car at the beginning of the month for $16,800 cash. The car will depreciate $4,200 per year. 5. Salaries owed to employees at the end of the month total $5,300. The salaries will be paid on July 5. Instructions Prepare a correct income statement. Solution 149 (15 min.) LOGAN INSURANCE AGENCY Income Statement For the Month Ended June 30 ——————————————————————————————————————————— Revenues Premium Commission Revenue ($35,000 + $5,600) .................... $40,600 Expenses Salary expense ($6,000 + $5,300) ................................................ $11,300 Advertising expense ..................................................................... 800 Rent expense ............................................................................... 4,200 Depreciation expense ($2,800 + $350) ......................................... 3,150 Utilities expense ($0 + $2,000) ..................................................... 2,000 Supplies expense ($0 + $3,300) ................................................... 3,300 Total expenses .................................................................... 24,750 Net income ............................................................................................ $15,850 Ex. 150 One part of eight adjusting entries is given below. Instructions Indicate the account title for the other part of each entry. 1. Unearned Revenue is debited. 2. Prepaid Rent is credited. 3. Accounts Receivable is debited. 4. Depreciation Expense is debited. 5. Utilities Expense is debited. 6. Interest Payable is credited. 7. Service Revenue is credited (give two possible debit accounts). 8. Interest Receivable is debited. Solution 150 (5 min.) 1. Service Revenue 5. Utilities Payable 2. Rent Expense 6. Interest Expense 3. Service Revenue 7. Accounts Receivable or Unearned Revenue 4. Accumulated Depreciation 8. Interest Revenue 3 - 32
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 151 For each of the following accounts, indicate (a) the type of adjusting entry (prepaid expense, accrued revenue, etc.) and (b) the related account in the adjusting entry. 1. Depreciation Expense 2. Salaries Payable 3. Service Revenue 4. Supplies 5. Unearned Revenue Solution 151 (5 min.) Account Type of Entry Related Account 1. Depreciation Expense Prepaid expense Accum. Depreciation 2. Salaries Payable Accrued expense Salaries Expense 3. Service Revenue Accrued revenue Accounts Receivable 4. Supplies Prepaid expense Supplies Expense 5. Unearned Revenue Unearned revenue Service Revenue 3 - 33
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Ex. 152 Prepare the necessary adjusting entry for each of the following (you may omit explantions for the transactions): 1. Services provided but unrecorded totaled $700. 2. Accrued salaries at year-end are $1,000. 3. Depreciation for the year is $600. Solution 152 (5 min.) 1. Accounts Receivable ....................................................................... 700 Service Revenue .................................................................... 700 2. Salaries Expense ............................................................................ 1,000 Salaries Payable ..................................................................... 1,000 3. Depreciation Expense ..................................................................... 600 Accumulated Depreciation ...................................................... 600 Ex. 153 The following ledger accounts are used by the Ottawa Greyhound Park: Accounts Receivable Prepaid Printing Prepaid Rent Unearned Admissions Revenue Interest Payable Printing Expense Rent Expense Interest Expense Admissions Revenue Concessions Revenue Instructions For each of the following transactions below, prepare the journal entry (if one is required) to record the initial transaction and then prepare the adjusting entry, if any, required on September 30, the end of the fiscal year. (a) On September 1, paid rent on the track facility for three months, $180,000. (b) On September 1, sold season tickets for admission to the racetrack. The racing season is year-round with 25 racing days each month. Season ticket sales totaled $900,000. (c) On September 1, borrowed $200,000 from First National Bank by issuing a 9% note payable due in three months. (d) On September 5, schedules for 20 racing days in September, 25 racing days in October, and 15 racing days in November were printed for $3,000. (e) The accountant for the concessions company reported that gross receipts for September were $140,000. Ten percent is due to Ottawa and will be remitted by October 10. 3 - 34
