TRUE/FALSE
Answer No. Description
F 1. Recording transactions.
T 2. Nominal accounts.
F 3. Liability and stockholders’ equity accounts.
F 4. Steps in accounting cycle.
T 5. General journal.
T 6. Adjusting entries for prepayments.
F 7. Book value of depreciable assets.
T 8. Reporting ending retained earnings.
F 9. Closing entries and Income Summary.
T 10. Perpetual inventory system.
Multiple Choice—Conceptual
Answer No. Description
d 11. Purpose of an accounting system.
d 12. Necessity of accounting records.
d 13. Purpose of an accounting system.
c 14. Meaning of debit.
c 15. Double-entry system.
a 16. Effect on stockholders’ equity.
d 17. Criteria for recording events.
d 18. Identification of a recordable event.
c 19. Identification of internal events.
d 20. Book of original entry.
a 21. Transaction analysis.
d 22. Purpose of trial balance.
d 23. Limitations of trial balance.
d 24. Identification of a real account.
b 25. Identification of a temporary account.
a 26. Temporary vs. permanent accounts.
d 27. External events.
a 28. General journal.
b 29. Journal entry.
c 30. Journal entry.
d 31. Journal entry.
a 32. Timing of adjustments.
a 33. Prepaid expense.
a 34. Expiration of prepaid expenses.
b 35. Effect of depreciation entry.
a 36. Unearned revenue relationships.
a 37. Computation of interest expense for adjusting entry.
d 38. Purpose of adjusting entries.
c 39. Matching principle.
a 40. Prepaid items.
d 41. Accrued items.
c 42. Definition of unearned revenue.
d 43. Definition of accrued expense.
c 44. Adjusting entry for accrued expense.
d 45. Factors to consider in estimating depreciation.
d 46. Adjusting entries.
d 47. Effect of adjusting entries.
b 48. Prepaid expense and the matching principle.
c 49. Accrued revenue and the matching principle.
b 50. Unearned revenue and the matching principle.
b 51. Adjusted trial balance.
c 52. Closing entry process.
c 53. Year-end inventory adjustment.
c 54. Effect of understanding ending inventory.
d *55. Cash basis revenue.
c *56. Convert cash receipts to service revenue.
c *57. Convert cash paid for operating expenses.
c *58. Purpose of reversing entries.
d *59. Identification of reversing entries.
d *60. Identification of reversing entries.
Multiple Choice—Computational
Answer No. Description
c 61. Effect of transactions on owners’ equity.
c 62. Effect of transactions on owners’ equity.
c 63. Unearned rent adjustment.
c 64. Unearned rent adjustment.
a *65. Determine adjusting entry.
d *66. Determine adjusting entry.
d 67. Determine adjusting entry.
c 68. Adjusting entry for bad debts.
b 69. Adjusting entry for bad debts.
b *70. Unearned rent adjustment.
c 71. Adjusting entry for interest receivable.
c 72. Subsequent period entry for interest.
d *73. Use of reversing entry.
d 74. Effect of closing entries.
c *75. Calculate commission expense for the year.
b *76. Calculate cash received for interest.
b *77. Calculate cash paid for salaries.
d *78. Calculate cash paid for insurance.
c *79. Calculate insurance expense.
c *80. Calculate interest revenue.
c *81. Calculate salary expense.
c *82. Reversing entries.
c *83. Calculate total purchases.
b *84. Calculate cost of goods sold.
Multiple Choice—CPA Adapted
Answer No. Description
c 85. Determine accrued interest payable.
b 86. Determine balance of unearned revenues.
a 87. Calculate subscriptions revenue.
c 88. Determine interest receivable.
b 89. Calculate balance of accrued payable.
b 90. Calculate accrued salaries.
a 91. Calculate royalty revenue.
d 92. Calculate deferred revenue.
b *93. Difference between cash basis and accrual method.
c *94. Determine cash basis revenue.
b *95. Determine accrual basis revenue.
a *96. Calculate cost of goods sold.
*This topic is dealt with in an Appendix to the chapter.
Exercises
Item Description
E3-97 Definitions.
E3-98 Terminology.
E3-99 Accrued and deferred items.
E3-100 Adjusting entries.
E3-101 Adjusting entries.
E3-102 Financial statements.
*E3-103 Cash basis vs. accrual basis accounting.
*E3-104 Accrual basis.
*E3-105 Accrual basis.
*E3-106 Accrual basis.
*E3-107 Cash basis.
PROBLEMS
Item Description
P3-108 Adjusting entries and account classifications.
P3-109 Adjusting entries.
P3-110 Adjusting and closing entries.
*P3-111 Cash to accrual accounting.
*P3-112 Accrual accounting.
*P3-113 Accrual accounting.
*P3-114 Eight-column work sheet.
CHAPTER LEARNING OBJECTIVES
1. Understand basic accounting terminology.
2. Explain double-entry rules.
3. Identify steps in the accounting cycle.
4. Record transactions in journals, post to ledger accounts, and prepare a trial balance.
5. Explain the reasons for preparing adjusting entries.
6. Prepare financial statements from the adjusted trial balance.
7. Prepare closing entries.
8. Explain how to adjust inventory accounts at year-end.
*9. Differentiate the cash basis of accounting from the accrual basis of accounting.
*10. Identify adjusting entries that may be reversed.
*11. Prepare a 10-column worksheet.
SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS
Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type | Item | Type |
Learning Objective 1 | |||||||||||||
1. 2. | TF TF | MC MC | 13. 20. | MC MC | 22. 24. | MC MC | 25. 98. | MC E | |||||
Learning Objective 2 | |||||||||||||
3. | TF | 14. | MC | 15. | MC | 16. | MC | 21. | MC | ||||
Learning Objective 3 | |||||||||||||
4. | TF | 17. | MC | 18. | MC | 19. | MC | 26. | MC | 27. | MC | 28. | MC |
Learning Objective 4 | |||||||||||||
5. | TF | 22. 23. | MC MC | 29. | MC | 30. | MC | 31. | MC | 61. | MC | 62. | MC |
Learning Objective 5 | |||||||||||||
6. | TF | 39. | MC | 48. | MC | 72. | MC | 97. | E | 108. | P | 110. | P |
7. | TF | 40. | MC | 49. | MC | 85. | MC | 98. | E | 109. | P | ||
32. | MC | 41. | MC | 50. | MC | 86. | MC | 99. | E | ||||
33. | MC | 42. | MC | 63. | MC | 87. | MC | 100. | E | ||||
34. | MC | 43. | MC | 64. | MC | 88. | MC | 101. | E | ||||
35. 36. 37. 38. | MC MC MC MC | 44. 45. 46. 47. | MC MC MC MC | 67. 68. 69. 71. | MC MC MC MC | 89. 90. 91. 92. | MC MC MC MC | ||||||
