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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
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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
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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
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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
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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.
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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.
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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.
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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
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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?
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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
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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
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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.
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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
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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
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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
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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.
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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.
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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
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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
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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.
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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
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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
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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)
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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
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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
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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
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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)
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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
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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
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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.
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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.
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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
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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
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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.
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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.
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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
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