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Solution 153 (15 min.) (a) Journal Entry Prepaid Rent ........................................................................... 180,000 Cash .............................................................................. 180,000 Adjusting Entry Rent Expense ......................................................................... 60,000 Prepaid Rent .................................................................. 60,000 (b) Journal Entry Cash ....................................................................................... 900,000 Unearned Admissions Revenue ..................................... 900,000 Adjusting Entry Unearned Admissions Revenue ............................................. 75,000 Admissions Revenue ..................................................... 75,000 ($900,000 ÷ 12 = $75,000) (c) Journal Entry Cash ....................................................................................... 200,000 Note Payable ................................................................. 200,000 Adjusting Entry Interest Expense ..................................................................... 1,500 Interest Payable ............................................................. 1,500 ($200,000 × .09 × 1 ÷ 12 = $1,500) (d) Journal Entry Prepaid Printing ...................................................................... 3,000 Cash .............................................................................. 3,000 Adjusting Entry Printing Expense .................................................................... 1,000 Prepaid Printing ............................................................. 1,000 ($3,000 × 20 ÷ 60 = $1,000) (e) Journal Entry None Adjusting Entry Accounts Receivable .............................................................. 14,000 Concessions Revenue ................................................... 14,000 3 - 35
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Ex. 154 Determine the impact on the accounting equation (overstated or understated assets, liabilities or stockholders’ equity) if the following adjusting journal entries are omitted by Menken International for the month of August, 2006. 1. Plant and equipment are depreciated at the rate of $10,000 per month. 2. Supplies used during the month totalled $3,500. 3. Prepaid insurance of $1,200 expired during the month. 4. Unearned revenues of $5,000 were earned during the month. 5. Service revenue of $4,500 was earned but not billed at the end of the month. Solution 154 (5 min.) 1. Assets overstated and Stockholders’ Equity overstated. 2. Assets overstated and Stockholders’ Equity overstated. 3. Assets overstated and Stockholders’ Equity overstated. 4. Liabilities overstated and Stockholders’ Equity understated. 5. Assets understated and Stockholders’ Equity understated. Ex. 155 Determine the dollar impact (understated or overstated) on assets, liabilties, revenues and expenses if the Noblett Company omits adjusting journal entries for the following items for the month of April 2006, its first month of operations: 1. On Friday of each week, Noblett Company pays its staff weekly wages amounting to $5,000 for a five-day work week. April 30 falls on a Monday. 2. The unadjusted balance in Supplies is $4,000. An inventory of supplies at April 30 reports $500 of supplies on hand. 3. On April 1, Noblett purchased equipment for a cost of $22,000. Noblett expects to use the equipment for 5 years. It has no salvage value. 4. Noblett borrowed $20,000 by signing a 5-year Note Payable to Compass Bank on April 1. The interest rate on the loan is 8%. 5. Noblett purchased a 12-month insurance policy on April 2 for $3,600. 6. Noblett earned service revenue of $30,000 during the month. As of the end of the month, it had not yet billed customers for $2,500 of services. Solution 155 (10 min.) Omitted entry Assets Liabilties Revenues Expenses 1 $1,000 Under $1,000 Under 2 $3,500 Over $3,500 Under 3 $367 Over $367 Under 4 $133 Under $133 Under 5 $300 Over $300 Under 6 $2,500 Under $2,500 Under 3 - 36
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 156 Presented below is the Trial Balance and Adjusted Trial Balance for Jennings Company on December 31. JENNINGS COMPANY Trial Balance December 31 ——————————————————————————————————————————— Before Adjustment After Adjustment Dr. Cr. Dr. Cr. Cash $ 2,000 $ 2,000 Accounts Receivable 2,800 3,900 Prepaid Rent 2,100 1,500 Supplies 1,200 800 Automobile equipment 18,000 18,000 Accumulated depreciation— Automobile equipment $ 1,300 $ 1,500 Accounts Payable 2,700 3,000 Notes Payable 10,000 10,000 Interest Payable 120 Salaries Payable 600 Unearned Revenue 4,460 4,360 Common Stock 7,200 7,200 Dividends 3,200 3,200 Service Revenue 8,000 9,200 Salaries Expense 2,060 2,660 Utilities Expense 1,800 2,100 Rent Expense 500 1,100 Supplies Expense 400 Depreciation Expense— Automobile Equipment 200 Interest Expense 120 Totals $33,660 $33,660 $35,980 $35,980 Instructions Prepare in journal form, with explanations, the adjusting entries that explain the changes in the balances from the trial balance to the adjusted trial balance. Solution 156 (15 min.) Accounts Receivable ............................................................................. 1,100 Service Revenue .......................................................................... 1,100 (To record revenue earned but not yet received) Rent Expense ........................................................................................ 600 Prepaid Rent ................................................................................ 600 (To record expiration of prepaid rent) Supplies Expense ................................................................................. 400 Supplies ........................................................................................ 400 (To record supplies used) 3 - 37