Learning Objective 6 | |||||||||||||
8. | TF | 51. | MC | 102. | E | ||||||||
Learning Objective 7 | |||||||||||||
9. | TF | 52. | MC | 74. | MC | 110. | P | ||||||
Learning Objective 8 | |||||||||||||
10. | TF | 53. | MC | 54. | MC | 100. | E | 108. | P | 110. | P | ||
Learning Objective *9 | |||||||||||||
55. | MC | 76. | MC | 80. | MC | 93. | MC | 103. | E | 107. | E | ||
56. | MC | 77. | MC | 81. | MC | 94. | MC | 104. | E | 111. | P | ||
57. | MC | 78. | MC | 83. | MC | 95. | MC | 105. | E | 112. | P | ||
75. | MC | 79. | MC | 84. | MC | 96. | MC | 106. | E | 113. | P | ||
Learning Objective *10 | |||||||||||||
58. | MC | 59. | MC | 60. | MC | 65. 66. 73. | MC MC MC | 82. | MC | 101. | E | ||
Learning Objective *11 | |||||||||||||
       114. P | |||||||||||||
Note: TF = True/False E = Exercise
MC = Multiple Choice P = Problem
TRUE/FALSE
1. A ledger is where the company initially records transactions and selected other events.
2. Nominal (temporary) accounts are revenue, expense, and dividend accounts and are periodically closed.
3. All liability and stockholders’ equity accounts are increased on the credit side and decreased on the debit side.
4. The first step in the accounting cycle is the journalizing of transactions and selected other events.
5. A general journal chronologically lists transactions and other events, expressed in terms of debits and credits to accounts.
6. Adjusting entries for prepayments record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.
7. The book value of any depreciable asset is the difference between its cost and its salvage value.
8. The ending retained earnings balance is reported on both the retained earnings statement and the balance sheet.
9. All revenues, expenses, and the dividends account are closed through the Income Summary account.
10. With a perpetual inventory system, a company records purchases and sales directly in the Inventory account as the purchases and sales occur.
MULTIPLE CHOICE—Conceptual
11. Factors that shape an accounting information system include the
a. nature of the business.
b. size of the firm.
c. volume of data to be handled.
d. all of these.
12. Maintaining a set of accounting records is
a. optional.
b. required by the Internal Revenue Service.
c. required by the Foreign Corrupt Practices Act.
d. required by the Internal Revenue Service and the Foreign Corrupt Practices Act.
13. Debit always means
a. right side of an account.
b. increase.
c. decrease.
d. none of these.
14. The double-entry accounting system means
a. Each transaction is recorded with two journal entries.
b. Each item is recorded in a journal entry, then in a general ledger account.
c. The dual effect of each transaction is recorded with a debit and a credit.
d. More than one of the above.
15. When a corporation pays a note payable and interest,
a. the account notes payable will be increased.
b. the account interest expense will be decreased.
c. they will debit notes payable and interest expense.
d. they will debit cash.
16. Stockholders’ equity is not affected by all
a. cash receipts.
b. dividends.
c. revenues.
d. expenses.
17. Which of the following criteria must be met before an event or item should be recorded for accounting purposes?
a. The event or item can be measured objectively in financial terms.
b. The event or item is relevant and reliable.
c. The event or item is an element.
d. All of these must be met.
18. Which of the following is a recordable event or item?
a. Changes in managerial policy
b. The value of human resources
c. Changes in personnel
d. None of these
19. Which of the following is not an internal event?
a. Depreciation
b. Using raw materials in the production process
c. Dividend declaration and subsequent payment
d. All of these are internal transactions.
20. An accounting record into which the essential facts and figures in connection with all transactions are initially recorded is called the
a. ledger.
b. account.
c. trial balance.
d. none of these.
21. The debit and credit analysis of a transaction normally takes place
a. before an entry is recorded in a journal.
b. when the entry is posted to the ledger.
c. when the trial balance is prepared.
d. at some other point in the accounting cycle.
22. A trial balance
a. proves that debits and credits are equal in the ledger.
b. supplies a listing of open accounts and their balances that are used in preparing financial statements.
c. is normally prepared three times in the accounting cycle.
d. all of these.
23. A trial balance may prove that debits and credits are equal, but
a. an amount could be entered in the wrong account.
b. a transaction could have been entered twice.
c. a transaction could have been omitted.
d. all of these.
24. Which of the following is a real (permanent) account?
a. Goodwill
b. Sales
c. Accounts Receivable
d. Both Goodwill and Accounts Receivable
25. Which of the following is a nominal (temporary) account?
a. Unearned Revenue
b. Salary Expense
c. Inventory
d. Retained Earnings
26. Nominal accounts are also called
a. temporary accounts.
b. permanent accounts.
c. real accounts.
d. none of these.
27. External events do not include
a. interaction between an entity and its environment.
b. a change in the price of a good or service that an entity buys or sells, a flood or earthquake.
c. improvement in technology by a competitor.
d. using buildings and machinery in operations.
28. A general journal
a. chronologically lists transactions and other events, expressed in terms of debits and credits.
b. contains one record for each of the asset, liability, stockholders’ equity, revenue, and expense accounts.
c. lists all the increases and decreases in each account in one place.
d. contains only adjusting entries.
29. A journal entry to record the sale of inventory on account will include a
a. debit to inventory.
b. debit to accounts receivable.
c. debit to sales.
d. credit to cost of goods sold.
30. A journal entry to record a payment on account will include a
a. debit to accounts receivable.
b. credit to accounts receivable.
c. debit to accounts payable.
d. credit to accounts payable.
31. A journal entry to record a receipt of rent revenue in advance will include a
a. debit to rent revenue.
b. credit to rent revenue.
c. credit to cash.
d. credit to unearned rent.
32. Adjustments are often prepared
a. after the balance sheet date, but dated as of the balance sheet date.
b. after the balance sheet date, and dated after the balance sheet date.
c. before the balance sheet date, but dated as of the balance sheet date.
d. before the balance sheet date, and dated after the balance sheet date.
33. At the time a company prepays a cost
a. it debits an asset account to show the service or benefit it will receive in the future.
b. it debits an expense account to match the expense against revenues earned.
c. its credits a liability account to show the obligation to pay for the service in the future.
d. more than one of the above.
34. How do these prepaid expenses expire?
Rent Supplies
a. With the passage of time Through use and consumption
b. With the passage of time With the passage of time
c. Through use and consumption Through use and consumption
d. Through use and consumption With the passage of time
35. Recording the adjusting entry for depreciation has the same effect as recording the adjusting entry for
a. an unearned revenue.
b. a prepaid expense.
c. an accrued revenue.
d. an accrued expense.
36. Unearned revenue on the books of one company is likely to be
a. a prepaid expense on the books of the company that made the advance payment.
b. an unearned revenue on the books of the company that made the advance payment.
c. an accrued expense on the books of the company that made the advance payment.
d. an accrued revenue on the books of the company that made the advance payment.
37. To compute interest expense for an adjusting entry, the formula is principal X rate X a fraction. The numerator and denominator of the fraction are:
Numerator Denomintor
a. Length of time note has been outstanding 12 months
b. Length of note 12 months
c. Length of time until note matures Length of note
d. Length of time note has been outstanding Length of note
38. Adjusting entries are necessary to
1. obtain a proper matching of revenue and expense.
2. achieve an accurate statement of assets and equities.
3. adjust assets and liabilities to their fair market value.
a. 1
b. 2
c. 3
d. 1 and 2
39. Why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?
a. To reduce the federal income tax liability
b. To aid management in cash-flow analysis
c. To match the costs of production with revenues as earned
d. To adhere to the accounting constraint of conservatism
40. When an item of expense is paid and recorded in advance, it is normally called a(n)
a. prepaid expense.
b. accrued expense.
c. estimated expense.
d. cash expense.
