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  • 1. Chapter 3 Do it! Numerous timing concepts are discussed on pages 100–102. A list of concepts is provided in the left column below, with a description of the concept in the right column below and on the next page. There are more descriptions provided than concepts. Match the description of the concept to the concept. 1. ____Accrual-basis accounting. 2. ____Calendar year. 3. ____Time period assumption. 4. ____Expense recognition principle. (a) Monthly and quarterly time periods. (b) Efforts (expenses) should be matched with results (revenues). (c) Accountants divide the economic life of a business into artificial time periods. (d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that starts on January 1 and ends on December 31. (f) Companies record transactions in the period in which the events occur. Solution 1. f 2. e 3. c 4. b Related exercise material: E3-1, E3-2, E3-3, and Do it! 3-1. Timing Concepts action plan ✔ Review the glossary terms identified on page 102. ✔ Study carefully the revenue recognition principle, the expense recognition principle, and the time period assumption. ● ✔ [The Navigator]
  • 2. Do it! Adjusting Entries for Deferrals The ledger of Hammond Company, on March 31, 2012, includes these selected accounts before adjusting entries are prepared. Prepaid Insurance Supplies Equipment Accumulated Depreciation—Equipment Unearned Service Revenue Debit $ 3,600 2,800 25,000 Credit $5,000 9,200 An analysis of the accounts shows the following. 1. 2. 3. 4. action plan ✔ Make adjusting entries at the end of the period for revenues earned and expenses incurred in the period. ✔ Don’t forget to make adjusting entries for deferrals. Failure to adjust for deferrals leads to overstatement of the asset or liability and understatement of the related expense or revenue. Insurance expires at the rate of $100 per month. Supplies on hand total $800. The equipment depreciates $200 a month. One-half of the unearned service revenue was earned in March. Prepare the adjusting entries for the month of March. Solution 1. Insurance Expense Prepaid Insurance (To record insurance expired) 2. Supplies Expense Supplies (To record supplies used) 3. Depreciation Expense Accumulated Depreciation—Equipment (To record monthly depreciation) 4. Unearned Service Revenue Service Revenue (To record revenue earned) 100 100 2,000 2,000 200 200 4,600 4,600 Related exercise material: BE3-3, BE3-4, BE3-6, and Do it! 3-2. ● ✔ [The Navigator]
  • 3. Do it! Calvin and Hobbs are the new owners of Micro Computer Services. At the end of August 2012, their first month of operations, Calvin and Hobbs attempted to prepare monthly financial statements. The following information relates to August. Adjusting Entries for Accruals 1. At August 31, the company owed its employees $800 in salaries and wages that will be paid on September 1. 2. On August 1, the company borrowed $30,000 from a local bank on a 15-year mortgage. The annual interest rate is 10%. 3. Revenue earned but unrecorded for August totaled $1,100. Prepare the adjusting entries needed at August 31, 2012. Solution 1. Salaries and Wages Expense Salaries and Wages Payable (To record accrued salaries) 2. Interest Expense Interest Payable (To record accrued interest: 1 $30,000 3 10% 3 — 5 $250) 12 3. Accounts Receivable Service Revenue (To record revenue earned) 800 800 250 250 action plan ✔ Make adjusting entries at the end of the period for revenues earned and expenses incurred in the period. ✔ Don’t forget to make adjusting entries for accruals. Adjusting entries for accruals will increase both a balance sheet and an income statement account. 1,100 1,100 Related exercise material: BE3-7, E3-5, E3-6, E3-7, E3-8, E3-9, E3-10, E3-11, E3-12, and Do it! 3-3. ● ✔ [The Navigator]
  • 4. Do it! Trial Balance Skolnick Co. was organized on April 1, 2012. The company prepares quarterly financial statements. The adjusted trial balance amounts at June 30 are shown below. Debits Credits Cash Accounts Receivable Prepaid Rent Supplies Equipment Owner’s Drawings Salaries and Wages Expense Rent Expense Depreciation Expense Supplies Expense Utilities Expense Interest Expense Accumulated Depreciation—Equipment Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Rent Revenue Owner’s Capital Service Revenue Rent Revenue $ Total debits action plan ✔ In an adjusted trial balance, all asset, liability, revenue, and expense accounts are properly stated. ✔ To determine the ending balance in Owner’s Capital, add net income and subtract dividends. $ 6,700 600 900 1,000 15,000 600 9,400 1,500 850 200 510 50 850 5,000 1,510 400 50 500 14,000 14,200 800 $37,310 Total credits $37,310 (a) Determine the net income for the quarter April 1 to June 30. (b) Determine the total assets and