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Solution 156 (cont.) Depreciation Expense—Automobile Equipment .................................... 200 Accumulated Depreciation—Automobile Equipment .................... 200 (To record depreciation expense) Salaries Expense .................................................................................. 600 Salaries Payable .......................................................................... 600 (To record salaries owed, not yet paid) Interest Expense ................................................................................... 120 Interest Payable ........................................................................... 120 (To record accrued interest payable) Unearned Revenue ............................................................................... 100 Service Revenue .......................................................................... 100 (To record revenue earned) Utilities Expense .................................................................................... 300 Accounts Payable ......................................................................... 300 (To record receipt of utility bill) Ex. 157 Compute the net income for 2005 based on the following amounts presented on the adjusted trial balance of Pryor Company. Accumulated Depreciation $20,000 Depreciation Expense 10,000 Salaries Expense 15,000 Service Revenue 45,000 Unearned Revenue 8,000 Solution 157 (5 min.) Service Revenue $45,000 Depreciation Expense $10,000 Salaries Expense 15,000 25,000 Net Income $20,000 3 - 38
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts Ex. 158 T.O. Bainbridge Company began operations on June 1, 2006. The company adopted the calender year for accounting purposes. During 2006, the company earned revenues of $45,000. They have collected all but $5,000 as of December 31. The company incurred rent, interest, salaries and utilities expenses of $33,000. At December 31, 2006, they owed $3,000 in accounts payable. In addition, Bainbridge paid cash for supplies of $1,000 of which $300 remain at December 31. 1. Calculate Bainbridge’s accrual basis net income for 2006. 2. Calculate Bainbridge’s cash basis net income for 2006. Solution 158 (10 minutes) 1. Revenues earned $45,000 – Expenses incurred $33,000 – Supplies consurmed $700 = $11,300 2. Cash basis revenues (cash collections) = $45,000 – 5,000 = $40,000 Cash basis expenses (cash disbursements) = $33,000 – 3,000 + 1,000 = $31,000 Cash basis net income = $40,000 – 31,000 = $9,000 Ex. 159 The adjusted trial balance of Ryan Financial Planners appears below. Using the information from the adjusted trial balance, you are to prepare for the month ending December 31: 1. an income statement. 2. a statement of retained earnings. 3. a balance sheet. RYAN FINANCIAL PLANNERS Adjusted Trial Balance December 31, 2005 ——————————————————————————————————————————— Debit Credit Cash ...................................................................................................... $ 4,400 Accounts Receivable ............................................................................. 2,200 Office Supplies ...................................................................................... 1,800 Office Equipment ................................................................................... 15,000 Accumulated Depreciation—Office Equipment ...................................... $ 4,000 Accounts Payable ................................................................................. 3,800 Unearned Revenue ............................................................................... 5,000 Common Stock ...................................................................................... 10,000 Retained Earnings ................................................................................. 4,400 Dividends .............................................................................................. 2,500 Service Revenue ................................................................................... 3,700 Office Supplies Expense ....................................................................... 600 Depreciation Expense ........................................................................... 2,500 Rent Expense ........................................................................................ 1,900 $30,900 $30,900 3 - 39