41. When an item of revenue or expense has been earned or incurred but not yet collected or paid, it is normally called a(n) ____________ revenue or expense.
a. prepaid
b. adjusted
c. estimated
d. none of these
42. When an item of revenue is collected and recorded in advance, it is normally called a(n) ___________ revenue.
a. accrued
b. prepaid
c. unearned
d. cash
43. An accrued expense can best be described as an amount
a. paid and currently matched with earnings.
b. paid and not currently matched with earnings.
c. not paid and not currently matched with earnings.
d. not paid and currently matched with earnings.
44. If, during an accounting period, an expense item has been incurred and consumed but not yet paid for or recorded, then the end-of-period adjusting entry would involve
a. a liability account and an asset account.
b. an asset or contra asset account and an expense account.
c. a liability account and an expense account.
d. a receivable account and a revenue account.
45. Which of the following must be considered in estimating depreciation on an asset for an accounting period?
a. The original cost of the asset
b. Its useful life
c. The decline of its fair market value
d. Both the original cost of the asset and its useful life.
46. Which of the following would not be a correct form for an adjusting entry?
a. A debit to a revenue and a credit to a liability
b. A debit to an expense and a credit to a liability
c. A debit to a liability and a credit to a revenue
d. A debit to an asset and a credit to a liability
47. Year-end net assets would be overstated and current expenses would be understated as a result of failure to record which of the following adjusting entries?
a. Expiration of prepaid insurance
b. Depreciation of fixed assets
c. Accrued wages payable
d. All of these
48. A prepaid expense can best be described as an amount
a. paid and currently matched with revenues.
b. paid and not currently matched with revenues.
c. not paid and currently matched with revenues.
d. not paid and not currently matched with revenues.
49. An accrued revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
50. An unearned revenue can best be described as an amount
a. collected and currently matched with expenses.
b. collected and not currently matched with expenses.
c. not collected and currently matched with expenses.
d. not collected and not currently matched with expenses.
51. 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.
52. Which type of account is always debited during the closing process?
a. Dividends.
b. Expense.
c. Revenue.
d. Retained earnings.
53. When a company uses a periodic inventory system, the year-end entry to adjust the inventory account will debit and credit inventory as follows:
Beginning Inventory Amount Ending Inventory Amount
a. Debited Credited
b. Debited Debited
c. Credited Debited
d. Credited Credited
54. If the inventory account at the end of the year is understated, the effect will be to
a. overstate the gross profit on sales.
b. understate the net purchases.
c. overstate the cost of goods sold.
d. overstate the goods available for sale.
*55. Under the cash basis of accounting, revenues are recorded
a. when they are earned and realized.
b. when they are earned and realizable.
c. when they are earned.
d. when they are realized.
*56. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash receipts from customers to determine accrual basis service revenue?
a. Subtract ending accounts receivable.
b. Subtract beginning unearned service revenue.
c. Add ending accounts receivable.
d. Add cash sales.
*57. When converting from cash basis to accrual basis accounting, which of the following adjustments should be made to cash paid for operating expenses to determine accrual basis operating expenses?
a. Add beginning accrued liabilities.
b. Add beginning prepaid expense.
c. Subtract ending prepaid expense.
d. Subtract interest expense.
*58. Reversing entries are
1. normally prepared for prepaid, accrued, and estimated items.
2. necessary to achieve a proper matching of revenue and expense.
3. desirable to exercise consistency and establish standardized procedures.
a. 1
b. 2
c. 3
d. 1 and 2
*59. Adjusting entries that should be reversed include those for prepaid or unearned items that
a. create an asset or a liability account.
b. were originally entered in a revenue or expense account.
c. were originally entered in an asset or liability account.
d. create an asset or a liability account and were originally entered in a revenue or expense account.
*60. Adjusting entries that should be reversed include
a. all accrued revenues.
b. all accrued expenses.
c. those that debit an asset or credit a liability.
d. all of these.
Multiple Choice Answers—Conceptual
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
11. | d | 20. | d | 29. | b | 38. | d | 47. | d | *56. | c |
12. | d | 21. | a | 30. | c | 39. | c | 48. | b | *57. | c |
13. | d | 22. | d | 31. | d | 40. | a | 49. | c | *58. | c |
14. | c | 23. | d | 32. | a | 41. | d | 50. | b | *59. | d |
15. | c | 24. | d | 33. | a | 42. | c | 51. | b | *60. | d |
16. | a | 25. | b | 34. | a | 43. | d | 52. | c | ||
17. | d | 26. | a | 35. | b | 44. | c | 53. | c | ||
18. | d | 27. | d | 36. | a | 45. | d | 54. | c | ||
19. | c | 28. | a | 37. | a | 46. | d | *55. | d |
Multiple Choice—Computational
61. Maso Company recorded journal entries for the issuance of common stock for $40,000, the payment of $13,000 on accounts payable, and the payment of salaries expense of $21,000. What net effect do these entries have on owners’ equity?
a. Increase of $40,000.
b. Increase of $27,000.
c. Increase of $19,000.
d. Increase of $6,000.
62. Mune Company recorded journal entries for the payment of $50,000 of dividends, the $32,000 increase in accounts receivable for services rendered, and the purchase of equipment for $21,000. What net effect do these entries have on owners’ equity?
a. Decrease of $71,000.
b. Decrease of $39,000.
c. Decrease of $18,000.
d. Increase of $11,000.
63. Pappy Corporation received cash of $13,500 on September 1, 2007 for one year’s rent in advance and recorded the transaction with a credit to Unearned Rent. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $4,500.
b. debit Rent Revenue and credit Unearned Rent, $9,000.
c. debit Unearned Rent and credit Rent Revenue, $4,500.
d. debit Cash and credit Unearned Rent, $9,000.
64. Panda Corporation paid cash of $18,000 on June 1, 2007 for one year’s rent in advance and recorded the transaction with a debit to Prepaid Rent. The December 31, 2007 adjusting entry is
a. debit Prepaid Rent and credit Rent Expense, $7,500.
b. debit Prepaid Rent and credit Rent Expense, $10,500.
c. debit Rent Expense and credit Prepaid Rent, $10,500.
d. debit Prepaid Rent and credit Cash, $7,500.
Solutions to those Multiple Choice questions for which the answer is “none of these.”
13. left or left-side.
18. Many answers are possible.
20. journal.
41. accrued.
*65. Lopez Company received $6,400 on April 1, 2007 for one year's rent in advance and recorded the transaction with a credit to a nominal account. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $1,600.
b. debit Rent Revenue and credit Unearned Rent, $4,800.
c. debit Unearned Rent and credit Rent Revenue, $1,600.
d. debit Unearned Rent and credit Rent Revenue, $4,800.
*66. Gibson Company paid $3,600 on June 1, 2007 for a two-year insurance policy and recorded the entire amount as Insurance Expense. The December 31, 2007 adjusting entry is
a. debit Insurance Expense and credit Prepaid Insurance, $1,050.
b. debit Insurance Expense and credit Prepaid Insurance, $2,550.
c. debit Prepaid Insurance and credit Insurance Expense, $1,050
d. debit Prepaid Insurance and credit Insurance Expense, $2,550.