total liabilities at June 30, 2012, for Skolnick Co. (c) Determine the amount that appears for Owner’s Capital at June 30, 2012. Solution (a) The net income is determined by adding revenues and subtracting expenses. The net income is computed as follows. Revenues Service revenue $14,200 Rent revenue 800 Total revenues $15,000 Expenses Salaries and wages expense $ 9,400 Rent expense 1,500 Depreciation expense 850 Utilities expense 510 Supplies expense 200 Interest expense 50 Total expenses 12,510 Net income $ 2,490 (b) Total assets and liabilities are computed as follows. Assets Liabilities Cash $ 6,700 Notes payable Accounts receivable 600 Accounts payable Supplies 1,000 Unearned rent Prepaid rent 900 revenue Salaries and wages Equipment 15,000 payable Less: Accumulated Interest payable depreciation— equipment 850 14,150 Total assets $23,350 Total liabilities $5,000 1,510 500 400 50 $7,460
  • 5. (c) Owner’s capital, April 1 Add: Net income Less: Drawings Owner’s capital, June 30 $14,000 2,490 600 $15,890 Related exercise material: BE3-9, BE3-10, E3-11, E3-13, and Do it! 3-4. ● ✔ [The Navigator] COMPREHENSIVE Do it! Terry Thomas opens the Green Thumb Lawn Care Company on April 1. At April 30, the trial balance shows the following balances for selected accounts. Prepaid Insurance Equipment Notes Payable Unearned Service Revenue Service Revenue $ 3,600 28,000 20,000 4,200 1,800 Analysis reveals the following additional data. 1. 2. 3. 4. Prepaid insurance is the cost of a 2-year insurance policy, effective April 1. Depreciation on the equipment is $500 per month. The note payable is dated April 1. It is a 6-month, 12% note. Seven customers paid for the company’s 6 months’ lawn service package of $600 beginning in April. The company performed services for these customers in April. 5. Lawn services provided other customers but not recorded at April 30 totaled $1,500. Instructions Prepare the adjusting entries for the month of April. Show computations. Solution to Comprehensive Do it! GENERAL JOURNAL Date Apr. 30 30 30 Account Titles and Explanation Adjusting Entries Insurance Expense Prepaid Insurance (To record insurance expired: $3,600 4 24 5 $150 per month) Depreciation Expense Accumulated Depreciation—Equipment (To record monthly depreciation) Interest Expense Interest Payable (To record interest on notes payable: $20,000 3 12% 3 1/12 5 $200) J1 Ref. Debit Credit 150 150 500 500 200 200 action plan ✔ Note that adjustments are being made for one month. ✔ Make computations carefully. ✔ Select account titles carefully. ✔ Make sure debits are made first and credits are indented. ✔ Check that debits equal credits for each entry.
  • 6. GENERAL JOURNAL (Continued) Date 30 30 Account Titles and Explanation Ref. Unearned Service Revenue Service Revenue (To record service revenue: $600 4 6 5 $100; $100 per month 3 7 5 $700) Accounts Receivable Service Revenue (To record revenue for services provided) Debit Credit 700 700 1,500 1,500 ● ✔ [The Navigator] Do it! Review Identify timing concepts. (SO 1, 2), K Do it! 3-1 Numerous timing concepts are discussed on pages 100–102. A list of concepts is provided below in the left column, with a description of the concept in the right column. There are more descriptions provided than concepts. Match the description of the concept to the concept. (a) Monthly and quarterly time periods. 1. ____ Cash-basis accounting. (b) Accountants divide the economic life of a business 2. ____ Fiscal year. into artificial time periods. 3. ____ Revenue recognition principle. 4. ____ Expense recognition principle. (c) Efforts (expenses) should be matched with accomplishments (revenues). (d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that is one year in length. (f) An accounting time period that starts on January 1 and ends on December 31. (g) Companies record transactions in the period in which the events occur. (h) Recognize revenue in the accounting period in which it is earned. Prepare adjusting entries for deferrals. (SO 5), AN Do it! 3-2 The ledger of Lefevour, Inc. on March 31, 2012, includes the following selected accounts before adjusting entries. Debit Prepaid Insurance Supplies Equipment Unearned Service Revenue Credit 2,400 2,500 30,000 9,000 An analysis of the accounts shows the following. 1. Insurance expires at the rate of $300 per month. 2. Supplies on hand total $1,100. 3. The equipment depreciates $500 per month. 4. 2/5 of the unearned service revenue was earned in March. Prepare the adjusting entries for the month of March. Prepare adjusting entries for accruals. (SO 6), AN Do it! 3-3 Johnny Knox is the new owner of Swift Computer Services. At the end of July 2012, his first month of ownership, Johnny is trying to prepare monthly financial statements. He has the following information for the month.