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Solution 159 (20 min.) 1. RYAN FINANCIAL PLANNERS Income Statement For the Month Ended December 31, 2005 ——————————————————————————————————————————— Revenues Service Revenue .......................................................................... $ 3,700 Expenses Depreciation expense ................................................................... $2,500 Rent expense ............................................................................... 1,900 Office supplies expense ............................................................... 600 Total expenses ....................................................................... 5,000 Net loss ................................................................................................. $(1,300 ) 2. RYAN FINANCIAL PLANNERS Statement of Retained Earnings For the Month Ended December 31, 2005 ——————————————————————————————————————————— Retained Earnings, December 1 ........................................................... $4,400 Less: Net loss ..................................................................................... $1,300 Dividends ................................................................................... 2,500 3,800 Retained Earnings December 31 .......................................................... $600 3. RYAN FINANCIAL PLANNERS Balance Sheet December 31, 2005 ——————————————————————————————————————————— Assets Cash ..................................................................................................... $ 4,400 Accounts receivable .............................................................................. 2,200 Office supplies ....................................................................................... 1,800 Office equipment ................................................................................... $15,000 Less: Accumulated depreciation—office equipment ............................ 4,000 11,000 Total assets .................................................................................. $19,400 Liabilities and Stockholders’ Equity Liabilities Accounts payable ......................................................................... $3,800 Unearned revenue ........................................................................ 5,000 Total liabilities ......................................................................... $ 8,800 Stockholders Equity Common Stock ............................................................................. 10,000 Retained Earnings ........................................................................ 600 10,600 Total liabilities and stockholders’ equity .................................. $19,400 3 - 40
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts a Ex. 160 1. Flynn Company prepares monthly financial statements. On July 1, the Office Supplies account had a balance of $3,000. During July, additional office supplies were purchased for $3,800 and that amount was debited to Office Supplies Expense. On July 31, a physical count of office supplies revealed that there was $2,700 on hand. Prepare the adjusting journal entry that Flynn Company should make on July 31. 2. Reese Rental Agency prepares monthly financial statements. On September 1, a check for $9,600 was received from a tenant for six months’ rent. The full amount was credited to Rent Revenue. Prepare the adjusting entry the company should make on September 30. a Solution 160 (5 min.) 1. July 31 Office Supplies Expense ................................................ 300 Office Supplies ...................................................... 300 (To record supplies used) 2. Sept. 30 Rent Revenue ................................................................ 8,000 Unearned Rent Revenue ....................................... 8,000 (To record unearned rent) 3 - 41
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition COMPLETION STATEMENTS 161. A business can compute net income for a month, a quarter or a year because the __________________________ allows that the economic life of a business can be divided into artificial time periods. 162. An accounting period that is one year in length is referred to as a ______________ year. 163. The ______________ principle requires that revenue be recorded in the period when earned regardless of when the cash is collected. 164. In a service company, revenue is earned when the service is ______________. 165. The matching principle attempts to match ______________ with ______________. 166. Expenses paid and recorded in an asset account before they are used or consumed are called ______________. Revenue received and recorded as a liability before it is earned is referred to as ______________. 167. Failure to adjust a prepaid expense account for the amount expired will cause ______________ to be understated and ________________ to be overstated. 168. Failure to record depreciation will cause ________________ to be overstated and __________________ to be understated 169. Accumulated Depreciation is a ___________________________ account and has a normal __________________ balance. 170. An accrued expense is an expense that has been ____________________ but not ______________________. 171. An adjusted trial balance proves the ______________ of the total debit and credit balances after all ______________ entries have been made. Answers to Completion Statements 161. time period assumption 167. expenses, assets 162. fiscal 168. assets, expenses 163. revenue recognition 169. contra-asset, credit 164. performed 170. incurred, paid or recorded 165. expenses, revenues 171. equality, adjusting 166. prepaid expenses, unearned revenue 3 - 42