67. Tate Company purchased equipment on November 1, 2007 and gave a 3-month, 9% note with a face value of $20,000. The December 31, 2007 adjusting entry is
a. debit Interest Expense and credit Interest Payable, $1,800.
b. debit Interest Expense and credit Interest Payable, $450.
c. debit Interest Expense and credit Cash, $300.
d. debit Interest Expense and credit Interest Payable, $300.
68. Brown Company's account balances at December 31, 2007 for Accounts Receivable and the related Allowance for Doubtful Accounts are $460,000 debit and $700 credit, respectively. From an aging of accounts receivable, it is estimated that $12,500 of the December 31 receivables will be uncollectible. The necessary adjusting entry would include a credit to the allowance account for
a. $12,500.
b. $13,200.
c. $11,800.
d. $700.
69. Chen Company's account balances at December 31, 2007 for Accounts Receivable and the Allowance for Doubtful Accounts are $320,000 debit and $600 credit. Sales during 2007 were $900,000. It is estimated that 1% of sales will be uncollectible. The adjusting entry would include a credit to the allowance account for
a. $9,600.
b. $9,000.
c. $8,400.
d. $3,200.
*70. Garcia Corporation received cash of $18,000 on August 1, 2007 for one year's rent in advance and recorded the transaction with a credit to Rent Revenue. The December 31, 2007 adjusting entry is
a. debit Rent Revenue and credit Unearned Rent, $7,500.
b. debit Rent Revenue and credit Unearned Rent, $10,500.
c. debit Unearned Rent and credit Rent Revenue, $7,500.
d. debit Cash and credit Unearned Rent, $10,500.
71. Starr Corporation loaned $90,000 to another corporation on December 1, 2007 and received a 3-month, 8% interest-bearing note with a face value of $90,000. What adjusting entry should Starr make on December 31, 2007?
a. Debit Interest Receivable and credit Interest Revenue, $1,800.
b. Debit Cash and credit Interest Revenue, $600.
c. Debit Interest Receivable and credit Interest Revenue, $600.
d. Debit Cash and credit Interest Receivable, $1,800.
Use the following information for questions 72 and 73:
A company receives interest on a $30,000, 8%, 5-year note receivable each April 1. At December 31, 2006, the following adjusting entry was made to accrue interest receivable:
Interest Receivable ............................................................... 1,800
Interest Revenue ...................................................... 1,800
72. Assuming that the company does not use reversing entries, what entry should be made on April 1, 2007 when the annual interest payment is received?
a. Cash ...................................................................................... 600
Interest Revenue ...................................................... 600
b. Cash ...................................................................................... 1,800
Interest Receivable ................................................... 1,800
c. Cash ...................................................................................... 2,400
Interest Receivable ................................................... 1,800
Interest Revenue ...................................................... 600
d. Cash ...................................................................................... 2,400
Interest Revenue ...................................................... 2,400
*73. Assuming that the company does use reversing entries, what entry should be made on April 1, 2007 when the annual interest payment is received?
a. Cash ...................................................................................... 600
Interest Revenue ...................................................... 600
b. Cash ...................................................................................... 1,800
Interest Receivable ................................................... 1,800
c. Cash ..................................................................................... 2,400
Interest Receivable ................................................... 1,800
Interest Revenue ...................................................... 600
d. Cash ...................................................................................... 2,400
Interest Revenue....................................................... 2,400
74. Big-Mouth Frog Corporation had revenues of $200,000, expenses of $120,000, and dividends of $30,000. When Income Summary is closed to Retained Earnings, the amount of the debit or credit to Retained Earnings is a
a. debit of $50,000.
b. debit of $80,000.
c. credit of $50,000.
d. credit of $80,000.
*75. Lane Corporation has an incentive commission plan for its salesmen, entitling them to an additional sales commission when actual quarterly sales exceed budgeted estimates. An analysis of the account "incentive commission expense" for the year ended December 31, 2007, follows:
Amount For Quarter Ended Date Paid
$40,000 December 31, 2006 January 23, 2007
36,000 March 31, 2007 April 24, 2007
39,000 June 30, 2007 July 19, 2007
43,000 September 30, 2007 October 22, 2007
The incentive commission for the quarter ended December 31, 2007, was $42,000. This amount was recorded and paid in January 2008. What amount should Lane report as incentive commission expense for 2007?
a. $158,000.
b. $118,000.
c. $160,000.
d. $200,000.
Use the following information for questions 76 through 78:
The income statement of Dolan Corporation for 2007 included the following items:
Interest revenue $65,500
Salaries expense 85,000
Insurance expense 7,600
The following balances have been excerpted from Dolan Corporation's balance sheets:
December 31, 2007 December 31, 2006
Accrued interest receivable $9,100 $7,500
Accrued salaries payable 8,900 4,200
Prepaid insurance 1,100 1,500
*76. The cash received for interest during 2007 was
a. $56,400.
b. $63,900.
c. $65,500.
d. $67,100.
*77. The cash paid for salaries during 2007 was
a. $89,700.
b. $80,300.
c. $80,800.
d. $93,900.
*78. The cash paid for insurance premiums during 2007 was
a. $6,500.
b. $6,100.
c. $8,000.
d. $7,200.
Use the following information for questions 79 through 81:
Olsen Company paid or collected during 2007 the following items:
Insurance premiums paid $ 10,400
Interest collected 33,900
Salaries paid 120,200
The following balances have been excerpted from Olsen's balance sheets:
December 31, 2007 December 31, 2006
Prepaid insurance $ 1,200 $ 1,500
Interest receivable 3,700 2,900
Salaries payable 12,300 10,600
*79. The insurance expense on the income statement for 2007 was
a. $7,700.
b. $10,100.
c. $10,700.
d. $13,100.
*80. The interest revenue on the income statement for 2007 was
a. $27,300.
b. $33,100.
c. $34,700.
d. $40,500.
*81. The salary expense on the income statement for 2007 was
a. $97,300.
b. $118,500.
c. $121,900.
d. $143,100.
*82. At the end of 2007, Drew Company made four adjusting entries for the following items:
1. Depreciation expense, $25,000.
2. Expired insurance, $2,200 (originally recorded as prepaid insurance).
3. Interest payable, $6,000.
4. Rental revenue receivable, $10,000.
In the normal situation, to facilitate subsequent entries, the adjusting entry or entries that may be reversed is (are)
a. Entry No. 3.
b. Entry No. 4.
c. Entries No. 3 and No. 4.
d. Entries No. 2, No. 3, and No. 4.
*83. The following information is available concerning the accounts of Franz Company:
Accounts payable, January 1, 2007 $18,000
Cash payments on account during 2007 58,000
Purchase discounts taken during 2007 on 2007 purchases 1,200
Accounts payable, December 31, 2007 10,000
Assuming the company records purchases at the gross amounts, the total purchases for 2007 would be
a. $65,200.
b. $48,800.
c. $51,200.
d. $50,000.
*84. The following information is available for Carr Company:
Payment for goods during 2007 $92,000
Accounts payable, January 1, 2007 9,000
Inventory, January 1, 2007 10,400
Accounts payable, December 31, 2007 7,200
Inventory, December 31, 2007 9,700
Cost of goods sold for 2007 is
a. $89,500.
b. $90,900.
c. $97,100.
d. $98,500.