  • 7. 1. At July 31, Knox owed employees $1,300 in salaries that the company will pay in August. 2. On July 1, Knox borrowed $20,000 from a local bank on a 10-year note. The annual interest rate is 12%. 3. Service revenue unrecorded in July totaled $2,400. Prepare the adjusting entries needed at July 31, 2012. Do it! 3-4 Kreutz Co. was organized on April 1, 2012. The company prepares quarterly financial statements. The adjusted trial balance amounts at June 30 are shown on the next page. Debits Credits Cash Accounts Receivable Prepaid Rent Supplies Equipment Owner’s Drawings Salaries and Wages Expense Rent Expense Depreciation Expense Supplies Expense Utilities Expense Interest Expense $ 5,360 480 720 920 12,000 500 7,400 1,200 700 160 410 40 Total debits Accumulated Depreciation— Equipment Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Rent Revenue Owner’s Capital Service Revenue Rent Revenue $ $29,890 Total credits $29,890 (a) Determine the net income for the quarter April 1 to June 30. (b) Determine the total assets and total liabilities at June 30, 2012 for Kreutz Company. (c) Determine the amount that appears for Owner’s Capital at June 30, 2012. 700 4,000 790 300 40 400 11,200 11,360 1,100 Calculate amounts from trial balance. (SO 7), AN
  • 8. Problems: Set B Prepare adjusting entries, post to ledger accounts, and prepare an adjusted trial balance. (SO 5, 6, 7), AN P3-1B Fran Omiyale started her own consulting firm, Omiyale Consulting, on May 1, 2012. The trial balance at May 31 is as follows. OMIYALE CONSULTING Trial Balance May 31, 2012 Account Number 101 112 126 130 149 201 209 301 400 726 729 Debit Cash Accounts Receivable Supplies Prepaid Insurance Equipment Accounts Payable Unearned Service Revenue Owner’s Capital Service Revenue Salaries and Wages Expense Rent Expense Credit $ 4,500 6,000 1,900 3,600 11,400 $ 4,500 2,000 17,700 7,500 3,400 900 $31,700 $31,700 In addition to those accounts listed on the trial balance, the chart of accounts for Omiyale Consulting also contains the following accounts and account numbers: No. 150 Accumulated Depreciation—Equipment, No. 212 Salaries and Wages Payable, No. 631 Supplies Expense, No. 717 Depreciation Expense, No. 722 Insurance Expense, and No. 736 Utilities Expense. Other data: 1. $900 of supplies have been used during the month. 2. Utilities expense incurred but not paid on May 31, 2012, $250. 3. The insurance policy is for 2 years. 4. $400 of the balance in the unearned service revenue account remains unearned at the end of the month. 5. May 31 is a Wednesday, and employees are paid on Fridays. Omiyale Consulting has two employees, who are paid $900 each for a 5-day work week. 6. The office furniture has a 5-year life with no salvage value. It is being depreciated at $190 per month for 60 months. 7. Invoices representing $1,700 of services performed during the month have not been recorded as of May 31. (c) Adj. trial balance $34,920 Instructions (a) Prepare the adjusting entries for the month of May. Use J4 as the page number for your journal. (b) Post the adjusting entries to the ledger accounts. Enter the totals from the trial balance as beginning account balances and place a check mark in the posting reference column. (c) Prepare an adjusted trial balance at May 31, 2012.