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts MATCHING 172. Match the items below by entering the appropriate code letter in the space provided. A. Adjusted trial balance F. Accrued revenues B. Time period assumption G. Cash basis accounting C. Revenue recognition principle H. Accumulated depreciation D. Prepaid expenses I. Accrued expenses E. Matching principle J. Book value ______ 1. A listing of accounts and their balances after all adjusting entries have been made and posted. ______ 2. Examples include Supplies and Prepaid Insurance ______ 3. Cost less accumulated depreciation ______ 4. Divides the economic life of a business into artificial time periods ______ 5. Requires that the cost of a long-term asset be allocated to expense over the periods it will be used ______ 6. A contra asset account ______ 7. Recognition of revenue when it is earned ______ 8. Revenues earned but not yet received ______ 9. Expenses incurred but not yet paid ______10. Records revenue when cash is received and expenses when cash is paid Answers to Matching 1. A 6. H 2. D 7. C 3. J 8. F 4. B 9. I 5. E 10. G 3 - 43
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition SHORT-ANSWER ESSAY QUESTIONS S-A E 173 The income statement is an important financial statement used by individuals who are interested in the operations of a business enterprise. Explain how the time period assumption and the revenue recognition and matching principles provide guidance to accountants in preparing an income statement. Solution 173 The time period assumption divides the economic life of an accounting entity, such as a business enterprise, into arbitrary time periods. The revenue recognition and matching principles are the basic rules for allocating revenues and expenses to these arbitrary time periods under accrual- basis accounting. The revenue recognition principle dictates the time period to which revenue is to be allocated and recognized; that is, on which income statement the revenue is to be reported. The matching principle dictates the time period to which costs are allocated and recognized as expenses; that is, on which income statement the expenses are to be reported and matched against revenues in the determination of net income. S-A E 174 In developing an accounting information system, it is important to establish procedures whereby all transactions that affect the components of the accounting equation are recorded. Why then, is it often necessary to adjust the accounts before financial statements are prepared even in a properly designed accounting system? Identify the major types of adjustments that are frequently made and give a specific example of each. Solution 174 Account balances must be adjusted before financial statements are prepared, even in a properly designed accounting system, because (1) some of the recorded transactions have been recognized prematurely and (2) some effects on components of the accounting equation have not been recorded. Prepayments and deferrals are types of adjustments of recorded transactions that must be allocated to future periods as well as the current period. Examples of deferral-type adjustments are: prepaid rent, prepaid insurance, and unearned revenue. Accruals are adjustments for unrecorded transactions that must be recognized in the current period. Examples of accrual-type adjustments are: salaries and wages payable, interest payable, and interest receivable. S-A E 175 (Ethics) Marsh and Linton is a manufacturing company that specializes in writing instruments. The past year was a difficult one for the company, as it sought to retain its share in a market in which the largest competitors were also rapid innovators. Marsh and Linton introduced a new product late in the year, even though testing was not complete. It was a pen designed with two cartridges: one supplying ink and the other correction fluid. A person could then switch easily between writing and correcting errors. It was priced fairly high, and was never heavily advertised. Even so, the Correct-O-Pen, as the product was named, was an overwhelming success. 3 - 44