Multiple Choice Answers—Computational
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
61. | c | *65. | a | 69. | b | 73. | d | *77. | b | *81. | c | ||
62. | c | *66. | d | *70. | b | 74. | d | *78. | d | *82. | c | ||
63. | c | 67. | d | 71. | c | *75. | c | *79. | c | *83. | c | ||
64. | c | 68. | c | 72. | c | *76. | b | *80. | c | *84. | b |
Multiple Choice—CPA Adapted
85. On September 1, 2006, Lowe Co. issued a note payable to National Bank in the amount of $600,000, bearing interest at 12%, and payable in three equal annual principal payments of $200,000. On this date, the bank's prime rate was 11%. The first payment for interest and principal was made on September 1, 2007. At December 31, 2007, Lowe should record accrued interest payable of
a. $24,000.
b. $22,000.
c. $16,000.
d. $14,667.
86. Eaton Co. sells major household appliance service contracts for cash. The service contracts are for a one-year, two-year, or three-year period. Cash receipts from contracts are credited to Unearned Service Revenues. This account had a balance of $1,800,000 at December 31, 2007 before year-end adjustment. Service contract costs are charged as incurred to the Service Contract Expense account, which had a balance of $450,000 at December 31, 2007.
Service contracts still outstanding at December 31, 2007 expire as follows:
During 2008 $380,000
During 2009 570,000
During 2010 350,000
What amount should be reported as Unearned Service Revenues in Eaton's December 31, 2007 balance sheet?
a. $1,350,000.
b. $1,300,000.
c. $850,000.
d. $500,000.
87. In November and December 2007, Lane Co., a newly organized magazine publisher, received $90,000 for 1,000 three-year subscriptions at $30 per year, starting with the January 2008 issue. Lane included the entire $90,000 in its 2007 income tax return. What amount should Lane report in its 2007 income statement for subscriptions revenue?
a. $0.
b. $5,000.
c. $30,000.
d. $90,000.
88. On June 1, 2007, Nott Corp. loaned Horn $400,000 on a 12% note, payable in five annual installments of $80,000 beginning January 2, 2008. In connection with this loan, Horn was required to deposit $5,000 in a noninterest-bearing escrow account. The amount held in escrow is to be returned to Horn after all principal and interest payments have been made. Interest on the note is payable on the first day of each month beginning July 1, 2007. Horn made timely payments through November 1, 2007. On January 2, 2008, Nott received payment of the first principal installment plus all interest due. At December 31, 2007, Nott's interest receivable on the loan to Horn should be
a. $0.
b. $4,000.
c. $8,000.
d. $12,000.
89. Allen Corp.'s liability account balances at June 30, 2007 included a 10% note payable in the amount of $2,400,000. The note is dated October 1, 2005 and is payable in three equal annual payments of $800,000 plus interest. The first interest and principal payment was made on October 1, 2006. In Allen's June 30, 2007 balance sheet, what amount should be reported as accrued interest payable for this note?
a. $180,000.
b. $120,000.
c. $60,000.
d. $40,000.
90. Colaw Co. pays all salaried employees on a biweekly basis. Overtime pay, however, is paid in the next biweekly period. Colaw accrues salaries expense only at its December 31 year end. Data relating to salaries earned in December 2007 are as follows:
Last payroll was paid on 12/26/07, for the 2-week period ended 12/26/07.
Overtime pay earned in the 2-week period ended 12/26/07 was $10,000.
Remaining work days in 2007 were December 29, 30, 31, on which days there was no overtime.
The recurring biweekly salaries total $180,000.
Assuming a five-day work week, Colaw should record a liability at December 31, 2007 for accrued salaries of
a. $54,000.
b. $64,000.
c. $108,000.
d. $118,000.
91. Tolan Corp.'s trademark was licensed to Eddy Co. for royalties of 15% of sales of the trademarked items. Royalties are payable semiannually on March 15 for sales in July through December of the prior year, and on September 15 for sales in January through June of the same year. Tolan received the following royalties from Eddy:
March 15 September 15
2006 $5,000 $7,500
2007 6,000 8,500
Eddy estimated that sales of the trademarked items would total $40,000 for July through December 2007. In Tolan's 2007 income statement, the royalty revenue should be
a. $14,500.
b. $16,000.
c. $20,500.
d. $22,000.
92. At December 31, 2007, Sue’s Boutique had 1,000 gift certificates outstanding, which had been sold to customers during 2007 for $50 each. Sue’s operates on a gross margin of 60% of its sales. What amount of revenue pertaining to the 1,000 outstanding gift certificates should be deferred at December 31, 2007?
a. $0.
b. $20,000.
c. $30,000.
d. $50,000.
*93. Compared to the accrual basis of accounting, the cash basis of accounting overstates income by the net increase during the accounting period of the
Accounts Receivable Accrued Expenses Payable
a. No No
b. No Yes
c. Yes No
d. Yes Yes
*94. Gregg Corp. reported revenue of $1,100,000 in its accrual basis income statement for the year ended June 30, 2007. Additional information was as follows:
Accounts receivable June 30, 2006 $350,000
Accounts receivable June 30, 2007 530,000
Uncollectible accounts written off during the fiscal year 13,000
Under the cash basis, Gregg should report revenue of
a. $687,000.
b. $700,000.
c. $907,000.
d. $933,000.
*95. Jim Yount, M.D., keeps his accounting records on the cash basis. During 2007, Dr. Yount collected $360,000 from his patients. At December 31, 2006, Dr. Yount had accounts receivable of $50,000. At December 31, 2007, Dr. Yount had accounts receivable of $70,000 and unearned revenue of $10,000. On the accrual basis, how much was Dr. Yount's patient service revenue for 2007?
a. $310,000.
b. $370,000.
c. $380,000.
d. $390,000.
*96. The following information is available for Ace Company for 2007:
Disbursements for purchases $1,050,000
Increase in trade accounts payable 75,000
Decrease in merchandise inventory 30,000
Costs of goods sold for 2007 was
a. $1,155,000.
b. $1,095,000.
c. $1,005,000.
d. $945,000.
Multiple Choice Answers—CPA Adapted
Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. | Item | Ans. |
85. | c | 87. | a | 89. | b | 91. | a | *93. | b | *95. | b |
86. | b | 88. | c | 90. | b | 92. | d | *94. | c | *96. | a |
DERIVATIONS — Computational
No. Answer Derivation
61. c $40,000 - $21,000 = $19,000.
62. c $50,000 - $32,000 = $18,000.
63. c $13,500 x 4/12 = $4,500.
64. c $18,000 x 7/12 = $10,500.
*65. a 3/12 x $6,400 = $1,600.
*66. d 17/24 x $3,600 = $2,550.
67. d 2/12 x 9% x $20,000 = $300.
68. c $12,500 – $700 = $11,800.
69. b $900,000 x 1% = $9,000.
*70. b 7/12 x $18,000 = $10,500.
71. c 1/12 x 8% x $90,000 = $600.
72. c $30,000 x 8% = $2,400.
*73. d
*74. d $200,000 - $120,000 = $80,000.
*75. c $36,000 + $39,000 + $43,000 + $42,000 = $160,000.
*76. b $7,500 + $65,500 - $9,100 = $63,900.