  • 9. P3-2B The Bear Motel opened for business on May 1, 2012. Its trial balance before adjustment on May 31 is as follows. BEAR MOTEL Trial Balance May 31, 2012 Account Number 101 126 130 140 141 149 201 208 275 301 429 610 726 732 Debit Cash Supplies Prepaid Insurance Land Buildings Equipment Accounts Payable Unearned Rent Revenue Mortgage Payable Owner’s Capital Rent Revenue Advertising Expense Salaries and Wages Expense Utilities Expense Prepare adjusting entries, post, and prepare adjusted trial balance, and financial statements. (SO 5, 6, 7), AN Credit $ 3,500 2,080 2,400 12,000 60,000 15,000 $ 4,800 3,300 40,000 41,380 10,300 600 3,300 900 $99,780 $99,780 In addition to those accounts listed on the trial balance, the chart of accounts for Bear Motel also contains the following accounts and account numbers: No. 142 Accumulated Depreciation— Buildings, No. 150 Accumulated Depreciation—Equipment, No. 212 Salaries and Wages Payable, No. 230 Interest Payable, No. 619 Depreciation Expense, No. 631 Supplies Expense, No. 718 Interest Expense, and No. 722 Insurance Expense. Other data: 1. Prepaid insurance is a 1-year policy starting May 1, 2012. 2. A count of supplies shows $750 of unused supplies on May 31. 3. Annual depreciation is $3,000 on the buildings and $1,500 on equipment. 4. The mortgage interest rate is 12%. (The mortgage was taken out on May 1.) 5. Two-thirds of the unearned rent revenue has been earned. 6. Salaries of $750 are accrued and unpaid at May 31. Instructions (a) Journalize the adjusting entries on May 31. (b) Prepare a ledger using the three-column form of account. Enter the trial balance amounts and post the adjusting entries. (Use J1 as the posting reference.) (c) Prepare an adjusted trial balance on May 31. (d) Prepare an income statement and an owner’s equity statement for the month of May and a balance sheet at May 31. P3-3B Peterman Co. was organized on July 1, 2012. Quarterly financial statements are prepared. The unadjusted and adjusted trial balances as of September 30 are shown below. (c) Adj. trial balance $101,305 (d) Net income $4,645 Ending capital balance $46,025 Total assets $93,075 Prepare adjusting entries and financial statements. (SO 5, 6, 7), AN
  • 10. PETERMAN CO. Trial Balance September 30, 2012 Unadjusted Dr. Cash Accounts Receivable Supplies Prepaid Rent Equipment Accumulated Depreciation—Equipment Notes Payable Accounts Payable Salaries and Wages Payable Interest Payable Unearned Rent Revenue Owner’s Capital Owner’s Drawings Service Revenue Rent Revenue Salaries and Wages Expense Rent Expense Depreciation Expense Supplies Expense Utilities Expense Interest Expense Prepare adjusting entries (SO 5, 6), AN 1. Insurance expense $4,890 2. Rent revenue $84,000 Dr. $ 8,700 10,400 1,500 2,200 18,000 $ 700 10,000 2,500 725 100 1,050 22,000 1,600 1,600 16,000 1,410 17,100 2,260 8,000 1,900 8,725 2,900 700 850 1,510 100 1,510 $53,810 $56,435 P3-4B A review of the ledger of Roach Company at December 31, 2012, produces the following data pertaining to the preparation of annual adjusting entries. 1. Prepaid Insurance $10,440. The company has separate insurance policies on its buildings and its motor vehicles. Policy B4564 on the building was purchased on April 1, 2011, for $7 ,920. The policy has a term of 3 years. Policy A2958 on the vehicles was purchased on January 1, 2012, for $4,500. This policy has a term of 2 years. 2. Unearned Rent Revenue $429,000. The company began subleasing office space in its new building on November 1. At December 31, the company had the following rental contracts that are paid in full for the entire term of the lease. Term (in months) Monthly Rent Number of Leases Nov. 1 Dec. 1 4. Salaries and wages expense $2,000 $56,435 Instructions (a) Journalize the adjusting entries that were made. (b) Prepare an income statement and an owner’s equity statement for the 3 months ending September 30 and a balance sheet at September 30. (c) If the note bears interest at 12%, how many months has it been outstanding? Date 3. Interest expense $1,800 Cr. $ 8,700 11,500 650 1,200 18,000 $ –0– 10,000 2,500 –0– –0– 1,900 22,000 $53,810 (b) Net income $4,575 Ending capital $24,975 Total assets $39,350 Adjusted Cr. 9 6 $5,000 $8,500 5 4 3. Notes Payable $120,000. This balance consists of a note for 9 months at an annual interest rate of 9%, dated November 1. 4. Salaries and Wages Payable $0. There are eight salaried employees. Salaries are paid every Friday for the current week. Five employees receive a salary of $700 each per week, and three employees earn $500 each per week. Assume December 31 is a Tuesday. Employees do not work weekends. All employees worked the last 2 days of December. Instructions Prepare the adjusting entries at December 31, 2012.