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts S-A E 175 (cont.) The success of the product has Fran Henley, the manager of the New Products division, worried, however. She was concerned that quality problems would begin occurring, since the longevity of the pen and stability of the correction fluid formulation had not been tested. She did not want sales personnel to get the bonuses that appeared to be indicated, since they might aggressively promote a product that would fail in use. She preferred to complete testing of the pen first, so that more confidence could be placed in the results. Top management, however, declined the tests. Ms. Henley then instructed you, the accountant, not to prorate payroll taxes or rent expense for the rest of the year, but to show them as current expenses in total. In this way, the new product would appear to be only slightly profitable. Required: 1. Describe the alternatives that you as an accountant would have in this situation. 2. Indicate which alternative is best. Solution 175 1. The choices include: 1. Follow the manager's instructions. 2. Explain to the manager why you cannot follow her instructions. 3. Report the manager's actions to her superior. 4. Resign. There are probably other alternatives as well. Students should be able to come up with at least #1 and #2. 2. Of the choices, #1 is unethical because it will cause the financial statements to be misleading. #3 and #4 are rather drastic measures that do not seem to be indicated, at least not yet. #2, therefore, is the best choice. S-A E 176 (Communication) A new sales representative, Mark Yount, has just received his copy of the month-end financial reports. He is puzzled by the term "unearned revenue." He left the following e-mail message for you on the company's bulletin board system: What is this??? Creative Accounting, or what??? Line item 12 on year-to-date financials shows over $25Gs in Unearned Revenue!!! Come on, guys! Either we earned it, or we didn't . . . Right??! Is this how you guys lower our commissions? Reply to m.yount@sbd Required: Write a response to send to Mark. 3 - 45
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition Solution 176 Since the answer is being prepared for a "bulletin board" type system, it can be in informal language and can respond in kind to the humor. However, proper grammar and spelling are essential, as is the message about what unearned revenue really is. A proposed message follows: Mark—What a pleasant surprise to hear from you! Maybe you can teach those other guys in your department something about living in the present! Do you know some of them still write me notes on paper??? Unbelievable, right??! Now to your question. Your unearned revenue is the sales you made that us smart guys in accounting didn't figure you had earned, so we just took it away from you! Might as well save the company some dough for our own bonuses, right?? Seriously, Mark—unearned revenue is the result of your getting customers of the kind we like—they pay in advance! When they pay before we can even get their products made or shipped, we can't count the money they pay us as revenue. What we actually have is a liability—an obligation to make and ship products. So that's how we (smart guys) in accounting count it—as a liability. You happened to have about 25% of your sales that fit in that category. When production can catch up with orders, you'll get credit for the sales. You will receive your commissions the same month the company records the revenue as “earned.” (Take heart—It'll seem like Christmas all over again.) Thanks again for actually using the system. Talk to me again sometime. . . Reply to mking@sbd Brief Exercises BE 177 On January 1, 2006, J.C. Cohen Company purchased a general liability insurance policy for $3,600 to provide coverage for the calendar year. 1. If the company recorded the policy as an asset when purchased, what is the monthly adjusting journal entry that should be recorded at January 31, 2006? 2. If the company expensed the cost of the policy on January 1, 2006, what is the monthly adjusting entry that should be recorded at January 31, 2006? 177 Solution 1. Insurance Expense 300 Prepaid Insurance 300 2. Prepaid Insurance 3,300 Insurance Expense 3,300 3 - 46
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts BE 178 On June 1, during its first month of operations, Eggemeister Enterprises purchased supplies for $3,500 and debited the supplies account for that amount. At January 30, an inventory of supplies showed $1,200 of supplies on hand. What adjusting journal entry should be made for June? 178 Solution Supplies Expense 2,300 Supplies 2,300 BE 179 On January 1, the Biddle & Biddle, CPAs received a $9,000 cash retainer for legal services to be rendered ratably over the next 3 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned ratably over the 3 month period, what adjusting journal entry should be made at January 31? 179 Solution Unearned Revenue 3,000 Fees Earned 3,000 BE 180 On February 1, the Acts Tax Service received a $2,000 cash retainer for tax preparation services to be rendered ratably over the next 4 months. The full amount was credited to the liability account Unearned Revenue. Assuming that the revenue is earned ratably over the 4 month period, what balance would be reported on the February 28 balance sheet for Unearned Revenue? 180 Solution Revenue earned monthly = $2,000/ 4 months = $500 per month Feb 28 balance in Unearned Revenue = $2,000 - $500 revenue earned in February = $1,500 BE 181 Hans Albert Enterprises purchased computer equipment on May 1, 2006 for $5,000. The company expects to use the equipment for 3 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared (round answer to the nearest dollar)? 2. What is the book value of the equipment at May 31, 2006? Solution 181 1. Depreciation Expense 139 Accumulated Depreciation 139 2. Cost $5,000 Accumulated Depreciation - 139 Book value $4,861 3 - 47