*77. b $4,200 + $85,500 - $8,900 = $80,300.
*78. d $7,600 – $1,500 + $1,100 = $7,200.
*78. d $7,600 – $1,500 + $1,100 = $7,200.
*79. c $10,400 + $300 = $10,700.
*80. c $33,900 – $2,900 + $3,700 = $34,700.
*81. c $120,200 – $10,600 + $12,300 = $121,900.
*82. c
*83. c $58,000 + $1,200 – $18,000 + $10,000 = $51,200.
*84. b $92,000 – $9,000 + $7,200 = $90,200 (purchases).
$10,400 + $90,200 – $9,700 = $90,900.
DERIVATIONS — CPA Adapted
No. Answer Derivation
85. c ($600,000 – $200,000) × 12% × 4/12 = $16,000.
86. b $380,000 + $570,000 + $350,000 = $1,300,000.
87. a $0, none of the $90,000 is earned.
88. c $400,000 × 12% × 2/12 = $8,000.
89. b $1,600,000 × 9/12 × 10% = $120,000.
90. b $10,000 + ($180,000 ÷ 10 × 3) = $64,000.
91. a $8,500 + ($40,000 × 15%) = $14,500.
92. d 1,000 × $50 = $50,000.
*93. b Conceptual.
*94. c $1,100,000 + $350,000 – $530,000 – $13,000 = $907,000.
*95. b $360,000 – $50,000 + $70,000 – $10,000 = $370,000.
*96. a $1,050,000 + $75,000 + $30,000 = $1,155,000.
Exercises
Ex. 3-97—Definitions.
Provide clear, concise answers for the following.
1. What is the accrual basis of accounting?
2. What is an accrued expense?
3. What is accrued revenue?
4. What is a prepaid expense?
5. What is unearned revenue?
*6. State the rule that indicates which adjusting entries for prepaid and unearned items should be reversed.
Solution 3-97
1. The accrual basis of accounting recognizes revenue when earned and recognizes expenses in the period incurred.
2. An accrued expense is incurred, but will be paid in the future.
3. Accrued revenue is earned, but will be collected in the future.
4. A prepaid expense is paid, but will be incurred in the future.
5. Unearned revenue is collected, but will be earned in the future.
*6. Adjusting entries that create an asset or a liability account should be reversed. This would include prepaid and unearned items originally recorded in a revenue or expense account.
Ex. 3-98—Terminology.
In the space provided at the right, write the word or phrase that is defined or indicated.
1. Revenue and expense accounts. 1. _________________________________________
2. An optional step in the accounting 2. _________________________________________
cycle.
3. A revenue collected, but not earned. 3. _________________________________________
4. A revenue earned, but not collected. 4. _________________________________________
5. Asset, liability, and equity accounts. 5. _________________________________________
6. An expense paid, but not incurred. 6. _________________________________________
7. An expense incurred, but not paid. 7. _________________________________________
Solution 3-98
1. Nominal (temporary) accounts. 5. Real (permanent) accounts.
2. Reversing entries. 6. Prepaid expense.
3. Unearned revenue. 7. Accrued expense.
4. Accrued revenue.
Ex. 3-99—Accrued items and deferred (unearned or prepaid) items.
Generally accepted accounting principles require the use of accruals and deferrals in the determination of income. How is income determined under the accrual basis of accounting? Include in your answer what constitutes an accrued item and a deferred (prepaid) item, and give appropriate examples of each.
Solution 3-99
Accrual accounting recognizes and reports the effects of transactions and other events in the time periods to which they relate rather than only when cash is received or paid. Accrual accounting attempts to match revenues and the expenses associated with those revenues in order to determine net income for an accounting period.
An accrued item is an item of revenue or expense that has been earned or incurred during the period, but has not yet been collected or paid in cash. An example of an accrued revenue is rent for the last month of an accounting period that has been earned by a landlord but not yet paid by the tenant. An example of an accrued expense is salaries incurred for the last week of an accounting period that are not payable until the subsequent accounting period.
A deferred (unearned or prepaid) item is an item of revenue or expense that has been received or paid in cash, but has not yet been earned or consumed. An example of a deferred revenue is unearned subscription revenue collected in advance of being earned. An example of a deferred expense is an insurance premium paid at the end of an accounting period which will provide insurance coverage for the first six months of the subsequent period.
Ex. 3-100—Adjusting entries.
Present, in journal form, the adjustments that would be made on July 31, 2007, the end of the fiscal year, for each of the following.
1. The supplies inventory on August 1, 2006 was $7,350. Supplies costing $20,150 were acquired during the year and charged to the supplies inventory. A count on July 31, 2007 indicated supplies on hand of $8,810.
2. On April 30, a ten-month, 9% note for $20,000 was received from a customer.
*3. On March 1, $12,000 was collected as rent for one year and a nominal account was credited.
Solution 3-100
1. Supplies Expense ...................................................................... 18,690
Supplies Inventory .......................................................... 18,690
2. Interest Receivable .................................................................... 450
Interest Revenue ............................................................ 450
*3. Rent Revenue ............................................................................ 7,000
Unearned Revenue ........................................................ 7,000
Ex. 3-101—Adjusting entries.
Reed Co. wishes to enter receipts and payments in such a manner that adjustments at the end of the period will not require reversing entries at the beginning of the next period. Record the following transactions in the desired manner and give the adjusting entry on December 31, 2007. (Two entries for each part.)
1. An insurance policy for two years was acquired on April 1, 2007 for $8,000.
2. Rent of $12,000 for six months for a portion of the building was received on November 1, 2007.
Solution 3-101
1. Prepaid Insurance ....................................................................... 8,000
Cash ................................................................................ 8,000
Insurance Expense ..................................................................... 3,000
Prepaid Insurance ........................................................... 3,000
2. Cash ......................................................................................... 12,000
Unearned Rent ............................................................... 12,000
Unearned Rent ........................................................................... 4,000
Rent Revenue ................................................................. 4,000
Ex. 3-102
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, 2007
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
Solution 3-102 (20 min)
1. RYAN FINANCIAL PLANNERS
Income Statement
For the Month Ended December 31, 2007
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, 2007
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, 2007
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
*Ex. 3-103—Cash basis vs. accrual basis of accounting.
Contrast the cash basis of accounting with the accrual basis of accounting.
*Solution 3-103
The essential difference between the cash basis and the accrual basis of accounting relates to the timing of the recognition of revenues and expenses. Under the cash basis of accounting, the effects of transactions and other events are recognized and reported only when cash is received or paid. Under the accrual basis of accounting, these effects are recognized and reported in the time periods to which they relate, regardless of the time of the receipt or payment of cash. Because no attempt is made under the cash basis of accounting to match revenues and the expenses associated with those revenues, cash basis financial statements are not in accordance with generally accepted accounting principles.
*Ex. 3-104—Accrual basis.
Sales salaries paid during 2007 were $60,000. Advances to salesmen were $1,100 on January 1, 2007, and $800 on December 31, 2007. Sales salaries accrued were $1,360 on January 1, 2007, and $1,380 on December 31, 2007. Show the computation of sales salaries on an accrual basis for 2007.
*Solution 3-104
$60,000 + $1,100 – $800 – $1,360 + $1,380 = $60,320.