  • 11. P3-5B On November 1, 2012, the account balances of Robinson Equipment Repair were as follows. No. Debits No. Credits 101 112 126 153 Cash $ 2,400 Accounts Receivable 4,250 Supplies 1,800 Equipment 12,000 154 201 209 212 301 Accumulated Depreciation—Equipment $ 2,000 Accounts Payable 2,600 Unearned Service Revenue 1,200 Salaries and Wages Payable 700 Owner’s Capital 13,950 $20,450 Journalize transactions and follow through accounting cycle to preparation of financial statements. (SO 5, 6, 7), AN $20,450 During November, the following summary transactions were completed. Nov. 8 10 12 15 17 20 22 25 27 29 Paid $1,700 for salaries due employees, of which $700 is for October salaries. Received $3,420 cash from customers on account. Received $3,100 cash for services performed in November. Purchased equipment on account $2,000. Purchased supplies on account $700. Paid creditors on account $2,700. Paid November rent $400. Paid salaries $1,700. Performed services on account and billed customers for services provided $1,900. Received $600 from customers for future service. Adjustment data consist of: 1. Supplies on hand $1,400. 2. Accrued salaries payable $350. 3. Depreciation for the month is $200. 4. Unearned service revenue of $1,250 is earned. Instructions (a) Enter the November 1 balances in the ledger accounts. (b) Journalize the November transactions. (c) Post to the ledger accounts. Use J1 for the posting reference. Use the following additional accounts: No. 407 Service Revenue, No. 615 Depreciation Expense, No. 631 Supplies Expense, No. 726 Salaries and Wages Expense, and No. 729 Rent Expense. (d) Prepare a trial balance at November 30. (e) Journalize and post adjusting entries. (f) Prepare an adjusted trial balance. (g) Prepare an income statement and an owner’s equity statement for November and a balance sheet at November 30. (d) Trial balance $25,350 (f) Adj. trial balance $25,900 (g) Net income $1,500; Ending capital $15,450 Total assets $18,950
  • 12. Continuing Cookie Chronicle (Note: This is a continuation of the Cookie Chronicle from Chapters 1 and 2. Use the information from the previous chapters and follow the instructions below using the general ledger accounts you have already prepared.) CCC3 It is the end of November and Natalie has been in touch with her grandmother. Her grandmother asked Natalie how well things went in her first month of business. Natalie, too, would like to know if she has been profitable or not during November. Natalie realizes that in order to determine Cookie Creations’ income, she must first make adjustments. Natalie puts together the following additional information. 1. A count reveals that $35 of baking supplies were used during November. 2. Natalie estimates that all of her baking equipment will have a useful life of 5 years or 60 months. (Assume Natalie decides to record a full month’s worth of depreciation, regardless of when the equipment was obtained by the business.) 3. Natalie’s grandmother has decided to charge interest of 6% on the note payable extended on November 16. The loan plus interest is to be repaid in 24 months. (Assume that half a month of interest accrued during November.) 4. On November 30, a friend of Natalie’s asks her to teach a class at the neighborhood school. Natalie agrees and teaches a group of 35 first-grade students how to make Santa Claus cookies. The next day, Natalie prepares an invoice for $300 and leaves it with the school principal. The principal says that he will pass the invoice along to the head office, and it will be paid sometime in December. 5. Natalie receives a utilities bill for $45. The bill is for utilities consumed by Natalie’s business during November and is due December 15. Instructions Using the information that you have gathered through Chapter 2, and based on the new information above, do the following. (a) Prepare and post the adjusting journal entries. (b) Prepare an adjusting trial balance. (c) Using the adjusted trial balance, calculate Cookie Creations’ net income or net loss for the month of November. Do not prepare an income statement.

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