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition BE 182 Hampton International purchased software on October 1, 2006 for $10,800. The company expects to use the software for 3 years. It has no salvage value. 1. What adjusting journal entry should the company make at the end of each month if monthly financials are prepared? 2. What balance will be reported on the December 31, 2006 balance sheet for Accumulated Depreciation? Solution 182 1. Depreciation Expense 300 Accumulated Depreciation 300 2. Balance in Accumulated Depreciation at December 31, 2006: 3 months * $300 per month = $900 BE 183 Better Publications. sold annual subscriptions to their magazine for $24,000 in December, 2006. The magazine is published monthly. The new subscribers received their first magazine in January, 2007. 1. What adjusting entry should be made in January if the subscriptions were originally recorded as a liability? 2. What amount will be reported on the January 2007 balance sheet for Unearned Revenue? Solution 183 1. Unearned Revenue 2,000 Subscription Revenue 2,000 2. Unearned Revenue at January 31: $24,000 – 2,000 = $22,000 BE 184 River Ridge Music School borrowed $20,000 from the bank signing a 10%, 6-month note on November 1. Principal and interest are payable to the bank on May 1. If the company prepares monthly financial statements, what adjusting entry should the company make at November 30 with regard to the note (round answer to the nearest dollar)? Solution 184 Interest Expense (20,000 * 10% * 1/12) 167 Interest Payable 167 BE 185 The adjusted trial balance of Ninty-Six Inc. on December 31, 2006 includes the following accounts: Accumulated Depreciation, $6,000; Depreciation Expense, $2,000; Note Payable $7,500; Interest Expense $150; Utilities Expense, $300; Rent Expense, $500; Service Revenue, $19,600; Salaries Expense, $4,000; Supplies, $200; Supplies Expense, $1,200; Wages Payable, $600. Prepare an income statement for the month of December. 3 - 48
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Adjusting the Accounts 185 Solution Ninty-Six Inc. Income Statement For the month ending December 31,2006 Service Revenue $19,600 Expenses: Depreciation expense $2,000 Interest expense 150 Utilities expense 300 Rent expense 500 Salaries expense 4,000 Supplies expense 1,200 8,150 Net Income $11,450 BE 186 Identify the impact on the balance sheet if the following information is not used to adjust the accounts. 1. Supplies consumed totalled $3,000. 2. Interest accrues on notes payable at the rate of $200 per month. 3. Insurance of $450 expired during the month. 4. Plant and equipment are depreciated at the rate of $1,200 per month. BE 186 Solution 1. Assets overstated and Stockholders’ Equity overstated by $3,000. 2. Liabilities understated and Stockholders’ Equity overstated by $200. 3. Assets overstated and Stockholders’ Equity overstated by $450. 4. Assets overstated and Stockholders’ equity overstated by $1,200. BE 187 Determine the impact on the balance sheet accounts if the following information is not used to adjust the accounts of Lake Castle Company for the month of January, 2006. Round answers to the nearest dollar. 1. The company rents extra office space to Franz, CPAs. Franz pays the $12,000 rent annually on January 1. 2. The company has an outstanding loan to its President in the amount of $100,000. The loan accrues interest at the annual rate of 4%. Principle and interest are due January 1, 2010. 3. The company completed work on a project during January that was not yet billed to the client. The client will be charged $2,500. 187 Solution 1. Liabilities overstated and Stockholders’ equity understated by $1,000. 2. Assets understated and Stockholders’ equity understated by $333. 3. Assets understated and Stockholders’ equity understated by $2,500. 3 - 49
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help
Test Bank for Financial Accounting, Fifth Edition BE 188 Identify the type of account and the normal balance for each of the following accounts: 1. Accumulated Deprecation 2. Depreciation Expense 3. Interest Expense 4. Interest Payable 5. Unearned Revenue 6. Service Revenue Solution 188 Account Type of account Normal balance Accumulated Deprecation Contra asset Credit Depreciation Expense Expense Debit Interest Expense Expense Debit Interest Payable Liability Credit Unearned Revenue Liability Credit Service Revenue Revenue Credit 3 - 50
Your preview ends here
Eager to read complete document? Join bartleby learn and gain access to the full version
  • Access to all documents
  • Unlimited textbook solutions
  • 24/7 expert homework help