*Ex. 3-105—Accrual basis.
The records for Todd Inc. showed the following for 2007:
Jan. 1 Dec. 31
Accrued expenses $1,800 $2,150
Prepaid expenses 720 870
Cash paid during the year for expenses, $42,500
Show the computation of the amount of expense that should be reported on the income statement.
*Solution 3-105
$42,500 – $1,800 + $2,150 + $720 – $870 = $42,700.
*Ex. 3-106—Accrual basis.
The records for Kiley Company showed the following for 2007:
Jan. 1 Dec. 31
Unearned revenue $1,600 $2,160
Accrued revenue 1,260 920
Cash collected during the year for revenue, $70,000
Show the computation of the amount of revenue that should be reported on the income statement.
*Solution 3-106
$70,000 + $1,600 – $2,160 – $1,260 + $920 = $69,100.
*Ex. 3-107—Cash basis.
Revenue on the income statement was $125,800. Accounts receivable were $4,500 on January 1 and $3,540 on December 31. Unearned revenue was $1,050 on January 1 and $1,670 on December 31.
Show the computation of revenue for the year on a cash basis.
*Solution 3-107
$125,800 + $4,500 – $3,540 – $1,050 + $1,670 = $127,380.
PROBLEMS
Pr. 3-108—Adjusting entries and account classification.
Selected amounts from Trent Company's trial balance of 12/31/07 appear below:
1. Accounts Payable $ 160,000
2. Accounts Receivable 150,000
3. Accumulated Depreciation—Equipment 200,000
4. Allowance for Doubtful Accounts 20,000
5. Bonds Payable 500,000
6. Cash 150,000
7. Common Stock 60,000
8. Equipment 840,000
9. Insurance Expense 30,000
10. Interest Expense 10,000
11. Merchandise Inventory 300,000
12. Notes Payable (due 6/1/08) 200,000
13. Prepaid Rent 150,000
14. Retained Earnings 818,000
15. Salaries and Wages Expense 328,000
(All of the above accounts have their standard or normal debit or credit balance.)
Part A. Prepare adjusting journal entries at year end, December 31, 2007, based on the following supplemental information.
a. The equipment has a useful life of 15 years with no salvage value. (Straight-line method being used.)
b. Interest accrued on the bonds payable is $15,000 as of 12/31/07.
c. Expired insurance at 12/31/07 is $20,000.
d. The rent payment of $150,000 covered the six months from November 30, 2007 through May 31, 2008.
e. Salaries and wages earned but unpaid at 12/31/07, $22,000.
Part B. Indicate the proper balance sheet classification of each of the 15 numbered accounts in the 12/31/07 trial balance before adjustments by placing appropriate numbers after each of the following classifications. If the account title would appear on the income statement, do not put the number in any of the classifications.
a. Current assets
b. Property, plant, and equipment
c. Current liabilities
d. Long-term liabilities
e. Stockholders' equity
Solution 3-108
Part A.
a. Depreciation Expense—Equipment ($840,000 – 0) ¸ 15 ................. 56,000
Accumulated Depreciation—Equipment .............................. 56,000
b. Interest Expense ............................................................................... 15,000
Interest Payable .................................................................... 15,000
c. Prepaid Insurance ............................................................................. 10,000
Insurance Expense ($30,000 - $20,000) .............................. 10,000
d. Rent Expense ($150,000 ¸ 6)............................................................ 25,000
Prepaid Rent ......................................................................... 25,000
e. Salaries and Wages Expense ........................................................... 22,000
Salaries and Wages Payable ................................................ 22,000
Part B.
a. Current assets—2, 4, 6, 11, 13
b. Property, plant, and equipment—3, 8
c. Current liabilities—1, 12
d. Long-term liabilities—5
e. Stockholders' equity—7, 14
Pr. 3-109—Adjusting entries.
Data relating to the balances of various accounts affected by adjusting or closing entries appear below. (The entries which caused the changes in the balances are not given.) You are asked to supply the missing journal entries which would logically account for the changes in the account balances.
1. Interest receivable at 1/1/07 was $1,000. During 2007 cash received from debtors for interest on outstanding notes receivable amounted to $5,000. The 2007 income statement showed interest revenue in the amount of $5,400. You are to provide the missing adjusting entry that must have been made, assuming reversing entries are not made.
2. Unearned rent at 1/1/07 was $5,300 and at 12/31/07 was $8,000. The records indicate cash receipts from rental sources during 2007 amounted to $40,000, all of which was credited to the Unearned Rent Account. You are to prepare the missing adjusting entry.
3. Accumulated depreciation—equipment at 1/1/07 was $230,000. At 12/31/07 the balance of the account was $270,000. During 2007, one piece of equipment was sold. The equipment had an original cost of $40,000 and was 3/4 depreciated when sold. You are to prepare the missing adjusting entry.
4. Allowance for doubtful accounts on 1/1/07 was $50,000. The balance in the allowance account on 12/31/07 after making the annual adjusting entry was $65,000 and during 2007 bad debts written off amounted to $30,000. You are to provide the missing adjusting entry.
5. Prepaid rent at 1/1/07 was $9,000. During 2007 rent payments of $120,000 were made and charged to "rent expense." The 2007 income statement shows as a general expense the item "rent expense" in the amount of $125,000. You are to prepare the missing adjusting entry that must have been made, assuming reversing entries are not made.
6. Retained earnings at 1/1/07 was $150,000 and at 12/31/07 it was $210,000. During 2007, cash dividends of $50,000 were paid and a stock dividend of $40,000 was issued. Both dividends were properly charged to retained earnings. You are to provide the missing closing entry.
Solution 3-109
1. Interest Receivable ..................................................................... 1,400
Interest Revenue ............................................................ 1,400
Interest revenue per books $5,400
Interest revenue received related to 2007
($5,000 – $1,000) 4,000
Interest accrued $1,400
2. Unearned Rent Revenue ............................................................ 37,300
Rent Revenue ................................................................. 37,300
Cash receipts $40,000
Beginning balance 5,300
Ending balance (8,000)
Rent revenue $37,300
Solution 3-109 (cont.)
3. Depreciation Expense ............................................................... 70,000
Accumulated Depreciation—Equipment ........................ 70,000
Ending balance $270,000
Beginning balance 230,000
Difference 40,000
Write-off at time of sale 3/4 × $40,000 30,000
$ 70,000
4. Bad Debt Expense ...................................................................... 45,000
Allowance for Doubtful Accounts ................................... 45,000
Ending balance $65,000
Beginning balance 50,000
Difference 15,000
Written off 30,000
$45,000
5. Rent Expense ............................................................................. 5,000
Prepaid Rent ................................................................... 5,000
Rent expense $125,000
Less cash paid 120,000
Reduction in prepaid rent account $ 5,000
6. Income Summary ....................................................................... 150,000
Retained Earnings .......................................................... 150,000
Ending balance $210,000
Beginning balance 150,000
Difference 60,000
Cash dividends $50,000
Stock dividends 40,000 90,000
$150,000
Pr. 3-110—Adjusting and closing entries.
The following trial balance was taken from the books of Fisk Corporation on December 31, 2007.
Account Debit Credit
Cash $ 12,000
Accounts Receivable 40,000
Note Receivable 7,000
Allowance for Doubtful Accounts $ 1,800
Merchandise Inventory 44,000
Prepaid Insurance 4,800
Furniture and Equipment 125,000
Accumulated Depreciation--F. & E. 15,000
Accounts Payable 10,800
Common Stock 44,000
Retained Earnings 55,000
Sales 280,000
Cost of Goods Sold 111,000
Salaries Expense 50,000
Rent Expense 12,800
Totals $406,600 $406,600
Pr. 3-110 (cont.)
At year end, the following items have not yet been recorded.
a. Insurance expired during the year, $2,000.
b. Estimated bad debts, 1% of gross sales.
c. Depreciation on furniture and equipment, 10% per year.
d. Interest at 6% is receivable on the note for one full year.
*e. Rent paid in advance at December 31, $5,400 (originally charged to expense).
f. Accrued salaries at December 31, $5,800.
Instructions
(a) Prepare the necessary adjusting entries.
(b) Prepare the necessary closing entries.
Solution 3-110
(a) Adjusting Entries
a. Insurance Expense .................................................................. 2,000
Prepaid Insurance ........................................................... 2,000
b. Bad Debt Expense ................................................................... 2,800
Allowance for Doubtful Accounts ................................... 2,800
c. Depreciation Expense ............................................................. 12,500
Accumulated Depreciation--F. & E. ............................... 12,500
d. Interest Receivable .................................................................. 420
Interest Revenue ............................................................ 420
*e. Prepaid Rent ............................................................................ 5,400
Rent Expense ................................................................. 5,400
f. Salaries Expense ..................................................................... 5,800
Salaries Payable ............................................................. 5,800
(b) Closing Entries
Sales ............................................................................................... 280,000
Interest Revenue ............................................................................. 420
Income Summary ................................................................. 280,420
Income Summary ........................................................................... 191,500
Salaries Expense .................................................................. 55,800
Rent Expense ....................................................................... 7,400
Depreciation Expense .......................................................... 12,500
Bad Debt Expense ................................................................ 2,800
Insurance Expense ............................................................... 2,000
Cost of Goods Sold .............................................................. 111,000
Income Summary ........................................................................... 88,920
Retained Earnings ................................................................ 88,920
*Pr. 3-111—Cash to accrual accounting.
The following information is available for Renn Corporation's first year of operations:
Payment for merchandise purchases $250,000
Ending merchandise inventory 110,000
Accounts payable (balance at end of year) 60,000
Collections from customers 210,000
The balance in accounts payable relates only to merchandise purchases. All merchandise items were marked to sell at 40% above cost. What should be the ending balance in accounts receivable, assuming all accounts are deemed collectible?
*Solution 3-111
Since this is the first year of operations and there were $210,000 of accounts receivable collected, one must compute total sales to determine the ending balance in accounts receivable. Cost of goods sold is $200,000 assuming the accounts payable are for inventory (the $250,000 constitutes only payments made for purchases). Since the markup is 40% on cost, the sales are $280,000 ($200,000 × 140%). Sales of $280,000 less collections of $210,000 results in an ending accounts receivable balance of $70,000 as calculated below.
Cash purchases $250,000
A/P balance 60,000
Total purchases 310,000
Ending inventory 110,000
Cost of goods sold 200,000
× 140%
Sales 280,000
Less collections 210,000
Ending A/R $70,000
*Pr. 3-112—Accrual accounting.
Yates Company's records provide the following information concerning certain account balances and changes in these account balances during the current year. Transaction information is missing from each item below.
Instructions
Prepare the entry to record the missing information for each account. (Consider each inde-pendently.)
1. Accounts Receivable: Jan. 1, balance $41,000, Dec. 31, balance $55,000, uncollectible accounts written off during the year, $6,000; accounts receivable collected during the year, $134,000. Prepare the entry to record sales.
2. Allowance for Doubtful Accounts: Jan. 1, balance $4,000, Dec. 31, balance $7,500, uncollectible accounts written off during the year, $25,000. Prepare the entry to record bad debt expense.
3. Accounts Payable: Jan. 1, balance $25,000, Dec. 31, balance $44,000, purchases on account for the year, $110,000. Prepare the entry to record payments on account.
4. Interest Receivable: Jan. 1 accrued, $3,000, Dec. 31 accrued, $2,100, earned for the year, $30,000. Prepare the entry to record cash interest received.
*Solution 3-112
1. Ending balance $ 55,000 Ending balance $ 55,000
Beginning balance 41,000 Plus: Rec. collected 134,000
Difference 14,000 Write-offs 6,000
Uncollectible accounts 6,000 OR 195,000
Receivables collected 134,000 Less: Beginning balance 41,000
Sales for period $154,000 Sales for period $154,000
Accounts Receivable ........................................................................ 154,000
Sales ..................................................................................... 154,000
2. Ending balance $ 7,500 Ending balance $ 7,500
Beginning balance 4,000 Write-off 25,000
Difference 3,500 OR 32,500
Write-off 25,000 Beginning balance 4,000
Adjusting entry $28,500 Adjusting entry $28,500
Bad Debt Expense ............................................................................ 28,500
Allowance for Doubtful Accounts ......................................... 28,500
3. Ending balance $ 44,000 Beginning balance $ 25,000
Beginning balance 25,000 Plus purchases 110,000
Difference 19,000 OR 135,000
Purchases 110,000 Less ending balance 44,000
Payments $ 91,000 Payments $ 91,000
Accounts Payable.............................................................................. 91,000
Cash ...................................................................................... 91,000
4. Revenue Earned $30,000 Beginning balance $ 3,000
Less: Dec. 31 accrual (2,100) Plus revenue earned 30,000
Plus: Jan. 1 accrual 3,000 OR 33,000
Cash received $30,900 Less ending balance 2,100
Cash received $30,900
Cash .................................................................................................. 30,900
Interest Receivable................................................................ 30,900
(This entry assumes that the $30,000 interest earned
was first recorded as a receivable.)
*Pr. 3-113—Accrual basis.
Grier & Associates maintains its records on the cash basis. You have been engaged to convert its cash basis income statement to the accrual basis. The cash basis income statement, along with additional information, follows:
Grier & Associates
Income Statement (Cash Basis)
For the Year Ended December 31, 2007
Cash receipts from customers $450,000
Cash payments:
Wages $150,000
Taxes 65,000
Insurance 40,000
Interest 25,000 280,000
Net income $170,000
Additional information:
Balances at 12/31
2007 2006
Accounts receivable $50,000 $30,000
Wages payable 10,000 20,000
Taxes payable 14,000 19,000
Prepaid insurance 8,000 4,000
Accumulated depreciation 90,000 75,000
Interest payable 3,000 9,000
No plant assets were sold during 2007.
*Solution 3-113
Grier & Associates
Income Statement (Accrual Basis)
For the Year Ended December 31, 2007
Revenue ($450,000 + $50,000 – $30,000) $470,000
Expenses
Wages ($150,000 + $10,000 – $20,000) $140,000
Taxes ($65,000 + $14,000 – $19,000) 60,000
Insurance ($40,000 + $4,000 – $8,000) 36,000
Depreciation ($95,000 – $75,000) 15,000
Interest ($25,000 + $3,000 – $9,000) 19,000
Total expenses 270,000
Net Income $200,000
the Prepaid Rent.)
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